Leaked document reveals EU proposals for taxing the Digital Economy


A leaked European Commission document (dated 26 February 2018 and available here) reveals an insight into the EU’s intentions regarding taxing the digital economy. The draft proposal notes there is a continuing mismatch between where profits are taxed and value is created from the digital economy as a result of (i) making supplies where a digital business is not physically present, (ii) reliance on intellectual property and (iii) user value creation.

The “comprehensive solution”

Two key measures are outlined as part of a comprehensive EU solution to taxing the wider digital economy:

  1. a standalone Directive on digital permanent establishment (“digital PE”) and profit allocation rules, which would be included among the rules on the Common Consolidated Corporate Tax Base (“CCTB”, see our article here for further information); and
  2. a recommendation for Member States to implement corresponding rules in their double tax treaties.

Under the proposal, a business would have a digital PE, and therefore a taxable presence in an overseas jurisdiction, if it had (a) revenues from digital services exceeding €10 million, (b) a certain number (not included in the draft) of active users, or (c) a certain (yet unspecified) number of online contracts in that other jurisdiction.

Profit allocation rules under the CCTB would set out additional criteria specifically targeted at attributing profit to a digital PE by looking at where users are based and data is collected and processed, including (a) users’ engagement and contributions to platform development, (b) user data collection, (c) number of users and (d) user-generated content.

The proposed “comprehensive solution” would apply to all digital businesses of any size and would continue to be a profit (not turnover) based tax.

The “targeted solution”

Pending implementation of the EU “comprehensive solution” or satisfactory amendments to the OECD Model Tax Convention, a “targeted solution” is proposed aimed at businesses that:

  1. rely on “the exploitation of digital activities characterised by user value creation” (ie those where a user’s participation in a digital activity is an essential input to business activities);
  2. have annual worldwide total revenue in excess of €750 million; and
  3. generate revenue from the provision of digital services in the EU of at least in the range of €10 million to €20 million (the exact figure being undecided).

Services (a) supplied in consideration for the valorisation of user data by way of selling advertising space or user data (the following are noted as examples: Facebook, Google AdWords, Twitter, Instagram and “free” Spotify), and (b) digital platforms/marketplaces, which offer intermediation services for the suppliers and recipients of the underlying goods or services (the following are noted as examples: Airbnb and Uber) are stated to be in scope of the “targeted solution”. The EU perceives these as sources of greatest mismatch between profit generation and taxation.

For those businesses within scope, it is proposed that a single rate of tax (presently proposed to be between 1% and 5%) would be applied to gross revenues without any allowable deductions for expenses (ie a turnover tax, see our article here). This gross/turnover tax would be payable to the Member State where the supply takes places (applying the digital PE rules) and thereafter would be an allowable deduction against corporation tax in the country of residence of the given business.


This leaked paper will not be surprising for businesses that are active in the digital economy, given that taxing the digital economy was the subject of the OECD BEPS Action 1 Report and that the European Commission released a paper on 21 September 2017 outlining different options for taxing profits of digital businesses. However, the clarity of the “targeted solution” proposals suggests that changes to the taxation of the digital economy in the EU may come sooner than some might have expected.

For more information in respect of changes affecting the digital economy and the CC(C)TB, please see our articles: EU proposals move ahead for a common corporate tax base (here), Europe Taxing the Digital Economy: could a turnover tax be on the horizon? (here), Taxing the Digital Economy: first steps by the UK (here), Public Input on Taxing the Digital Economy (here), and EU blacklist of tax havens and plans for taxing the digital economy (here).