EN   EN 
 
 
 EUROPEAN  
COMMISSION   
Brussels, 21.3.2018  
SWD(2018) 81 final  
 
COMMISSION STAFF WORKING DOCUMENT  
 
IMPACT ASSESSMENT  
 
Accompanying the document  
Proposal for a Council Directive laying down rules relating to the corporate taxation of 
a significant digital presence  
 
 and 
 
Proposal for a Council Directive on the common system of a digital services tax on 
revenues resulting from the provision of certa in digital services  
{COM(2018)  147 final}  - {COM(2018)  148 final} - {SWD(2018)  82 final}   
 
2 
  
Table of Contents  
1. INTRODUCTION: POLITI CAL AND LEGAL CONTEX T ................................ ...............................  4 
2. PROBLEM DEFINITION  ................................ ................................ ................................ .....................  8 
2.1 What are the problem drivers?  ................................ ................................ ..........  8 
2.2 What are the consequences?  ................................ ................................ ............  16 
3. WHY SHOULD THE EU AC T? ................................ ................................ ................................ .........  20 
3.1 Legal basis  ................................ ................................ ................................ ....... 20 
3.2 Subsidiarity: Necessity of EU action  ................................ ..............................  20 
3.3 Subsidiarity: Added value of EU action  ................................ ..........................  21 
4. OBJECTIVES: WHAT IS TO BE ACHIEVED?  ................................ ................................ ................  22 
4.1 General objectives  ................................ ................................ ...........................  22 
4.2 Specific objectives  ................................ ................................ ...........................  23 
5. WHAT ARE THE AVAILAB LE COMPREHENSIVE POL ICY OPTIONS?  ................................ .. 23 
5.1 What is the baseline against which options are assessed?  ..............................  23 
5.2 What are the available comprehensive policy options?  ................................ .. 28 
5.3 Policy options discarded at an ear ly stage  ................................ .......................  34 
6. WHAT ARE THE IMPACTS  OF THE COMPREHENSIVE  POLICY OPTIONS?  .........................  35 
6.1 Realigning profit allocation rules with value creation intra -EU  - Options 1 
and 2  ................................ ................................ ................................ ................  35 
6.2 Option 3: Realigning profit allocation rules with value creation intra -EU 
and recommendation to change rules vis -à-vis third countries  .......................  43 
6.3 Type and level of digital activities  ................................ ................................ .. 44 
6.4 Impact on small and medium -sized enterprises  ................................ ..............  47 
7. HOW DO THE COMPREHEN SIVE OPTIONS COMPARE ? ................................ ..........................  48 
8. PREFERRED COMPREHENS IVE OPTION ................................ ................................ .....................  49 
8.1 Description of the preferred comprehensive option  ................................ ........  49 
8.2 Administrative burden and compliance costs  ................................ ..................  51 
8.3 Subsidiarity and proportionality of the preferred option  ................................ . 52 
9. INTERIM SOLUTION  ................................ ................................ ................................ .......................  53 
9.1 What is the baseline against which the interim solution is assessed?  .............  53 
9.2 What are the available interim policy options?  ................................ ...............  55 
9.3 What are the impacts of interim policy options?  ................................ .............  60 
9.4 Preferred interim option  ................................ ................................ ..................  78 
10. HOW WILL ACTUAL IMPA CTS BE MONITORED AND  EVALUATED?  ................................ .. 80 
10.1  Monitoring arrangements  ................................ ................................ ................  80 
 
3 10.2  Evaluation  ................................ ................................ ................................ ........  82 
ANNEX 1: PRO CEDURAL INFORMATION  ................................ ................................ ............................  83 
ANNEX 2: STAKEHOLDER  CONSULTATION  ................................ ................................ .......................  85 
ANNEX 3: WHO IS AFFE CTED AND HOW?  ................................ ................................ ...........................  98 
ANNEX 4: ANALYTICAL METHODS  ................................ ................................ ................................ .... 105 
ANNEX 5: SPECFICITIE S OF DIGITAL BUSINES S MODELS IN RELATION  TO TAXATION  ...... 110 
ANNEX 6: DETAILED BA SELINE SCENARIO ON R ELEVANT POLI CY INITIATIVES .................  118 
ANNEX  7: WHAT ARE T HE CONSEQUENCES?  ................................ ................................ .................  131 
ANNEX 8: METHODOLGY BEHIND REVENUE ESTIM ATES FOR THE INTERIM  OPTIONS  ...... 140 
ANNEX  9: PROPERTIES  OF A DESTINATION -BASED CASH -FLOW TAX  ................................ .... 143 
ANNEX  10: MACROECON OMIC I MPACT OF CHANGES IN THE CCCTB FORMULA  .................  145 
ANNEX  11: COMPATIBI LITY OF PREFERRED IN TERIM SOLUTION WITH EU LAW  ................  148 
ANNEX 12: INTERIM SO LUTION – HOW IT WOULD WORK IN  PRACTICE  ................................ .. 150 
ANNEX  13: WORK AT T HE OECD  ................................ ................................ ................................ ........  157 
ANNEX  14: REFERENCE S ................................ ................................ ................................ ......................  158 
 
