The rapid pace with which work on tax reform in the tech world is continuing has resulted in a key decision by the Member States of the EU to ask the Commission to consider further the reform of taxation on multinationals in respect of digital activities in the EU. But the EU is not alone in its enthusiasm for extending taxing rights against tech giants. It remains to be seen how EU momentum will interact with the ongoing work of the OECD and the existing body of international tax law to which multinational tech companies are subject. (For background, please see our earlier briefings on 22 September and 3 October 2017.)

Is there a digital economy?

A fundamental question has resurfaced in the midst of the suggested reform: ‘is there a digital economy?’ The OECD’s conclusion in its 2015 Final Report on BEPS Action 1 was that it was not possible to 'ring fence' the digital economy as technology pervades all sectors of the economy. The responses to the OECD’s Request for Input (RFI) on this area are divided, with some asserting robustly that the 'digital economy is the economy'. However, it is not clear whether the OECD retains this stance as it appears to be proceeding on the basis, in its formulation of its RFI and Public Consultation, that the viability of taxation solely aimed at this section of the market is a question that does indeed require (re-)consideration in and of itself.

At EU level, the Commission, together with several Member States including France and Germany as well as the current Estonian Presidency of the Council of the EU, appear to accept as fact that there is a digital economy. This is made clear in the Commission’s public consultation which directly asks EU citizens (individuals and companies) for their views on the taxation of said economy. This consultation is open until 3 January 2018. In the meantime, we have just received the published ‘Conclusions’ of the Council, discussed further below.

Until a clear consensus can be reached at all levels, discussion of properly co-ordinated international tax reform can only remain abstract at best.

Where is the value?

All sides of the debate appear to agree that tax should be imposed where ‘value is created’. However where such value creation occurs in the digital economy remains heavily disputed and, even if there is indeed a separate ‘digital economy’, important structural differences remain between the various business models therein. Proponents of a new tax for tech companies argue that the marketplace is critical to value and, more specifically, that a user’s raw data is valuable; as this is not currently captured by the international tax framework, changes are needed. The potential importance of user data is also highlighted by the EU Council’s Conclusions (see further below). Contrastingly, tech businesses have argued that this would signal a move away from taxation upon value creation as it is only when the data is processed into something useful, usually where the company is based, that value arises; raw data is said to have little or no value. Some key stakeholders have suggested that any attempt to impose tax by reference to data capture would cause serious macro-economic harm.

Digital business models

As the focus shifts from when to act to precisely how, it is important to consider, and perhaps differentiate, the various business models operating in the digital economy. The advertising model, utilised by search engines and social media platforms alike, is the target of much political scrutiny. Revenue is generated through advertising (targeted at users) at a business to business level and so tax could relatively easily be tied to this cash flow.

This is not so true of the subscription model, epitomised by film and music streaming services, where the paying customers are essentially retail consumers. Tax collection is then practically more challenging than with business to business models. The agency model (e.g. where a digital platform facilitates sales or lettings between users, to some extent epitomising the ‘sharing economy’) has an easier locus to tax in so far as it can attach to the revenue stream from the product or service being sold. A fourth model is that of the online retailer whose tax base would most naturally be its profit but where, compared with its non-digital counterpart, establishing a taxing nexus is more challenging in the absence of physical presence.

Any ‘digital tax’ solution should be considered in light of these different business models to ensure that the proposed tax adequately attaches to the right base, and is administratively workable. Perhaps different tax responses are appropriate for the various business models?

International momentum


The Estonian Presidency, now in its last weeks, remains an advocate of establishing a new nexus for taxation on the basis that a company's continued interaction with a state's economy via technology should not be enjoyed tax free. The Member States in the Council appear to share these ambitions in their ‘Conclusions on Responding to the Challenges of Taxation of Profits of the Digital Economy’ adopted on 5 December. Notably, the tone of this paper has moderated somewhat from that in earlier leaked drafts. Now, the Council considers that any temporary EU measures, such as the equalization levy based on revenues from digital activities in the EU that would remain outside the scope of double tax conventions concluded by Member States, should only be considered by the Commission to the extent that the implementation of the OECD BEPS actions do not substantially address the issue. It expects any appropriate Commission proposals to follow by 'early' 2018, probably around March 2018, taking into account relevant developments in ongoing OECD work.

