Digital Economy Taxation: OECD Publishes Report on Taxation of the Digital Economy; European Commission Publishes Draft Directives

Sullivan & Cromwell LLP - March 27, 2018
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While the OECD has published a report on the taxation of the digital economy, noting that there is no consensus on what changes, if any, should be made, the European Commission has published two draft directives.

The first sets out a “digital services tax” levied on businesses of sufficient size at a rate of 3% on their gross revenues from on-line advertising, sales of user data or provision of digital platforms enabling user interaction.  This is intended as a temporary measure until wide agreement can be reached on a comprehensive proposal for digital tax reform.

The second is the Commission’s comprehensive proposal for reform.  It would introduce the concept of “significant digital presence” for corporate income tax purposes.  A member state would be able to tax a company on profits treated as made through a significant digital presence, even if it had no physical presence in that member state. 

The digital services tax may be implemented by individual member states even if no EU-wide directive is adopted.  The digital services tax as proposed raises a number of issues, such as:

  • how it will interact with corporate income tax systems and tax treaties;
  • what is and is not taxed; and
  • how and where users are counted in calculating it.