 
4 1. INTRODUCTION : POLITICAL AND LEGAL C ONTEXT  
 
The digital single market is one of the 10 political priorities of the European 
Commission.  The digital single market strategy1 aims at opening up digital opportunities for 
people and businesses in a market of over 500 million EU consumers. Completing the digital 
single market could contribute up to EUR 415 billion per year to Europe's economy, create 
jobs and transform our public services. In the 18 months following the adoption of the digital 
single market strategy, the European Commission delivered the announced pro posals. In the 
mid-term review of the strategy2 it has updated its analysis and focused on the next series of 
challenges. Digital technologies are transforming our world and having an important impact 
on taxation systems. They help to improve their managem ent, offering solutions to reduce 
administrative burdens, facilitate collaboration between tax authorities, and address tax 
evasion. However, they also transform business models, putting pressure on taxation systems 
of EU Member States.  
To fully deliver on  its potential, the digital single market needs a modern and stable tax 
framework for the digital economy. This framework is important to stimulate innovation, 
tackle market fragmentation and allow all players to tap into the new market dynamics under 
fair and balanced conditions. It is essential to ensure tax certainty for business investment and 
to prevent new tax loopholes emerging in the single market.3   
Policy makers are struggling to find solutions which would ensure fair and effective 
taxation  as th e digital transformation of the economy accelerates . There are weaknesses in 
the international tax rules as they were originally designed in the 1920s for 'brick and mortar' 
businesses and have now become outdated. In particular, this has led to a misalign ment of the 
place where value is created, notably in the case of user contributions, and the allocation of 
the taxing rights and ability to enforce taxation (Hallerstein, 2014).  
Being grounded in the concept of physical presence, the current corporate tax  rules no 
longer fit the modern context , where online trading across borders with no physical 
presence has been facilitated and where businesses rely heavily on hard -to-value intangible 
assets, where automation, user generated contents and data collection,  analysis and treatment 
have moved from being auxiliary to being core activities for value creation. These issues 
potentially impact all businesses. As a result, some businesses are present in some countries 
where they offer services to consumers and concl ude contracts with them, taking full 
advantage of the infrastructure and legal framework available while they are not considered 
established for corporate tax purposes. This situation tilts the playing field in their favour 
compared to established companie s.  
                                                 
1  COM(2015) 192.  
2  COM(2017) 228.  
3 The scope of this initiative is limited to tax issues arising in corporate taxation. Challenges in relation to the 
application of personal income taxes, especially of relevance for collaborative models, are not addressed in this 
framework. They are notably covered in the June 2016 Communication on an Agenda for the Collaborative 
economy (COM(2016) 356 final.  
 
5 In contrast, the VAT system is effectively being adapted to the digital economy , as 
announced in the Action Plan on VAT4 adopted in April 2016. Notably, the problem of digital 
companies establishing themselves in Member States with low VAT rates, or di gital 
companies not being established in the EU at all, is addressed by taxing sales in the Member 
State of the consumer rather than in the Member State where the supplier is established (i.e., 
the VAT system is evolving towards the 'destination principle' ).5  It is in the framework of this 
reform that the VAT proposal on e -commerce was adopted by finance ministers in December 
2017 .6 
Since the start of its mandate, this Commission has taken action to ensure the principle 
that all businesses operating in the  EU pay their taxes where profits are made and thus 
where value is created.  This principle is essential for a fair and effective taxation in the 
single market, and it can only be enforced through common and coordinated measures. 
Divergent national approach es within the EU can fragment the single market, increase tax 
uncertainty, destabilise the level playing field and open new loopholes for tax abuse. As 
already identified in the Commission's report in May 2014,7 the international tax framework 
needs to be reformed so that it effectively captures the value created from new business 
models. As it has so far proved difficult to agree on solutions at global level (OECD, 2015a), 
the Commission has adopted a communication in September 2017 on "A fair and efficien t tax 
system in the EU for the digital single market"8. The Communication sets out an ambitious 
agenda for a common EU approach in the absence of adequate global progress, with the aim 
to ensure that the digital economy is taxed effectively and in a way th at ensures fairness and 
supports growth.  
The growing challenge of ensuring that all actors in the digital economy are fairly taxed 
on their income has still not been adequately addressed, primarily due to a lack of 
international consensus and the multidim ensional nature of the challenge . The OECD 
examined this issue in the context of its BEPS project. However, at the time it proved difficult 
to agree on structural solutions at global level, as is evident from the OECD report on BEPS 
Action 1 (OECD, 2015a).  The OECD has published its interim report on the taxation of the 
digital economy and presented it to the G20 Finance Ministers at their meeting in March 2018 
(OECD, 2018). A final report is due in 2020, with a progress update in 2019.  
The current situatio n is clearly unsustainable in an increasingly globalised and digitally 
connected world, where ever more activity is moving into the digital space.  Failure to 
address this situation will lead to more opportunities for tax avoidance, less tax revenues for 
public budgets, negative impact on social fairness, including through erosion of the social 
                                                 
4 COM(2016) 148 final .  
5 In the 2011 Communication on the Future of VAT ( COM(2011) 851  final), the Commission outlined that the 
general principle of EU VAT law should be based on taxation taking place in the country where the good or the 
service is consumed (the destination principle). In considering the Communication, Council in May 2012 
broadly endorsed the destination principle as the way forward for a definitive VAT system in the EU ( Council 
conclusions ).  
6 Council Directive (EU) 2017/2455  (OJ L 348, 29.12.2017, p. 7 –22).   
7 European Commission Expert Group on Taxation of the Digital Economy Report, May 2014.  
8 COM(2017) 547 final.  
 
6 budgets, and it will destabilise the level playing field for businesses. This puts at risk EU 
competitiveness, fair taxation and the sustainability of Member States' budgets. In its 
conclusions of 5 December 2017, the ECOFIN Council looked forward to appropriate 
Commission proposals by early 2018, taking into account relevant developments in the 
ongoing discussions at the OECD.  EU leaders committed to global change of  taxation rules, 
to adapt their tax systems to ensure that digitally -generated profits in the European Union are 
taxed where the value is created.9 
The OECD is continuing its work on finding global solutions that can address the 
challenges, which is an opp ortunity for the EU to feed its work into this process. The 
Commission has followed closely the preparatory work at OECD level to ensure its approach 
is coordinated as much as possible. Indeed, there is a very broad agreement on the problem 
analysis and th e most promising directions for solutions. As is clear from the interim report 
(OECD, 2018), work at the OECD through the Inclusive Framework10 will focus on finding 
consensus -based solutions by 2020. Annex 13 explains the interaction between the 
Commission 's initiative and the work of the OECD.  
The priority for the Commission is to propose a meaningful, comprehensive solution, 
that can positively impact solutions at international level, against a baseline scenario in 
which digitalisation progresses rapidly , and so does the pressure to act.  The impact 
assessment therefore concentrates on assessing comprehensive policy options and identifying 
a preferred solution in responding to core objectives. The comprehensive solutions revolve 
around structural changes t hat address the root issue, aligning the way in which the right to 
tax and profits are allocated between jurisdictions with the new ways of value creation. The 
assessment is done against a baseline scenario, in which the CCCTB and other relevant 
initiative s underway, such as the recently adopted VAT e -commerce proposals, will be 
implemented.  
Arriving at a meaningful comprehensive solution can take time, but there is an urgent 
need to act. The urgency for an EU action lies in the immediate threat of unilater al actions 
from Member States that risks further fragmenting the single market while preventing the full 
roll-out of the digital single market. The longer it takes to find a solution, the bigger the 
pressure on individual Member States to act to ensure fai r taxation and a more level playing 
field among businesses. The imperative to act now has been confirmed by the different 
consultation activities that the Commission has carried out as part of the preparatory works 
that are the basis for this impact assess ment report. From the 462 respondents to the open 
public consultation, 82% as well as 16 out of 21 national tax administrations agree that 
"something should be done about the current international tax rules in what concerns the 
digital economy ".11 Therefore , unilateral initiatives are expected to spread. Since 2013, there 
                                                 
