Digital economy taxation: lessons learned from the dispute in the EU

The increasing importance of mobile sources of income such as intangibles, combined with the possibility to manage global businesses remotely, has showed how the main traditional criteria to identify a taxable presence in a certain jurisdiction – i.e. residence and a fixed place of business or a dependent agent – result being inadequate.

Multinational enterprises (MNEs), especially the ‘champions’ in the Digital Economy, have certainly taken advantage of such circumstance in order to reduce their production and distribution costs and thus increase their profit margins and their competitive advantage. Practically, they structured their supply chains in such a way that a) prevented the identification of a taxable presence in those high-tax jurisdictions which coincided with the main markets where most of their business took place, and b) enabled them to qualify for the most appealing tax breaks granted by governments all around the world.

As a response to such aggressive tax planning, governments of the most industrialized EU countries reacted initially through unilateral twofold measures: on the one hand, they strengthened their anti-avoidance rules and their tax audit and assessment activities; on the other hand, they introduced many tax incentives for new investments by MNEs.  

More recently, certain tax measures implemented by Ireland, Luxembourg and the Netherlands to attract MNEs have been deemed by the EU Commission to be in violation of the EU State Aid legislation. As a result, such countries have to recover about €14 billion. Furthermore, a number of EU Member States is now considering the implementation of new types of taxes on the gross revenues arising from the provision of digital services.