As ‘the digital economy is increasingly becoming the economy itself’,[1] there is growing opinion that big companies should pay their “fair share” of taxes. It is not surprising, then, that governments are setting their sights on taxing the digital economy.

Under the traditional rules for taxing cross-border business profit generation, profits can be taxed in a country other than the company’s country of residence only if they are attributed to a permanent establishment (PE) located there. The PE concept was designed with the idea of ‘physical presence’ in another country, i.e., traditional brick-and mortar businesses, when the company had a fixed place of business or a dependent agent there.

It is now obvious that companies can generate enormous volumes of sales in a country without having offices or employees there. As Tom Goodwin cleverly pointed out[2], “something interesting is happening”:



The OECD’s Base Erosion and Profit Shifting report (BEPS) identified the challenges to tax digital economy operators into three broad categories[3]: (i) data (attributing value to its generation); (ii) characterization (characterizing payments); and (iii) nexus (where-to-tax the profits generated by the digital business), followed by the what-to-tax question, i.e., value creation.

Recently, we learned that, to face these challenges, the finance ministers of Spain, Italy, France and Germany signed a letter addressed to the EU’s Estonian presidency proposing the taxation of digital companies by establishing an ‘equalization tax’ on the digital companies’ turnover in Europe. The OECD has already mentioned it as an alternative tax based on a new nexus, the concept of ‘the virtual PE’.

In the absence of international consensus, some countries have already introduced short-term unilateral actions, such as the equalization tax on turnover, the withholding tax on digital transactions, and the tax on revenues generated from digital services and advertising activities.

Australia and the United Kingdom introduced “diverted profits” tax with the view that MNEs are running economic activities in their countries but have no physical presence there as the contracts are performed remotely. In the United Kingdom, this is widely known as `the google tax’.

These free-rider unilateral measures can, however, increase tax uncertainty, create new loopholes for tax abuse, and raise double taxation issues as the same income may be taxed twice (the new tax at source and the traditional corporate income tax at place of residence).

From a long-term perspective, international common measures need to be adopted. In the EU, the Common Consolidated Corporate Tax Base proposes allocating MNEs’ profits in EU countries by using the apportionment approach based on assets, labor and sales. The purpose is to tax value creation where it is generated.

The main challenge for tax purposes is whether to add patches to the traditional rules or create new ones; either way, it demands out-of-the-box thinking. The EU countries are in motion for this to be done sooner than later: every day without proper rules results in huge tax collection losses.

Let us hope that the long expected OECD interim report on the digital economy taxation, to be presented in the spring of 2018, proposes a coordinated approach respectful of the single market integrity, double taxation treaties, fundamental freedoms and fair competition between EU countries. So far, it has proven to be a titanic task.



1 OECD Final Report (2015) Addressing the Tax Challenges of the Digital Economy, Action 1, Executive Summary.
2 Extracted from the article posted by T. Goodwin on March 3, 2015: The Battle Is For The Customer Interface:
3 OECD Final Report (2015) Addressing the Tax Challenges of the Digital Economy, Action 1, n.248.


165 artículos

Blog de Cuatrecasas, uno de los referentes en la abogacía de negocios en España y Portugal. Representamos a algunas de las principales empresas cotizadas de ambos países y asesoramos a nuestros clientes en operaciones estratégicas, así como a inversores extranjeros interesados en el mercado ibérico

Leave a Reply

Your email address will not be published. Required fields are marked *