9 ECOFIN Council conclusion, 'A' Item note 15175/17.  
10 The Inclusive Framework  brings together about 110 jurisdictions to collaborate on the implementation of the 
OECD/G20 Base Erosion and Profit Shifting (BEPS) Package . 
11 Annex 2 presents a detailed summary of the results.  The OECD has also carried out a public consultation 
exercis e recently between September and October 2017. A summary of the main results can be found in Annex 2 
to this report.  
 
7 is an accelerating trend of countries testing or planning to implement alternative approaches to 
ensure effective taxation of the digital economy (see section 9.1).  
There are clear risks of postponing EU action  
 There is a risk of creating additional barriers  to the emergence and scaling -up of 
new businesses, especially start -ups. The digital single market cannot reach its full 
potential if young and innovative companies are held back by an tiquated tax rules.  
 There is a  risk of quickly losing our competitiveness  by deterring investment, 
innovation and growth by offering an uncertain, unstable, fragmented and outdated tax 
framework.    
 Moreover, there is a risk of  missing the chance to realis tically agree on a common 
response in the future . The more measures are already in place, the less likely are the 
chances to agree on a common approach.  
This is why the Commission believes that more immediate, interim measures should be 
considered. Hence t his impact assessment also examines interim solutions to tackle the 
problem. These solutions revolve around new taxes that are relatively easy to implement and 
can serve as a good proxy for the comprehensive solution until this is implemented. This is in 
line with the Conclusions of the 5 December 2017 ECOFIN Council, which invite the 
Commission to assess such measures.  
This impact assessment concludes that the best comprehensive policy option centres on 
new permanent establishment rules capturing 'digital presence' and new rules for profit 
allocation to the permanent establishment taking into account the contribution of users 
to the value creation process.  These would be implemented within the EU through a 
Directive with a broad scope. All companies surpass ing certain digital activity thresholds in a 
jurisdiction would trigger a (digital) permanent establishment in that jurisdiction. To make the 
current proposal for a Common Consolidated Corporate Tax Base (CCCTB) consistent with 
these new rules, the CCCTB p roposal would have to be adapted to reflect the new digital 
permanent establishment rules. Its apportionment formula would also be adapted by 
introducing a factor that reflects the importance of user contributions to value creation, in line 
with the new pr inciples for profit allocation. The new rules laid down in the Directive (and 
included in the CCCTB) would apply to companies that are tax resident in EU Member 
States. To deal with companies that have no tax presence anywhere in the EU, the Directive 
woul d be complemented by a Recommendation to Member States to update their double tax 
conventions in line with the new rules.   
For the time period until implementation of the comprehensive solution, the preferred 
interim solution is a tax on gross revenue lev ied on digital activities relying strongly on 
user contributions . This is notably the case for revenue from services related to online 
advertising and from multi -sided digital platforms, connecting different sides of the relevant 
market (these types of bus inesses are further explained in section 2.1.3). After implementation 
of the comprehensive solution, the interim tax on revenue should stop being applied.   
 
8  
 
2. PROBLEM DEFINITION  
 
The digitalisation of th e global economy is happening fast and corporate taxation rules 
are outdated.  Today's rules have been built on the principle that profits should be taxed 
where the value is created. However, they were largely conceived in the early 20th century. A 
vast majority of the respondents to the open public consultation (65%) as well as 13 out of 21 
national tax administrations surveyed agreed with this view that the current rules are not at all 
or only to a little extent adapted to the digital e conomy (see Annex 2 for more details).  
1.1 What are the problem drivers?  
1.1.1 Current corporate tax rules  
In the vast majority of cases, the allocation of taxing rights between two countries is laid 
down in bilateral double tax treaties.  The network of double tax treaties within the EU is 
Figure ( 1): Problem tree  
Difficulty to tax/ 
opportunities 
for tax 
avoidance  Less revenue for public 
budgets/negative impact 
on social fairness  
Current tax rules  
Taxation based on physical presence  
Profit attribution based on analysis of 
traditional factors   Risk of 
internal 
market 
fragmentation  
Drive towards the digital economy  
Increased user contribution to value creation  
Increased use of knowledge, data, intangible assets  
More complex and global value chains  
Data as new source of revenue  Lack of a 
level playing 
field and 
distortion of 
competition  
 
