Digital service tax: is an international agreement reachable?

“France demands tax payments from big techs”: you may have heard this over and over in the past few weeks. Indeed, this statement refers to the “digital service tax” (or “web tax”, “Internet tax”) France has recently imposed on companies providing digital services, such as the GAFAM (Google, Amazon, Facebook, Apple and Microsoft). In this article we will review the reasons behind such a tax, how it can be implemented and the international developments around its introduction.

Why a tax on digital services

The main problem concerns the growth of the digital economy over the last few decades, which has seen a further boost during the pandemic. Several governments claim big tech companies pay too little in taxes on the profit they make in their countries, as they are able to record it in “tax haven” jurisdictions, a phenomenon known as tax avoidance.

The issue lies in the traditional international tax principles, according to which revenues must be recorded (and, most importantly, taxed) in the country where the company has its permanent establishment, its fiscal residence, that is where they have employees and operations.

It is immediate to see that companies offering digital services no longer need a physical presence in a country to operate and make a profit there. Hence, according to the current rules, they manage to not pay taxes (except for VAT) in the countries where they actually produce revenues. For example, it has been calculated that the 15 largest providers of digital services worldwide paid in Italy only as little as €68 million in taxes in 2018, in contrast with revenues amounting to €2.4 billion.

To tackle this issue, starting from 2017, the countries in the Organization for Economic Co-operation and Development (OECD) have been working on a multilateral agreement aimed at designing a fairer international tax regime. At a time of great financial difficulties, it is even more important that those who benefited from lockdown measures contribute more, according to their means.

An agreement was expected to be reached by the end of 2020. However, the COVID-19 crisis has called for a pause in negotiations and unilateral actions from many countries are threatening the possibility to reach a compromise. There is disagreement even among countries belonging to the same block, the EU.

The European Commission, indeed, acknowledged the problem already two years ago and warned Member States against adopting unilateral solutions. Instead, it presented two proposals aimed at preventing incoordination in the tax framework at least inside the EU.

The EU proposal