An Across-the-Board Solution for the Taxation of Digital Services Not in Sight?

The OECD’s two-pillar strategy for income taxation was discussed during a Paris summit in March. At its meeting in March, ECOFIN rejected the European Commission’s proposal for the taxation of income from digital services on the part of Finland, Sweden and Ireland. France, Italy and Spain are going to introduce national rules for the taxation of income from digital services in 2019.

OECD’s Approach to the Taxation of Digital Services

On 29 January 2019, the OECD released an update regarding its activities in the taxation of income from digital services. The OECD seeks to reach an across-the-board agreement in the taxation of digital services by 2020. The OECD’s strategy is based on two basic pillars. The first of the pillars relates to the distribution of the right to income taxation among individual states taking into account the taxable presence (the “nexus approach”) and the allocation principles in respecting the rules of the arm’s length principle. Therefore, as part of the first pillar, the existing rules must be revised in view of the active participation of digital services users, intangible marketing assets and the creation of value in the market economy, and the economic rather than merely the physical taxable presence that could result in a change to the definition of a permanent establishment. In turn, the second pillar places an emphasis on continuing the implementation of the BEPS rules, namely those that make it possible to additionally tax income in the recipient’s country, provided the income is subject to low or zero taxation in the source country.

A whole series of proposals is being debated by the OECD countries; however, these aim to tax not only income from digital services, but also multinationals’ income. The OECD’s objective is to reach an agreement about a proposal that will be acceptable for both the developed and developing countries while being easy to implement. Nevertheless, in seeking consensus, it is also necessary to consider the different definitions of the tax base across individual states, differences in the tax rates, which ensure competitiveness, and the sovereignty of individual countries.

Digital services income taxation featured on the agenda of the OECD summit that took place on 11-12 March 2019 in Paris. The supporting document for discussion was the newly issued publication introducing the future concept of digital transformation. A recording of the actual debate held during the summit is also available online.

Proposals for the Taxation of Digital Services as Submitted by the European Union

As we informed you earlier in our March and December issues of dReport, on 21 March 2018, the European Commission released a draft directive on the common system of a digital services tax on revenues resulting from the provision of certain digital services (for example, income from online advertising, sales of collected user data and income from digital platforms enabling interaction among users that use these platforms to exchange goods and services). According to the proposal, income from the online sale of goods and services, and income from regular payment or financial services should not be subject to taxation. The digital services turnover tax (“DST”) of 3% should only constitute a temporary solution until such time as an agreement is reached at the supranational level (namely at the level of the OECD, G7 and G20 countries), with effect from 1 January 2020.

By way of reminder, we note that the second of the proposals released by the European Commission on 21 March 2018 contained a definition of a “digital permanent establishment”, the objective being to infer a “virtual” taxable presence in a country where the digital services are provided. Therefore, the institutes of the “digital permanent establishment” should introduce the right of a country to collect tax arising from digital services if the recipient of the services is based in its territory.

A digital permanent establishment of the business would be formed in the territory of the given state if at least one of the following conditions were met during the taxation period: 

  1. the digital technology in question has more than 100,000 users in the taxation period
  2. the digital service generates revenues in excess of EUR 7 million
  3. the provider has concluded more than 3,000 business contracts for the provision of the technology.

The rules for allocating income arising from digital services should be compliant with the OECD’s transfer pricing guidelines – in other words, income should be taxed in the country in which the income-generating value originates: ie, according to the European Commission’s proposal, in the country where the digital services’ recipient is based. In its proposal, the European Commission also stated that it would seek to implement the institutes of a digital permanent establishment in the OECD’s model double taxation treaty. Despite the matters outlined above, the European Union prefers a supranational solution compliant with the solution proposed by the OECD.

However, following ECOFIN’s meeting of 12 March 2019, it seems that the latter of the two proposed solutions will not be implemented at the EU level either, the reason being that the implementation of the solutions requires unanimous agreement of all member states: at the most recent meeting, Ireland, Finland and Sweden, to name a few, voiced their opposition to the proposal.

Individual National Approaches to Digital Services Taxation

Given how lengthy the process of finding a unified solution for taxing digital services income is, a whole series of countries are considering a solution at a national level at least. These countries include, for example, France, Spain or Italy.


On 6 March 2019, France submitted a proposal for digital services income tax. According to the proposal, the tax would be imposed on income arising from online advertising, income arising from the sale of collected user data and on income arising from digital platforms enabling interaction among users that use these platforms to exchange goods and services. The French DST should apply to all businesses whose global annual turnover exceeds EUR 750 million and, at the same time, the annual turnover generated in France exceeds EUR 25 million (this is where the French DST differs from the European Commission’s draft directive, which proposes the threshold of national annual turnover at EUR 50 million).

However, the fact that the service takes place in France should be a necessary prerequisite for the taxation of income arising from digital services. The rules for inferring the place where the digital service is provided should be determined in relation to the location of the participants in the digital transaction or the location of the terminal through which the service is provided. France’s national DST should be introduced with retrospective effect from 1 January 2019 onwards and a variable tax rate depending on the business’ turnover at 5% at maximum. Income arising from digital services subject to taxation in France should be determined as a proportion of the total income that the business generates from digital services. Business should be able to prepay the tax liability in the form of two ongoing advance payments and the digital services tax paid should be tax deductible for income tax purposes.


Similarly, Spain introduced a proposal for digital services taxation on 18 January 2019. However, it is based on the digital services tax proposal as presented by the European Commission. It is assumed that the approval process will take between three to six months. If the proposal is approved, it will come into force three months following its promulgation in the national collection of laws. DST should be collected in Spain on a quarterly basis, and the obligation to tax income arising from digital services should be derived from the moment they are provided in Spain by the relevant taxable person. The ‘provision of a service in Spain’ refers to situations where the recipient of the service is located in Spain. Spanish DST would apply to all businesses whose global annual turnover exceeds EUR 750 million and, at the same time, the annual turnover generated from digital services in Spain exceeds EUR 3 million. The turnover generated in Spain will include all income without the possibility of excluding intercompany transactions. The tax rate should be at 3%. The Spanish proposal also anticipates that some services will not be subject to taxation (this should namely relate to regular financial services).


The introduction of digital services tax at the national level is also being considered in Italy. DST at 3% should be imposed on all payers whose global annual turnover exceeds EUR 750 million and, at the same time, annual income generated from digital services in Italy exceeds EUR 5.5 million. Italian DST is derived from the European Commission’s proposal and refers to all of the above listed types of income. It should be implemented by 30 April 2019 and come into effect within 60 days from the date of its promulgation. As opposed to the Spanish version of DST, intercompany income arising from digital services should not be subject to DST.

We have been following the latest developments in this issue at the level of both the OECD and the EU on an ongoing basis and will keep you informed of the next steps on our blog or through dReport.


The article is part of dReport – March 2019, Tax news; Grants and investment Incentives.

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