9 almost complete.12 The network of double tax conventions with the most relevant third 
countries is also quite dense.13  These treaties lay down the rules of 'where to tax', i.e. what 
triggers a right to ta x in a country, and 'how much to tax', i.e. how much of corporate income 
is allocated to a country. Tax residence in a country creates a right, in principle, for the 
residence country to tax worldwide income. Today's permanent establishment rules determine  
the threshold and type of activity that needs to be carried out in a country in order for a non -
resident business to be taxable in that country. Non-tax residents become liable to tax if they 
have a presence that amounts to a permanent establishment.14 In cases where there is no 
double tax treaty, domestic rules on tax residence and permanent establishment apply, without 
a mechanism to ensure that double taxation or double non -taxation does not happen.  
The international corporate tax rules aim to tax profit s where the value is created, but 
the implementation of this principle in the current international tax framework was 
mainly designed for the traditional economy. Because the current rules  on permanent 
establishment are largely based on having a physical p resence and treat the permanent 
establishment as if it was effectively a separate enterprise, these rules were clearly developed 
for the traditional economy . However, only profits attributed to the permanent establishment 
can be taxed. Today the profit of multinational groups that can be attributed to the subsidiaries 
and permanent establishments in various countries is determined by transfer pricing rules, 
based on an analysis of the functions performed, the assets used and the risks assumed by the 
differe nt entities within the group. These transfer pricing rules, too, were developed mainly 
for the traditional economy.15  
Most double tax treaties of EU Member States have been negotiated on the basis of the  
OECD Model Double Tax Convention, according to whic h having a permanent 
establishment  requires a fixed place of business.  Such a place will normally encompass 
physical premises, facilities and installations used for business purposes. This could also 
include a server, but it needs to be used to carry out core business activities, and not only 
preparatory or auxiliary ones. Furthermore, to be 'fixed', the establishment  requires a certain 
degree of permanence (often 6 months). Marketing alone, without corresponding sales taking 
place in the same location, wil l usually not be considered to be a core activity. The same is 
true for other activities common for the digital economy, such as data collection and analysis. 
Moreover, some specific installations have traditionally been explicitly exempt, such as a 
wareho use for the storage and delivery of goods. When those characteristics are missing, the 
enterprise will be deemed not to have a permanent establishment, leaving the state where it is 
                                                 
12 Only 4 bilateral situations are missing: Cyprus with Croatia and Luxemburg, and Denmark with France and 
Spain.  
13 All Member States have d ouble tax treaties with China, India and Canada. Only one Member State (Croatia) 
does not have a treaty with the US. There are 6 Member States that have no treaty with Japan.  
14 To avoid that a company has to pay tax on the same income both in the country o f the permanent 
establishment and in the country of tax residence, double tax conventions lay down rules to relieve double 
taxation in the form of an exemption of foreign income or a tax credit for taxes paid abroad.  
15 Section 2.2 of the OECD Action 1 repo rt (OECD, 2015a) contains a comprehensive and more detailed 
explanation of today's corporate tax rules and their origins.  
 
10 active without a taxing right. It also results in tax loopholes as explain ed in section 2.2.1 
below.  
The transfer pricing guidelines based on the OECD Model Double Tax Convention 
follow the 'arm's length principle' to determine the price for transactions that take place 
between companies in the same multinational group . Member States generally use these 
rules/guidelines as a benchmark for the double tax treaties. Specifically, transactions that take 
place between associated enterprises are analysed as if they had taken place between 
independent enterprises to ensure that they re flect market forces and not be used to shift 
profits for tax purposes. Profits accruing to an associated enterprise in a multinational group 
should reflect the functions performed, assets used and risks assumed by that enterprise.  
1.1.2 Drive towards the digital  economy  
The digitalisation of the global economy is happening fast and permeates almost all 
areas of society.  Although the size of the 'digital economy' is still relatively small - estimates 
revolve around 4 -5% of value added (see footnote 42) - businesse s of all kinds now derive 
much of their value from intangible assets, information and data. As a result, the digital 
economy displays a very strong growth path. Close to a third of the growth of Europe's 
overall industrial output is already due to the upta ke of digital technologies.16 In 2006, only 
one digital company was among the top 20 firms by market capitalisation whereas in 2017, 
already 9 digital companies were among the top 20.17 Between 2008 and 2016, the annual 
average growth of revenues of the top 5 e-commerce retailers amounted to a staggering 32%, 
compared to only 1% in the whole EU retail sector.  Between 2006 and 2016, digital 
advertising revenue in Europe has multiplied by more than 5.18  
There is no well -defined digital sector as such. Notably, the Information and 
Communication Technology (ICT) sector is no synonym for the digital economy. Rather, one 
might consider the ICT sector as the backbone of the digital economy (and important driver 
for the digitalisation of more traditional indu stries). T he ICT sector comprises both 
manufacturing activities and services, though services represent more than 90% of the total 
production. Computer and related activities is by far the largest sub -sector, followed by 
Telecommunications (Figure 1 in Ann ex 5) provides a breakdown by Member State). ICT 
                                                 
16 This is accompanied by a larger background process of creating value by adding services to products or by 
replacing a product with a service, which is known in in economic literature as 'servitisation' of products. For 
details, see Vandermerwe, S. and Rada, J. (1988). Moreover, according to World Bank data, over the past two 
decades, the value added of the services sector in general ( in terms of relative weight in GDP) has increased 
from about 58% in 1995 to 69% in 2015 ( https://data.worldbank.org/indicator/NV.SRV.TETC.ZS ).  
17 In this comparison, a company is considere d 'digital' if it belongs to the sectors: technology, consumer services 
(e-commerce) or telecommunications. In this sense, in 2006 the only digital company was Microsoft and in 
2017, the 9 digital companies were: Apple Inc, Alphabet Inc -Cl A, Microsoft Cor p, Amazon.com Inc, Facebook 
Inc-A, Tencent Holdings Ltd, Alibaba Group Holding -Sp Adr, AT&T Inc and China Mobile Ltd.  
18 IAB Europe and IHS Markit (2017); IAB and IHS establish figures on online advertising spending in Europe 
based on data received from 27  European countries, of which 21 are members of the European Union (EU 
countries missing are Cyprus, Estonia, Latvia, Lithuania, Luxembourg, Malta and Portugal and non -EU 
countries included are Belarus, Norway, Russia, Serbia, Switzerland and Turkey).  
 