An equalization levy would be a new tax with its own base, rate and set of taxpayers. Such a levy could have a disproportionate effect on start-ups which, by their very nature, may endure a period of loss-making and yet could nonetheless be subject to a potentially punitive level of tax. Even for established businesses, taxation of turnover obviously bears no necessary relationship to profit and thus value. In this indirect taxation sphere, this is why value added taxes have traditionally been preferred to sales taxes. Taxation of turnover presents a potential distortion which some fear could turn tech business away from the EU.

At least the Council Conclusions acknowledge that while, within the existing framework of international taxation and together with the OECD, the extension of the concept of 'permanent establishment' (PE) to cover virtual PEs should be explored, this should reflect where value is created across the different business models of the digital economy. A ‘globally accepted’ concept of PE remains ‘pivotal’ to addressing the challenges of taxation in the digital economy. Lip service, at least, is paid to the continued importance of the arm’s length principle.

Such changes to the scope of the traditional PE concept might be achieved by amending the bilateral treaties between member states (possibly via some EU multilateral act). Though it is apparent that the Council considers that any international tax policy response needs to make progress in the short term, any EU-wide measure will inevitably entail some delay to approve such revisions while consensus is built, followed by a phase of actual implementation. There should also be appropriate revisions to the rules on transfer pricing and PE profit attribution to ensure uniformity.

Austria’s Finance Minister Schelling has in the past come out strongly in support of an amendment to the PE concept and makes clear that, from an Austrian perspective, the bricks-and-mortar PE concept is considered insufficient and outdated. Austria’s position is of particular interest as it will assume the Presidency of the Council in July 2018. Some other states’ views are more opaque. The German position is unclear, reflecting both that the political situation is presently unclear and the fact that Germany itself is both an importer and exporter of digital services.

The UK Government, in its recent autumn Budget, has reiterated the mantra that tax law should adapt to account for all forms of value creation. It plans to achieve this by: (i) creating a domestic withholding tax on royalties paid to related parties in connection with sales to UK customers (but at least any such rule will be subject to existing double taxation treaties); (ii) supporting international tax reform; and (iii) introducing interim measures alongside other states if needed. The UK’s position paper contains some disconcerting flirtation with turnover taxation and formulary apportionment. The UK Government has asked for feedback on its position by 31 January 2018 and a consultation paper on the domestic royalty withholding tax was released on 1 December 2017.

This political will for reform is nonetheless surpassed by the Commission which framed the challenge as being to capture even those businesses who 'provide services digitally with little or no significant economic presence'. On 27 October, the Commission released an impact assessment discussing a series of short term and long term EU legislative solutions, which are notably not mutually exclusive. Suggestions for short term reform included a withholding on payments by resident consumers to non-resident businesses for goods purchased online, a tax on revenue from digital activities or services, or a digital transaction tax applied on the collection of data or other initial steps to creating value. The equalization levy remains an ‘example’ of a temporary measure the Council wishes the Commission to assess.

The notion of ‘short-term’, 'interim' or ‘transitional measures’ does not assuage all concerns. Some of the concepts being considered seem to have real potential for negatively affecting business. It has been observed that the EU has previously introduced measures on a transitional basis e.g. in the VAT field which remain in use sometimes decades later.


On the international plane, the OECD held a public consultation on the tax challenges of digitalisation on 1 November. The OECD confirmed that the interim report of its Task Force on the digital economy is expected in spring 2018 and only then will the OECD be able to assess, even if preliminarily, the success of the BEPS programme including Action 1 and therefore if further measures are warranted. This approach chimes with that of the UN who put forward its thoughts as part of the 15th Session of the UN Committee of Experts on International Cooperation in Tax Matters, held in October. This session approved the creation of a new UN sub-committee on tax issues related to the digitalisation of the economy, further demonstrating the seriousness with which this is topic is viewed at all levels.


New concepts of nexus for the digital economy, whether based on source of advertising revenue or location of data capture, subscription usage or retail purchase are likely to result in the taxation of intangibles-based profits that the US is also seeking to tax in its own reforms of US tax law. In particular, both Bills passed by the US Congress (now headed for harmonisation in a joint conference committee) would impose US tax on income attributable to intangible property regardless of where the intangible is located or revenues generated. The Bill passed by the House of Representatives several weeks ago would require US corporations to pay a 10% tax on the gross profits derived by their non-US subsidiaries in excess of a ‘routine return’ on tangible assets. The routine return would equal 7% plus the US short-term ‘applicable federal rate’ (a floating interest rate published monthly by the IRS), multiplied by the aggregate tax basis of tangible assets in those subsidiaries (such excess return, the ‘foreign high return amount’). The Bill passed by the Senate on 2 December similarly would impose a 10% tax (increasing to 12.5% after 2025) on a US corporation’s ‘global intangible low tax income’ or ‘GILTI’ defined as the aggregate profits of such corporation’s non-US subsidiaries over a 10% return on the aggregate tax basis of tangible assets in those subsidiaries.

