Taxation of the digitalised economy

Recent developments and their potential impact on the TMT industry

By Bart van der Gulik and Alexia Kardachaki

Taxation of the digitalised economy has rapidly become one of the central items of political and tax policy agendas. Various stakeholders are considering, proposing, or have already implemented measures at an international, European and unilateral level. The most characteristic examples are the two draft directives, which the European Commission (EC) published in March 2018. Although these directives are still at an early stage of political decision-making within the European Union (EU), they provide for concrete measures, which the TMT industry should be fully aware of. In fact, the potential reach of the draft directives is broader than one would immediately expect.

Taxation of the digitalized economy in the spotlight

The rapidly digitalising economy is fundamentally affecting many aspects of today’s society, such as employment, education, innovation, growth, business, and privacy. Modern information and communication technologies and internationalisation are profoundly changing value chains and business models, decoupling value creation from bricks-and-mortar operations and from a reliance on employees to execute business processes.

The digitalised economy gives rise to complicated tax policy challenges around value creation (i.e. where to tax?) and profit attribution (i.e. how much to tax?). These challenges highlight certain flaws of the current international tax system, which was originally designed in the 1920s to levy tax on companies based on their physical presence in a jurisdiction. This tax system has undergone only minor changes since that time. Discussions around the fit-for-purpose character of the international tax system have also been coupled with the growing public perception that certain technology companies are employing aggressive tax planning and tax avoidance practices to reduce their effective tax rate. Not surprisingly, taxation of the digitalised economy has very rapidly moved up the political agendas.

Both the Organisation for Economic Cooperation and Development (OECD), at the request of the G20, and the EU are now simultaneously working on the matter. Furthermore, certain countries have already taken unilateral measures to tax digital businesses and/or digital revenues. On 16 March 2018, the OECD has published an interim report as the groundwork for further work with the aim to publish a final report with proposed measures in 2020. On 21 March 2018, the EC has published quite concrete measures in the form of two draft directives, representing a short-term and a long-term solution (for a comparison of the work of the OECD and the EC, there is a reference to the Tax Policy Bulletin on PwC’s website).

The adoption of the measures proposed by the EC requires unanimity at the level of the Economic and Financial Affair Council and consultation of the EU Parliament. Both measures proposed by the EC have a proposed effective date of 1 January 2020.

The European Commission’s proposals

The short-term solution: a 3% levy on ‘digital’ turnover

The short-term solution is the Digital Services Tax (DST); in essence, a 3% levy on turnover resulting from the provision of certain digital services only.

The digital services that are in scope include: (i) advertising, i.e. the making available of advertising space on a digital interface, for advertising that is aimed at users of that interface; (ii) multisided interfaces, i.e. the making available of multi-sided digital interfaces which allow users to find other users and interact with them, and which may also facilitate the provision of underlying supplies of goods or services directly between users (also referred to as ‘intermediation services’); and (iii) transmitting user data, i.e. the transmission of data collected about users and generated from users’ activities on digital interfaces. Payment services, information technology and software, digital sales of audio, video and text, and intra-group transactions should in principle not fall within the scope of the proposed directive.

The DST applies to multinational companies with worldwide annual gross revenues exceeding 750 million euros and with annual taxable revenues from providing digital services in the EU of at least 50 million euros. In order to determine the portion of worldwide revenues allocable to the EU, specifically to the respective EU Member States, different allocation keys are being proposed depending on the type of digital services.

Digital service Allocation key
Advertising Number of times the advertisement appears
Multi-sided interfaces Number of transactions concluded by a user or number of users that have an account
Transmitting user data Number of local users whose data is being transmitted

The DST has been heavily criticised. A few important points of criticism are: (i) there would not be an appropriate measure to avoid double taxation as the DST paid would only be deductible as a cost from the corporate income tax base; (ii) the 3% gross levy does not take into account profit margins generated by the different business models, possibly resulting in after tax losses for low-margin businesses or passing on the tax burden to the ultimate customers; and (iii) being a turnover tax, the DST will most likely not fall within the scope of tax treaties and, hence, the bilateral double tax relief mechanisms as well as the tax treaty dispute resolution remedies will not be available.

The long-term solution: attribute profits to significant digital presence

The long-term solution includes common rules for the EU Member States to establish a taxable nexus for digital businesses operating across border (resident and non-resident) in cases of non-physical commercial presence (‘significant digital presence’), and attribute profits to such significant digital presence.