11 services are also growing at much faster rates than the ICT manufacturing sector (European 
Commission, 2017b).  
Digital companies should not be considered pre -dominantly as ICT companies. Many 
companies comm only considered as digital companies do not belong to the ICT sector. The 
2017 World Investment Report (UNCTAD, 2017a and 2017b) has developed a methodology 
to classify international companies into (1) digital companies, (2) IT and telecoms companies 
(both  enablers of the global digital economy) and (3) 'other multinational companies'.  IT and 
telecoms companies are broadly equivalent to the ICT sector. They are either IT hardware 
manufacturers or software developers/providers of IT services, or they are pro viders of 
telecommunication infrastructure and connectivity. Digital companies are characterised by the 
nature of their operations, which are strongly linked to the internet. The report further 
distinguishes between providers of internet platforms, e -comme rce, digital solutions and 
digital content.  
Focussing on the top companies in each category clearly shows the much more dynamic 
revenue growth in the digital sector.  Based on a unique assignment of companies into one 
of the categories, UNCTAD (2017b) has produced new lists of top 100 multinationals in the 
categories 'IT and telecoms' and 'digital'.19 Table (1) reports summary statistics for the largest 
companies in each category. Average revenue growth was around 14% for the top digital 
firms, compared to a round 3% for IT and telecom enterprises and 0.2% for other 
multinational enterprises, although total revenue by the largest digital companies is still 
considerably lower than that of the other sectors. The table also reports the 'international 
footprint' a nd the relevance of intangible assets, discussed in the next subsection.  
Table (1): Revenue growth, international footprint and relevance of intangible assets of 
largest multinational companies  
Type of MNE  Total revenue  Annual 
revenue 
growth  International 
footprint  Relevance of 
intangible assets  
Digital  872 14.2%  2.1 3.1 
IT&Telecoms  2825  3.1%  2.2 1.2 
Other  5682  0.2%  1.1 1.4 
Source : Own computations based on UNCTAD (2017a and 2017b) and Bureau van Dijk Orbis database.  
Notes: Total revenue for the latest available year for the top companies in each category in $ billion. 'Digital' 
and 'IT&Telecoms' each consist of 100 companies. The category 'Other' only includes 83 companies, since some 
of the companies on UNCTAD's usual list of top 100 global companies b elong to the first two categories. Annual 
average growth is measured over the latest 7 available years. International footprint is the ratio of the share of 
foreign sales in total sales to the share of foreign assets in total assets.  The relevance of intan gible assets is 
computed as the market capitalisation over equity book value minus 1.  
  
                                                 
19 As the focus in UNCTAD (2017b) is on international investment, only companies which exceed a certain 
threshold of international activity are considered. Furthermore, the companies need to report certain information 
in their publicly available financial accou nts. 
 
12 1.1.3  Specificities of digital business models in relation to taxation  
The main characteristics of digital business models - as compared to more traditional ones - 
are their  ability to conduct activities remotely, the contribution of internet users in their value 
creation, the importance of intangible assets and a tendency to winner -takes -most dynamics.  
(a) Limited physical presence  
Businesses in the digital economy can easily conduct activity remotely and are therefore 
very active in cross -border trade.  Little  physical presence is required  to sell into a market. 
From one click on the computer, consumers can order goods and services from all over the 
world, translating in to new market reach. For digital services more specifically, this is even 
more acute as the delivery of the service itself requires no or little physical presence.  Such 
activities used to be mostly conducted locally in the destination location, and are now  more 
and more conducted remotely in the country of origin (at source), although increasingly 
relying on consumer information from the destination country. One observes a 
disintermediation process – also referred as a 'scale without mass'  business structur e.  
As a result, businesses of the digital economy have a fundamentally different 
international footprint, with far fewer assets in the location of their foreign sales. One 
way to measure this phenomenon is by measuring the share of foreign assets in total  assets 
against the share of foreign sales in total sales.  
International footprint = (foreign sales/total sales)/(foreign assets/total assets)  
Doing so for the three categories of largest global companies (see Table (1) above) shows 
that, compared to the t raditional non -IT companies, digital companies, have a much larger 
share of sales earned outside their home country relative to the assets they hold abroad. 
UNCTAD (2017a) provides a more detailed breakdown which helps arriving at a clearer 
picture. As dis played in Figure 2 of Annex 5, the international footprint is particularly 
striking, with values exceeding 2.0, for internet platforms (search, social networks or other 
platforms), electronic payment companies and companies classified as 'other e -commerce' , 
which includes for example major travel platforms. In contrast, telecom companies, 
traditional businesses and online retailers, but also providers of digital media have a balanced 
ratio of around 1.  
(b) Disruption in value creation and indirect revenue generation  
The relevance of user contributions is central , materialising through the mass of adopters, 
the provision of personal data and other forms of user contributions to the production process.  
Participating in a platform or a network creates a value.  As opposed to the conventional 'value 
chain' business model where value is generated by the supplier of a product or a service, a 
large part of the value derived by users of an online platform is created by other users. This is 
particularly true for multi -sided platforms. The positive effects that one user of a good or 
 
