EU Digital Services Tax: Aiming towards a Unified Solution

Written by Srishti Singh

1. Introduction:

The onset of the digital economy during the past decade is being viewed as the dawn of the new era. The digital sector has led to a shift in the way corporates operate and create economic value without any physical presence in any country. But its rise has also questioned the current ways to tax them.

Globally the predominant way to tax relies upon the physical presence where these corporates operate. However, the tax controversies surrounding big tech giants soon revealed the fault in the traditional tax rules. For instance, the European Commission (“EC”) ordered Apple to pay back €13 billion to Ireland in 2016, having found that the company had reached a deal with the Irish government allowing it to pay a maximum corporate tax rate of 1%. [i].

Such cases caught the attention of the wider public revealing the fact that these digital companies can get away without paying their fair share in the countries where they make their profits, due to lack of physical presence. Especially within the European Union (“EU”) the EC estimated that digital companies are taxed at an effective tax rate of 9.5% on average, compared to 23.2% for traditional companies in the EU.[ii]It invokes the issue of morality and ethical consideration with which the corporates should be held accountable to the public. Thus the EU is actively working towards taxation of the digital economy. With this context, the following article traces the issues and challenges that arises out of implementing a unified digital tax solution through cooperation amongst different EU Member states.

2. Role of EU in taxing the Digital Economy:

The EU leaders called for “an effective and fair taxation system fit for the digital era” in October 2017[iii]. It will make sure that the companies pay their fair share of taxes in the digital economy.It will bring in a common taxation framework for digital services across EU to prevent unilateral measures that could fragment the single market.

After deliberate discussions on the challenges of taxation of profits of the digital economy during the following months, the Council proposed new rules on March 2018.

2.1. What is in the original proposal?

In March 2018[iv], the EU issued two new tax proposals. The first is a comprehensive reform to corporate tax rules which will allow European states collect taxes from companies that generate profits without any physical presence in their country, solely based on the location of their target users.

The Commission also proposed an interim tax solution for immediately regulating activities that the current system fails to capture such as

  • created from selling online targeted advertising
  • created from digital intermediary activities which allow users to interact with other users and which can facilitate the sale of goods and services between them
  • created from the sale of data generated from user-provided information.

The above-mentioned activities are deemed to be taxed at 3 percent. Dubbed as “GAFA tax” for targeting four digital giants Google, Apple, Facebook and Amazon, the current proposal is aimed only at large companies with total annual worldwide revenues of €750 million and EU revenues of €50 million. It will help to ensure that smaller start-ups and scale-up businesses remain unburdened.

However, EU tax reforms need the backing of all member states to become law as the tax requires the support of all 28 EU.

3. Working towards Unanimity Goal amongst Member state:

However, the path towards a unified solution towards digital taxation does not seem to be straight forward unlike the proposal of the EC. The constant debates and mutual vetoes in the European Council have stalled the process of reaching towards a consensus towards Digital Services Tax (“DST”) proposal. On the other hand, there is another pressure to meet the deadline for achieving consensus to DST by March 2019.[v]

When the member states could not reach consensus on the original proposal, it had a chance to be adopted or rejected again on December 4, 2018[vi], at a meeting of EU finance ministers. But the proposal was revised again to target only revenues from digital advertising—significantly narrowing the scope from the original proposal in March. Here France and Germany were the key proponents of the narrowed down version of the proposal under which big firms would pay a levy only on advertising sales and not on total revenues, planning to introduce it in 2021 unless OECD members agree on a global approach before that date.

3.1. What are the major points of disagreement on DST?

  • Different approaches to tax the digital economy:

Most of the countries were able to agree on the allocation of taxable profits based on value creation in a jurisdiction, even though there is no physical presence. But the primary point of disagreement arose out of their different approaches to tax and reallocated taxable profits between different taxing jurisdictions in the digital economy. For instance, Germany and France wanted to implement a global minimum tax, perhaps modelled after the Global Intangible Low Tax Income (GILTI) provision in the new U.S. tax law. This approach would effectively set an international floor for corporate tax rates faced by foreign subsidiaries of multinationals and limit tax competition. [vii]

On the other hand the UK[viii]  is of the view that the value created by users should be taxed in the jurisdiction where the users are located rather than the location where their data is processed and analyzed.

