European digital services taxes

In the last few years, there have been worries that the current international tax system doesn’t take into account how the economy is becoming more digital. Under the current rules for international taxes, multinational companies usually pay corporate income tax where production happens, not where consumers or, in the digital sector, users are. But some people say that, through the digital economy, businesses implicitly get money from users in other countries, but since they don’t have a physical presence in those countries, they don’t have to pay corporate income tax there.

The Organization for Economic Cooperation and Development (OECD) has been holding talks with more than 130 countries to change the international tax system in order to address these worries. Some of the biggest multinational companies in the world would have to pay some of their income taxes in the places where their customers are. Pillar One is the name of this plan.

Pillar One would replace some of the rules that are already in place for taxing multinationals and go against some of the rules that countries have put in place in recent years to tax digital companies. The most common type is a digital services tax (DST), which is a tax on certain large digital companies’ gross revenue streams.

Because Pillar One is focused on changing where profits are taxed, including for many large digital companies, digital services taxes are expected to be repealed as part of a transition process that will be finished by the end of 2023.

Once the Pillar One rules are in place, Austria, France, Italy, Spain, the United Kingdom, and the United States will make a joint statement on October 21, 2021, outlining a plan to get rid of digital service taxes and threats of retaliatory tariffs. The U.S. Treasury said on November 22 that Turkey had agreed to the same terms.

In the joint statement, they described a way to use credits to bridge the gap between the digital services tax liability and the new pillar one tax liability for companies that are subject to both. This would be needed for the transition to happen with as little double taxation as possible for companies that would have to pay both Pillar One taxes and the current taxes on digital services.

Even though work has continued on Pillar One, as shown in the most recent policy document, it is still not clear how many different policies might be removed if Pillar One is ever adopted.

But the OECD agreement may have effects on more countries than just those. About half of the OECD countries in Europe have announced, proposed, or already put in place a tax on digital services. Because these taxes mostly hurt U.S. companies and are seen as unfair because of that, the U.S. has threatened retaliatory tariffs against these policies.

A digital services tax has been put in place in Austria, France, Hungary, Italy, Poland, Portugal, Spain, Turkey, and the UK. Belgium, the Czech Republic, Denmark, and Slovakia have all put forward plans for a digital services tax, and Latvia, Norway, and Slovenia have either said they want to implement a digital tax or shown that they plan to do so.

The proposed and actual taxes on digital services are very different in how they are set up. For example, Austria and Hungary only tax online advertising income, but France’s tax base is much broader and includes income from providing a digital interface, targeted advertising, and the transmission of data collected about users for advertising purposes. Tax rates range from 1.5 percent in Poland to 7.5 percent in both Hungary and Turkey (though Hungary’s tax rate is temporarily lowered to 0 percent). Video streaming services would have to follow Denmark’s DST.

Most people thought that these taxes on digital services were temporary until an agreement was made at the OECD level. Now that an agreement has been made, it will be important to watch how countries change or get rid of their digital services taxes. At the same time, the United Nations (UN) has added special rules for income from automated digital services to the UN Model Tax Convention. These rules would apply to treaty parties that agree to include them.