13 service has on their value to other users are known as 'network effects'20, meaning that the 
marginal benefit of adopting the service increases with the number of users.  
The concept of 'prosumers' is emerging where end -users participate in the value 
creation.21 The end -user is no longer solely a consumer but contributes, either actively or 
passively, to the value creation.22 The consumer may receive services for free, but also 
provides dat a that are valuable for a company or contributes more actively to the service, for 
example by uploading content. This is a phenomenon that Colin (2013) associates to a form of 
work without monetised compensation (obvious examples are Google or Facebook to which 
access is free but all activities, searches, interactions that reveal interests and preferences are 
recorded and can used to create value). Petruzzi and Buriak (2017) also refer to 'unconscious 
contributor' or 'unconscious employees'. This creates ch allenges in determining where and by 
whom value is created.  
Often digital businesses provide one type of products for free and monetise others, 
creating a disconnection between revenues generated and services provided. Revenue 
generation in the digital eco nomy derives from both direct payments (subscription or 
transaction fees) and indirect payments through the generation of value in one activity (e.g. 
social media, search engines) that is later monetised as input for another activity (e.g. sales of 
adverti sing space or transmission of data). The generation of income via advertisements 
arguably replicates the selling of advertisement space on television or radio. What does make 
a difference, however, is the unique, almost personalised manner in which adverti sing 
placements track the user – by responding directly to their search -engine searches or direct 
clicks on advertisements ( Commission Expert Group on Taxation of the Digital Economy, 
2014 ). Taken together the disconnection between the consumers of adverti sements and the 
advertising companies and the fact that user data are central to the personalisation of 
advertisements result in a particularly stark deviation from the principle of taxation where the 
value is created.  
(c) Importance of intangible assets  
One key feature of intangible assets is that they are difficult to value reliably, while they 
are the essence of a competitive advantage in some businesses.  When generated internally, 
generally accounting principles including international accounting standa rds prohibit the 
recognition of those assets, even though they are a core component of a business model. As a 
consequence, they do not appear on a company's balance sheet until such assets are either 
acquired or otherwise transferred to a third party for a  consideration (e.g. through a business 
                                                 
20 See Commission Staff Working Document on Online Platforms, accompanying the document 
"Communication on Online Platforms and the Digital Single market" (COM(2016) 288)  
21 The term was first coined by futurist Alvin Toffler in his work  Future Shock (19 70) and later developed in its 
sequel, The Third Wave (1980).  
22 For example, network effects will be particularly relevant marketplaces multi -sided platforms) or social media 
that connect users. Reliance on big data is very strong for social media, internet search services and online 
advertising platforms while it is moderate for cloud services.  
 
14 combination), in which case the financial statements of the acquiring company must generally 
recognise these assets for their fair value.  
There is evidence that intangible assets are particularly important for companies with 
significant digital activities.  Markets tend to attribute their own value to assets, whether 
recognised or not. Therefore, as a proxy, differences in the importance of intangible assets can 
be derived by comparing differences between a compa ny's equity book value and its market 
valuation (UNCTAD, 2017a).  The increasing importance of intangible assets is shown by a 
widening gap between book and market values of companies. Undisclosed intangibles of the 
largest digital multinationals are estim ated to be on average roughly equal to 3 times the 
company's total equity book value – significantly more than the average recorded for IT & 
telecom companies and other multinational enterprises (see Table 1 above).  At the same time, 
the excess in market c apitalisation over equity book values are of course also an indication of 
the market expectations about future revenue generation.  
(d) Winner takes most dynamics  
Digital markets are often dominated by a few 'superstar' firms.  Today's big players of the 
digital economy are fairly young companies that have created new markets and quickly 
become global, dominant players.  Common characteristics related to this phenomenon include 
the volatility in the market (the rapid gaining and losing of market share), the t endency 
towards monopoly and oligopoly and the relevance of user contributions to the success of the 
business model (OECD, 2015a).  Although modern technologies, such as the internet, software 
and cloud services, make it possible to enter markets at minimal  costs and as such threaten a 
dominant position (Evans and Schmalensee, 2016), digitalisation and globalisation  contribute 
to a trend of 'winner takes most' markets that are dominated by a few 'superstar' firms 
(Veugelers, 2017).  For digital markets this has to do with the relevance of large fixed 
investments, combined with low marginal costs (once developed digital goods can be 
reproduced at almost no cost), network and lock -in effects.23 These are strong forces bringing 
about increasingly concentrated mar kets.24  
Based on the above discussion, some digital business models stand out in particular. 
There is no unique or best way to categorise business models. Box (1) identifies four 
categories based on the nature of activities, how revenues are generated and what this implies 
for taxation in the locations where activities take place. Often, companies are hybrid and mix 
the business models identified below.  
 
                                                 
23 See for example Shapiro and Varian (1998). Moreover, the literature on barriers to market entry recognises the 
type of lock -in effects that networks can entail as a possible switching barrier, which is one form of a barrier to 
market entry. Similarly, low taxes, giving a cost advantage to the incumbent firm, are one form of a market 
barrier. A review of the literature on market barriers and a classification of different forms of barriers is provided 
in McAfee et al. (2003).  
24 Capacity limits, product differentiation and potential for multi -homing (i.e. the possibility to be active on 
several similar platforms) however can limit the level of concentration (Haucap and Heimeshoff , 2014).  
 
15 Box (1): Business models in the digital economy  
  
1. The digital platform model granting access to a mar ketplace  
This business model offers a marketplace for users of the platform, which acts as an 
intermediary. The model typically covers two services: (i) the platform offers access to 
users in exchange for a fee (transaction -based or subscription); and (ii)  the users offer 
services or goods among themselves.  
This model connects demand and supply: this can be spare capacity and demand in the 
case of collaborative platforms; it uses reputational currency mechanisms to underpin 
consumption; and in some cases i t enables individuals to share 'access' to assets rather 
than exchanging them outright. Revenue models vary significantly among platforms. 
Most adopt a fixed or variable commission -based approach, with commissions ranging 
from 1 -2% within peer -to-peer lend ing to up to 20% for ride -sharing services. The value 
is derived from marketing, brands, collection and exploitation of user data needed for 
the matching of users and developments in software to enable better this user matching.  
 
2. The advertising model  
The model typically covers two services: (i) a platform offers access to a service that can 
be a social network, a search engine, a content etc. to users for free, in exchange of 
personal data; and (ii) personal data obtained from such users is used to sel l targeted 
advertisement placements or it is sold, either to advertising companies or to others 
businesses.  
The model relies on advertising revenues by targeting marketing messages to consumers 
or selling user data to business developers. The extent to which platform users have to 
provide personal data in exchange of an access to a service varies significantly from one 
activity or company to another as well as the degree of users' awareness and level of 
involvement (passive versus active participation) i n giving away personal data. More 
and personalised user data enables better targeting of marketing messages and increases 
the value of the advertisement medium. This value is difficult to measure for tax 
purposes. The specificity of such revenue model is t hat it disconnects users from the 
revenue sources.  
 
