Taxating digital economy: unilateral and multilateral solutions

Digital economy, intended as the set of all economic activities based on digital technologies, is becoming an increasingly fundamental branch of economy. Its centrale role brought to attention the series of fiscal challenges that brings with it, hence opening the debate on the most suitable solutions.

Traditional tax systems are based on a physical production economy, where a tax base is identified and a tax rate is collected by taxation.  In digital economy, this phase is made difficult by the very nature of the dematerialized activities that compose it. 

The supply of goods and services, in e-commerce for example, does not have a physical or legal presence. And since under the laws in force companies residing in one country can be taxed in another country only if they have a fixed physical headquarters in the latter, keeping track and regularizing the taxation related to the introits of companies operating in the digital sector is a difficult operation and still full of uncertainties. This made it possible, especially for multinationals, to develop tax evasion or avoidance practices.

That is what led to the proposal of several digital services taxes, both unilateral and multilateral. Let’s see what they are about.

The Digital Services Tax (DST), proposed by the European Commission in 2018, applies to revenues from advertising sales, data transfer and intermediation between users and businesses. Its aim is to regulate the taxation of multinationals trading on the Web, in order to ensure fiscal equity and fair competition. This is a tax reform that would affect EU countries and member countries of the OECD, the Organization for Economic Cooperation and Development. 

Sinces an agreement between the EU and the OECD still cannot be found, in the expectation of a multilateral digital tax, several countries have adopted unilateral digital taxes, which consists of taxes that are applied on the revenues earned by the so-called Big Tech companies. The countries that have applied it are Italy, Great Britain, Germany, France, Hungary and Spain.

Meanwhile, the deadline to reach an agreement has been postponed several times, also due to coronavirus. Last June, in fact, the USA withdrew from the negotiating table, blaming the pandemic, postponing the deadline to 2021. OECD lead candidate Anna Diamantopoulou believes the deal could be reached by early 2022.

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