A company will be considered to have a significant digital presence and, therefore, a digital permanent establishment (PE), in a Member State if one of the following criteria is met: (i) it exceeds a threshold of seven million euros in annual revenues from digital services provided to users located in a Member State; (ii) it has more than 100,000 users of its digital services in a Member State; or (iii) over 3,000 business contracts for the supply of digital services are concluded between the company and users located in a Member State.

Digital services are broadly defined. A digital service is a service that is delivered over the internet or an electronic network and the nature of which renders its supply essentially automated, involving minimal human intervention. The following are examples of services that would qualify as digital services under the proposed directive: the supply and upgrading of digitalised products including software, website/webpage hosting services, and maintenance of digital marketplaces. The mere sale of goods or services facilitated by using the internet or an electronic network is not regarded as a digital service. This means, for instance, that giving access (for remuneration) to a digital marketplace for buying and selling cars would be considered a digital service, but the sale of a car itself via such a website would not. Furthermore, ‘traditional’ radio and television broadcasting and telecommunication services are in principle not deemed to be digital services.

For purposes of attributing profits to a significant digital presence, the EC acknowledged that more work needs to be done. However, from the proposal it can be clearly inferred that, in the view of the EC, value creation, and thus profit attribution, should also take into account in which Member State a user of a digital service is established and data is collected and processed. This is irrespective of the absence of physical presence and significant people functions in that Member State.

Potential impact on the TMT industry

Digital Services Tax: not only a tax for the big technology companies?

The DST has been drafted with the aim to target the social media and advertising business models, which typically involve the following two services: (i) free access to users and the collection, processing and sale of personal data to advertising companies or other businesses (e.g. search engines, social networks) and (ii) the digital platform model, granting access to a marketplace. The latter also comprises two services: the platform offers access to users in exchange for either a fee on a transaction or subscription, and the users offer services among themselves (e.g. online marketplaces). TMT companies with this specific profile should obviously closely monitor further developments.

Although drafted with a particular target group in mind, the DST is at times unclear and may also have implications for situations one would not immediately expect. An example to consider would be an online news provider in the media sector. Providing news online would not prima facie be a DST transaction. However, to the extent that online advertising space to third parties is also made available through the online platform of the news provider, the latter could be faced with DST, if the revenue from advertising meets the 50 million euros threshold. Notably, DST is applicable even if the supplier of the advertising services does not own the digital interface on which the advertisement appears. Furthermore, the broadness of the transmission of data category means that the DST should also be closely followed by all companies that collect user data through digital interfaces, such as software, websites, and (mobile) applications, with the intention to sell such data to third parties.

Significant digital presence: impacting the entire TMT industry?

The existence of a digital PE can be established if a very broad range of digital services is provided. For instance, while online publishers and information technology and software companies in principle should not fall within the domain of the DST, they could be considered as having a significant digital presence in an EU Member State, if they meet one of the three thresholds outlined in the long-term solution. The fact that these thresholds are relatively low and separately applicable (i.e. non-cumulative) further enlarges the scope of application of the proposed directive.

This means that the EC’s long-term proposal could have significant implications on the TMT industry. Apart from the technology sector, the definition of digital services captures all ‘non-traditional’ business models of the media and telecom sectors. For instance, the definition of digital services according to the proposed directive also includes the following: the supply of digitalised content of books and other electronic publications, the subscription to online newspapers and journals, accessing or downloading of music, films and games.

While telecommunication services are explicitly carved out, telecom companies providing internet service packages that allow, next to internet access, access to other webpages providing news, weather or travel reports etc., could also fall within the scope of the proposed directive for these services.

While the reach of the proposed directive may be significant, especially for the TMT industry, it remains to be seen how profits should be attributable to a digital PE once its existence has been identified and, thus, what the real impact would be for the tax position of TMT companies.


The developments around the taxation of the digitalised economy potentially have a huge impact on the tax position of companies within the TMT industry. Although political decision making is still at an early stage, the EC proposals do provide an indication on what companies can expect within the EU, but also as unilateral measures. TMT companies should closely monitor further developments and gear up to take action when measures become more concrete.

Contact us

Bart van der Gulik

Partner, PwC Netherlands

Tel: + 31 (0)88 792 65 69

Alexia Kardachaki

Senior Manager, PwC Netherlands

Tel: +31 (0) 88 792 73 79

Follow us