3. The digital platform model granting access to content/solutions  
The model covers typically one service: the platform offers users access to a platform 
and to content or solutions in exchange for a (subscription) fee.  
This model covers a diverse set of digital activities, including online media, streaming 
and broadcast ing of digital content, gaming activities, the provision of digital solutions 
such as e -payment services or cloud computing. The business either provides access to 
digital contents such as music, videos or e -books that were traditionally connected to a 
physical product (for example, a DvD or a book) and charges a (subscription) fee for 
(continued) access. In cases where the services is provided for free and financed through 
the sale of targeted advertisement placements or the sale of data, the activity is 
considered to fall under business model 2 above. Or it offers a solution, such as cloud 
computing services or provision of software. The service provided is fully digitalised. In 
the business -to-consumer segment, the provision of the service often does not require 
any physical presence in the location, i.e. the market can be served fully remotely. For 
digital solutions in the business -to-business sector, the service is often highly 
customised and therefore tends to require more physical presence at the locat ion of the 
 
16 consumer.  
 
4. The distant sales model/e -commerce  
This model equates to online retail activities. Goods are sold via a website, and 
physically transferred afterwards. Revenues are generated from the sales of goods.  
 
 
1.2 What are the consequences?  
1.2.1 Difficulty to tax/opportunities for tax avoidance  
(a) Misalignment of value creation and taxes  
For globally active  companies that do not require physical presence to gather and 
process data there is a strong misalignment between value creation and taxation.25 The 
use of intangibles and of data knowledge (including consumer data) and other user 
contributions to improve or develop products and services or to define marketing, sales and 
pricing policies has increased considerably, although it is not a new phenomenon. It does not 
raise tax issues as long as a company's activities are pre -dominantly domestic, in which case 
all value creation would also be 'domestically' captured for taxing purposes. However, it does 
raise an issue in a global context. The current permanent establishment and transfer pricing 
rules that address the questions ' where to tax' and 'how much to tax'  do not take into account 
the user contribution in the allocation of taxable profits, which results in a mismatch with the 
value creation. The views of stakeholders have been tested on this topic: 67% of respondents 
to the open public consultation as well as 15 out of 21 national tax authorities agree with the 
statement that " states are not able to collect taxes on the value that some digital companies 
create on their territory".     
 (b) Artificial avoidance of permanent establishment rules  
Since  the curren t permanent establishment rules are grounded in physical presence  and 
traditional core activities,  they can be easily circumvented for certain digital activities.  
Even sizeable digital activities in a location do not always result in a permanent establishment 
in that location (see Section 2.1.1). Moreover, it is often fairly easy for digital economy 
businesses to find arrangements that circumvent the existence of a permanent establishment. 
Avoidance of a permanent establishment happens in practice  through (i) the use of 
commissionaire arrangements and (ii) the treatment of some critical functions as preparatory 
or auxiliary.  Through commissionaire arrangements a person sells products in a country in its 
own name but on behalf of a foreign enterpris e that owns these products. Other arrangements 
involve contracts that are substantially negotiated in one state but are finalised or authorised 
abroad, or where the person who concludes contracts is an 'independent agent' to whom 
exceptions are available. Moreover, businesses have been able to avoid creating a permanent 
                                                 
25 That is, the phenomenon of disintermedia tion due to a process of dematerialisation in the business model of 
digitalised firms.  
 
17 establishment by categorising their business activity as qualifying for one of the 'specific 
activity exemptions' according to which a permanent establishment is deemed not to exist 
where a place of business is only used to carry out the activities listed in that paragraph. One 
example is the use of a storage facility solely for the delivery of goods to customers . Another 
possibility to trigger exemptions is by breaking up into smaller operat ions to claim that each 
part is merely engaged in preparatory or auxiliary activities. A more detailed discussion on the 
artificial avoidance of permanent establishment rules is provided in Annex 7 . 
(c) Shifting profits through transfer of intangible asset s 
Even where there is a permanent establishment, tax can be avoided by shifting mobile 
intangible assets to low tax jurisdictions . Not only can intangible assets be shifted fairly 
easily from one jurisdiction to another, but they  also are difficult to valu e. In the absence of 
rules that are robust against abuse , this  opens significant opportunities for aggressive tax 
planning , which allow more digitalised companies to benefit from certain tax regimes and 
push down their tax burden. This is done via intra -group payments (royalties) for which an 
objective transfer price is difficult to determine.  Profits allocation rules follow contractual 
arrangements of transactions between intragroup companies. Indeed, legal ownership of 
intangibles is a decisive factor fo r determining profits, resulting in entities with little business 
activity potentially benefitting from high profit allocation (Olbert and Spengel, 2017).   
A detailed examination of tax rules confirms the profit shifting opportunities 
multinational enterp rises with sizeable intangible assets have.  Out of seven important tax 
planning structures identified by Ramboll Management Consulting and Corit Advisory 
(2015), three involve the use of intellectual property. The same study determines the 
prevalence acros s Member States of tax rules that are necessary or conducive for the set -up of 
aggressive tax planning schemes. It identifies 15 Member States whose tax frameworks have 
elements that directly promote or prompt an aggressive tax planning structure. All but two 
Member States show a lack of anti -abuse rules. ZEW (2016) estimates the impact of 
aggressive cross -border tax planning schemes on the effective average tax rates. It shows 
without ambiguity that placing intellectual property in a country with a generou s intellectual 
property box allows lowering the effective average tax rate significantly - and more than any 
other tax planning structure.  
Econometric studies evidence the importance of the location of intangibles, and notably 
intellectual property, in pr ofit shifting strategies . Dischinger and Riedel (2011) find that 
for European multinational enterprises a one percentage point increase in corporate income 
tax rate reduces intangible assets  in the balance sheet by about 1.7%.  Several contributions 
eviden ce more generally the significant effect of corporate taxation on the number of patent 
applications and relocations (Karkinsky and Riedel, 2012, Böhm et al., 2012, Griffith et al., 
2014, Alstadtsaeter et al., 2018). More evidence on this is summarised in A nnex 7.  
The views of stakeholders have been tested on this topic as well: 73% of respondents to the 
open public consultation as well as 14 out of 21 national tax authorities agree with the 
statement that " the current international taxation rules allow digi tal companies to benefit from 
certain tax regimes and push down their tax contributions".     
 