In this context, even the Organisation for Economic Cooperation and Development (“OECD”)[ix] has identified the challenges while implementing a specific tax policy design to digital business models as most businesses are becoming digital, which may not get caught under the targeted design. It leads to differing opinions on taxing the digital economy.

  • The Threat to International trade:

Many member states are of the view that the original proposal could pose as a potential threat to international trade. For example, Germany is wary of the fact the digital tax might provoke retaliatory measures from the US on the EU tech startups as the tax primarily targets the U.S Companies.[x]

  • Huge Administrative costs:

Many countries have voiced concerns over substantial administrative costs that will come along with DST[xi]. For instance Revenue officials from Ireland told the Oireachtas Finance Committee in May 2018 that the move could hit the Exchequer to the tune of €160m.[xii].  That’s because digital tax paid could be offset against corporation tax. It will significantly reduce the amount of tax paid by companies in their states in comparison to taxes paid elsewhere in Europe.

  • First achieve a solution at an international level:

Although most of the EU member states agree that an international tax framework also needs constant revisions like in the EU, to ensure that digital business models would be adequately captured, the majority preferred a global and coordinated approach at the OECD level.

For instance, Ireland’s position has been that the best place for reforms to take place is at the OECD, with many EU countries as members.[xiii] With the involvement of big non-EU economies like Japan and the US, as most headquarters of tech giants are based there, any solutions must be worked out at an international level through a coordinated approach.

Thus the constant debate amongst member states on the usefulness of interim approach has stalled the process of reaching towards any unanimous decision.

4. Taking the Unilateral Measures Route :

Many EU member states are taking the unilateral route to implement digital tax plans while the bloc is still at loggerheads on an EU-wide levy.  Political leaders in the EU member states are becoming super-sensitive to the public mood, which is intensifying in the wake of the issue of the massive tax avoidance by the big tech companies. Thus leaders want to cater to their national interests. For instance, Pressure is mounting for Le Maire in France to funnel additional money to its economy as nationwide demonstrations over the high cost of living and the government’s perceived partiality toward big businesses over the welfare of the poor grow.[xiv]

The French government has decided to unilaterally introduce a new tax (GAFA tax) at the rate of 3 percent targeting revenue from online advertising and sales of user data[xv]. Similarly, the Spanish government approved a draft law that would tax large companies 3 percent of their digital revenue, bringing an estimated 1.2 billion euros ($1.37 billion) to state coffers each year. On the other hand, Italy has proposed a 6% digital tax to go into effect in April, on companies with worldwide revenues of at least €500 million ($567 million), with at least €50 million ($56 million) of that from Italy.

Taking cognizance of the uncertainty in reaching a consensus on DST Austria too announced its plans of implementing a digital tax on a national level by 2020.  While in the UK, Chancellor Philip Hammond announced that he plans to introduce a digital services tax from April 2020 at the rate of 2% digital tax on domestic revenue made by companies having annual revenues of at least £500 million ($628 million) worldwide [xvi]

Thus there is a renewed effort by different member states to bring unilateral measures which are tailor-made in accordance to their sovereign interests. Howsoever different they may appear in their approach, they are clearly targeting big tech giants like Google, Facebook, Amazon with revenues of more than 700 million euros globally.

5. Ending the Unanimity Rule on Tax Matters:

Meanwhile, the EC has voiced its concerns that the issue of excessive delay and divisiveness on DST has rendered government institutions unresponsive to the public’s needs. It feeds stagnation which ultimately will lead the corporates to get away without paying their fair share.