The Senate Bill also provides a global minimum tax under which a US corporation’s taxable income calculated without deductions for amounts paid to related non-US parties (including interest paid to related parties, but excluding amounts that represent cost of goods sold and payments on certain types of derivatives) would be subject to tax at a 10% rate (with only the excess of this tax over the 20% regular tax computed without adjustments being payable). The minimum tax rate would increase to 12.5% after 2025. Thus, US multinationals with high value intangibles located outside the US (or generating profits from sales outside the US) may face double taxation of those profits under some of the proposals currently being considered by the EU for taxation of the digital economy.

We think that arriving at genuine international consensus by the spring will be highly challenging given the divergence of national views. Notably, alignment between the EU and US seems implausible given that so many of the tech giants are US-headed multinationals. The EU Council stresses its ‘preference for a global solution’ but nonetheless ‘looks forward’ to Commission proposals in early 2018.

Responses from players in the digital economy

The OECD’s RFI provoked a large number of responses from key stakeholders in the market. A common question asked of the OECD was ‘why now?’ Though there is some broad recognition that an effective solution is needed, some consider the OECD’s work mostly a reaction to political sentiment to attack the tech giants (and of course to raise revenue). As a result, some respondents call for 'breathing room' on the basis that it is premature to judge the OECD’s BEPS reforms inadequate at this stage.

A number of responses, such as from the Oxford University Centre for Business Taxation, begin with the dismissal of the notion of a ‘digital economy’ and thus a rejection of the notion of a bespoke tax regime for digital companies. Any attempt to follow this path, they argue, would risk violating the neutrality principle and so discriminate against such companies. This point was also picked up by the Digital Economy Group, a coalition of leading tech companies including online retailers, search engines, and social media platforms.

For some respondents, a major concern is the proliferation of unilateral measures by individual states. To illustrate the current state of play, a (somewhat subjective) global ‘heat map’ highlighting existing and proposed measures aimed at taxation of digital businesses is appended to this note. It is hard to argue that complexity and uncertainty are not exacerbated by uncoordinated and unilateral actions particularly within the EU where, some consider, such responses risk fragmenting the single market. A number of stakeholders strongly believe that the solution lies in a joint effort by businesses and governments. Most obviously, this should be achieved at OECD level, and ideally within the 100+ country BEPS Inclusive Framework. But such consensus building obviously requires time, which may not suit the politicians.

The new nexus concept of a virtual PE is also greatly discussed in responses to the RFI. Some commentators call for its introduction to counter exploitation by multinational companies of current flaws in international tax rules whilst other respondents dismiss the concept entirely for its imprecise nature. Views also vary on the time period in which any change should take place. Scepticism surrounds any temporary taxes remaining temporary, whilst a thoughtful overhaul of the international tax system to accommodate digitalisation is expected to take years.

Despite the range of options discussed above, the macro-economic concerns that they provoke and significant implementation challenges, it seems highly likely that change is coming, quite possibly in the not distant future. Political, NGO and media pressure, certainly supported by some individual states and the Commission, appear united in their dedication to ensure that tech multinationals pay more tax, some might say by any means possible.

Further reading

  1. Fifteenth Session of the UN Committee of Experts on International Cooperation in Tax Matters: other issues (Part III), 26 October 2017, United Nations
  2. The digitalized economy: selected issues of potential relevance to developing countries, UN Economic and Social Council, 8 August 2017, E/C.18/2017/6
  3. Public consultation on fair taxation of the digital economy (, 26 October 2017, European Commission
  4. Public Consultation on the Tax Challenges of Digitalisation, 1 November 2017, the OECD
  5. Inception Impact Assessment on fair taxation of the digital economy, 27 October 2017, European Commission
  6. Public comments received on the tax challenges of digitalisation – Part I and Part II, 25 October 2017, the OECD
  7. A Marxist approach to international taxation, Michael Devereux, University of Oxford Centre for Business Taxation blog, 17 November 2017
  8. Adopted Council conclusions on 'Responding to the Challenges of Taxation of Profits of the Digital Economy’, 30 November 2017, General Secretariat of the Council
  9. Autumn budget 2017, Corporate tax & the digital economy, HM Treasury, 22 November 2017