The Digital Levy: The Taxation of the Digital Economy in the EU

March 12, 2021

The European Commission has published a proposal for a directive introducing a digital levy, whose goal is to create a fair and competitive legal framework for the growing digital economy. The public consultation is open from January 18 to April 12, 2021, while the eventual implementation is scheduled for 2023.

Proposed Taxation Options for Digital Companies

The European Commission has outlined three taxation options for digital companies operating in the EU:  

  • A top-up tax on digital companies’ income
  • An additional tax on revenues generated from specific digital activities
  • An additional tax on B2B digital purchases. 

According to the EC, there are legislative and taxation gaps, from which digital companies are unfairly benefiting, compared to other sectors. 

Digital Companies’ Taxes and Tax Preferences

According to a 2018 report from Matthias Bauer at the ECIPE, the tax burden on companies from the EuroStoxx50 is similar to that of digital firms, which goes against the Commission’s assumption that the digital economy has created a disproportionately big amount of untaxed revenue. According to Bauer’s calculations and analysis, effective corporate tax rates of traditional corporations are at 27.1%, while for digital group corporations they are at 26.8%.

In different EU countries, some digital businesses have access to tax preferences, such as tax relief on patent profits, or on R&D expenditures. In general, digital companies are subject to the same corporate taxes as businesses from other sectors. In addition to that, different consumption tax systems exist, which aim to tax consumption at the buyer’s location. The EU has made a number of changes in the past years, geared towards charging and collecting VAT on digital products and services, leading to collecting €4.5 billion of additional tax revenue in 2018. The EU is implementing a new VAT directive, scheduled for July 2021, specifically targeting e-commerce. 

The Challenges of Special Taxation Regimes for Digital Companies 

If digital companies are taxed differently, as the digital levy consultation stipulates, this creates several challenges and difficulties. 

The economy is growingly digital, which is a trend that the current pandemic has only sped up. In that context, it’s difficult to define which companies should be considered as digital. More and more brick-and-mortar stores, for example, are offering their products online to reach more customers. 

DSTs (digital services taxes), which some EU countries have adopted as a temporary measure to tax digital companies, have, in some cases, led to price increases for EU customers, and also to an added tax and compliance burden on companies. 

The digital levy seems to be designed as a permanent measure that might increase the complexity of tax obligations, instead of simplifying them. In addition to that, adding a new tax on B2B transactions goes against the principles of allowing tax deductions on corporate taxes for companies’ expenses. 

The current consultation gives European companies, policymakers, and citizens the opportunity to discuss the digital economy’s taxation challenges, and to seek solutions that help tax digital products and services without overburdening businesses. 

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Check out also what is happening on the EU front after July 2021 in our article.