Thus, on December 21, 2018, the European Commission released a roadmap for moving away from unanimity. The materials describe the current voting procedure as “an obstacle to efficient decision-making.”[xvii] Interested parties had until January 17 to submit their responses. A communiqué on the topic is expected in the first quarter of 2019.

5.1. Why the EC wants to end Unanimity rule?

The commission said that globalization and, the ensuing growth of the digital sector have complicated taxation and revenue collection rights of countries, while new forms of digital tax fraud are on the rise. It demands for urgent cooperation to fight new forms of digital tax fraud and tax evasion, and harmonize reporting obligations for businesses in the EU.

On the other, the unanimity requirement of article 115 of the Treaty on the Functioning of the European Union has been a roadblock in reaching tax reforms over the years. Under such rule, each member state — regardless of GDP or population — has veto power over forward progress, which makes it difficult to reach consensus. The cost of the vetoes on tax reforms overall is in the hundreds of billions of euros a year. For instance, the commission in its document estimated that failure to agree on a reform of the corporate tax base, first proposed in 2011, has hampered EU growth, with losses worth 180 billion euros ($207 billion) in 2017 alone.[xviii] It has ultimately hampered EU growth and competitiveness as well as fiscal fairness.

It can be counter-argued that the unanimity principle has always acted as a cushion to protect the sovereignty of member states. But in light of the recent DST indecisiveness unanimity doesn’t protect the sovereignty anymore, as compromise often either leads to a stalemate or the solution at the level of lowest common denominator. Whereas member states often use important tax proposals as a bargaining chip against other demands.

In the absence of any unanimous approach in tax matters the Court of Justice of the European Union plays the main lead in resolving tax disputes of multinationals. But a typical CJEU tax decision must be the last resort as it offers negative guidance. It informs as to what constitutes a technical infringement of EU primary law. It tells the government what it can’t do, rather than what it can or should do. [xix].

5.2. Moving from Unanimity towards Qualified majority voting :

The EU Commission proposed on 15 January to extend majority voting to all EU tax policies by the end of 2025. The European Commission has published its proposed ‘roadmap’ for moving away from unanimity and towards qualified majority voting (QMV) by member states for making policy decisions in digital taxation.[xx]. The following are the most favoured options considered by the European commission:

  • Transition through “Ordinary legislative procedure”:

The transition process will require revision of the TFEU. That would be extraordinarily difficult. Better would be a workaround based on the existing treaty text. In order to achieve this, the Commission intends to move the decision-making process from the special legislative procedure under Treaty on the Functioning of the European Union (TFEU) art 113 and 115 that applies in taxation matters, under which the EU Parliament (EP) has only a consultative role, to the ordinary legislative procedure, requiring the consent of Parliament. Article 116 authorizes the use of “ordinary legislative procedure” when the European Commission determines that adherence to national law results in a market distortion affecting the single market’s competitive alignment. In these circumstances, the EU Council could adopt a remedial directive under QMV with the EP functioning as a joint legislator.

  • Invocation of “Passerelle Clause”:

The Commission’s second preferred approach to introducing the changes would not involve amending EU treaties but would use the so-called ‘passerelle clause’ in the Treaty on European Union (TEU) art 48(7). Under this clause, the Council can notify the member states of its intention to adopt QMV for a specific measure and, if there is no objection from national parliaments, agree on this procedural change unanimously with the consent of the EU Parliament. This way the EU could avoid the almost impossible task of renegotiating the treaty while at the same time smoothly move from unanimity towards qualified majority voting.

The benefit of general passerelle clause is that it gives the option of introducing qualified majority voting but remaining under the special legislative procedure – where the European Parliament  is limited to a consultative role. It also provides the option of qualified majority voting under ordinary legislative procedure – with co-decision by the European Parliament[xxi].

Hence both approaches will make sure that the EU could avoid the almost impossible task of renegotiating the treaty while at the same time smoothly move from unanimity towards qualified majority voting.

6. Conclusion: 

The decision of the EC to end unanimity in tax matters appears as a bold move. However, it is still riddled with numerous challenges which need to get resolved. Firstly, handing tax policy to the European level, even if only partially, would be a major intrusion on national sovereignty. Also smaller states might be left at a disadvantage if they lose the capability to exert influence in decision making. Again the move will suit the interests of larger EU member states with little to lose in terms of competitive advantage.

There is also a risk of thwarting global competitiveness in trade, especially for countries like Ireland whose booming economy depends on business-friendly tax environment. It would threaten Irish corporate tax revenues which could impair the overall competitiveness and would meet strong opposition from the Government as well as the businesses.

The transition process also needs to be weighed in. The Article 116 on QMV has never been used in this manner before, and its application would be controversial. Some member states might bring legal challenges before the CJEU. A preliminary question is determining who must identify the market distortion. The burden of proof on determining market distortion is also unsettled. These questions need to be introspected. A backup plan would be activating Passerelle clause, which authorises the EU heads of state to adopt QMV on a case-by-case basis.

In the end, the decision to end unanimity will have to be agreed again unanimously by all EU states — which seems impossible given the present chaos. There is a need to reflect upon the issue with a renewed focus by the commission to not overpower any member states influence in decision making while being able to reach a unanimous decision on DST.


[i]See Alex and Arthur, “Apple hit with €13bn EU tax penalty over illegal Irish aid”, Financial Times (Aug. 30, 2016)

[ii]See MEMO/18/2141, “Questions and Answers on a Fair and Efficient Tax System in the EU for the Digital Single Market”, European Commission – Press release (Mar.21, 2018)

[iii] See IP/17/4204, “Commission gathers views on how to tax the digital economy fairly and effectively”, European Commission – Press release (Oct. 26, 2017)

[iv]SeeFair Taxation of the Digital Economy“, European Commission (accessed 21 Jan. 2019)

[v]According to Pierre Moscovici, European Commissioner for Economic and Financial Affairs, Taxation and Customs, at the ECOFIN meeting of 4 December 2018, the deadline for completing a unitary approach to digital service tax is set for March 2019.”

[vi] Ibid.

[vii]See Daniel, “From the EU Digital Services Tax Debate—to the OECD?Tax Foundation, (Dec. 13, 2018)

[viii]Supra note 7.

[ix] See OECD (2015), Addressing the Tax Challenges of the Digital Economy, Action 1 – 2015 Final Report, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris,https://doi.org/10.1787/9789264241046-en.

[x] See Franceso, “EU digital tax plan flounders as states ready national moves”, Thomson Reuters, (Nov. 6, 2018)

[xi] See also Nordic Countries Oppose EU Commission Interim Proposals on Digital Tax”, CFE Tax (Jun. 4, 2018)

[xii] See Gavin “Paschal’s delicate EU tax balancing act is only going to get harder still”, Irish Independent (Dec. 31, 2018)

[xiii] Ibid.

[xiv] See Frank, “Austria to press ahead with digital tax for tech giants”, Born 2 Invest (Jan.3, 2019)

[xv] See Tom, “France Starts Digital Tax On Amazon, Facebook, Google”, Silicon (Jan.2, 2019)

[xvi]See Grace, “The EU can’t agree on a Digital Tax- But Silicon Valley’s still going pay”, Fortune (Jan.3, 2019)

[xvii]SeeEU roadmap for ending unanimity on taxation”, Tax Journal (Jan. 19, 2019)

[xviii]See Franceso, “EU Commission pushes back plan to end veto on digital tax to 2025”, Thomson Reuters (Jan.15, 2019)

[xix] See Robert,”Should the EU Scrap the Unanimity Requirement?”, Tax Notes (Jan 15, 2019)

[xx]SeeTaxation – more efficient EU law-making procedures”, European Commission (Jan 15, 2019)

[xxi] See COM(2019) 8,”Towards a more efficient and democratic decision making in EU tax policy”, European Commission (Jan. 15, 2019)

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