18 1.2.2 Lack of a level playing field and distortion of competition  
Digital businesses models in the EU face a lower effective average tax burden than 
traditional business  models. Based on stylised business models, ZEW et al. (2017) finds that 
a cross -border digital business model is subject to an effective average tax rate of only 9.5%. 
This compares to a rate of 23.2% of a cross -border traditional business. To a certain e xtent, 
the lower tax levels simply reflect that modern tax policy recognises the importance of R&D 
and digitalisation for future growth and prosperity, as is also reflected in the CCCTB proposal 
which includes an allowance for R&D expenses.26 However, benef icial regimes targeting very 
mobile assets also indicate that countries compete fiercely on this very mobile segment. 
Through aggressive tax planning , for example  by placing intellectual property in an 
intermediary company located in an EU country with an attractive intellectual property box 
regime, companies can achieve effective average tax rate levels of zero and below, i.e. their 
activity is effectively subsidised (ZEW, 2016). Table (2) reports effective average tax rates for 
different business models a nd type of companies.  
Table (2): Effective average tax rates of different model companies  
  Domestic 
company  Multinational 
group  Multinational group engaged in 
aggressive tax planning using 
most beneficial IP box regime  
Traditional business 
model  20.9 23.2 16.2 
Digital business model  8.5 9.5 -2.3 
Source: Own computations based on ZEW (2016,  2017) and ZEW et al.  (2017).  
Notes: 1/ Aggressive tax planning by the multinational group is assumed to be done though exploitation of the 
most beneficial intellectual property regime available in the EU. 2/ For the multinational groups, cross -border 
investments within the EU and with certain third countries (notably: US, Canada, Japan, Norway and 
Switzerland) are considered. 3/ The 9.5% for the multinational group with a digital business model is an average 
of 8.9% for a business -to-business model and 10 .1% for a business -to-consumer model.  
A lower tax burden for digital businesses can result in competitive distortions  that 
contribute to a lack of a level playing field between different types of companies . Some 
evidence exists, suggesting that tax plannin g can result in higher mark -ups and competitive 
advantages (see Annex 7).  This is not only true between those companies that are more 
digitalised and those that are less, but also between digital companies that pay tax in a given 
Member State and those that serve the same market remotely or minimise payments through 
aggressive tax planning. A lack of a level playing field also occurs across the single market, 
as some Member States feature more prominently in tax planning schemes than others. In the 
worst  case, a significantly lower tax burden enables larger digitalised companies to drive out 
                                                 
26 Three factors explain the difference in effective average tax rates. Expenses for the creation of software and 
other intangible goods, which play a much bigger role fo r digital businesses, are often immediately deductible 
whereas physical assets used in the traditional business model are depreciated over time. Businesses active in 
digital activities typically spend relatively more on R&D activities, for which many count ries apply tax 
incentives. Finally, an important number of countries offer lower tax rates for earnings derived from intellectual 
property ('intellectual property boxes').  
 
19 market competitors or hinder potential entrants.  This is economically inefficient and hurts 
innovation, growth and welfare.  
Both the national tax authorities as well  as the wider public that responded to the public 
consultation have confirmed that the competition between traditional and digital businesses is 
not an equal one. 13 out of 21 national tax authorities and 65% of the respondents to the 
public consultation a gree that "t he current international taxation rules do not allow for fair 
competition between traditional and digital companies".    
1.2.3 Less revenue for public budgets/negative impact on social fairness  
Lower (or even no) taxes paid on profits from digital act ivities puts at risk the 
sustainability of public finances.  It results in unfair burden sharing across taxpayers, 
constraints the financing of our social models and ultimately weakens our social contract. 
Although it is difficult to isolate the share of di gital activities, the tax revenue shortfalls from 
aggressive tax planning activities cost billions of euros every year. It has been estimated in a 
study for the European Parliament that within the EU the corporate tax revenue losses amount 
to about EUR 50 -70 billion (Dover et al., 2015).27 This is equivalent to the lower bound to 
around 0.4% of GDP. Governments of countries, whose tax bases are eroded, either have to 
raise revenue from other taxes or have less revenues for growth -enhancing reforms and for 
redistribution purposes to fight inequalities. Recent new estimates by Tørsløv et al. (2017) 
show that the aggregated loss to tax havens for Germany, France, Italy and Spain would reach 
over EUR 40 billion per year (see Figure 4 in Annex 7).  
The perception of the social fairness of the tax system suffers if companies do not 
contribute their 'fair share' to budgets.  Digital businesses conducting sizeable activities in 
a jurisdiction will usually also benefit from the public infrastructure offered by that 
jurisdiction. For mostly 'web -based' companies, this will include the physical internet 
infrastructure, rule of law and judiciary in the country, but also the education and digital skills 
of potential users. Within the single market, all companies with cross -border activities benefit 
from the fundamental freedoms. Therefore, a non -contribution to public budgets is seen as 
inherently unfair by many and can undermine taxpayer morale. This perception is widely 
shared by both the national tax administrations as wel l as the respondents to the public 
consultations. 14 out of 21 tax administrations as well as 67% of respondent agree that " social 
fairness is impacted because some digital companies do not pay their fair share of taxes".     
1.2.4 Risk of further single market fragmentation  
An uncoordinated implementation of national measures  adds distortions to the 
functioning of the single market, also contributing to business uncertainty on the future 
tax framework. The introduction of country -specific tax regimes leads to di stortions of 
competition, high tax compliance costs and may result in double taxation of digitalised 
companies that supply cross -border services in the single market. This hurts the 
                                                 
27 Their methodology assumes that national deviations from the average corporate tax to gross operating surplus 
of companies ratio are due to tax avoidance.  
 
20 competitiveness of the EU as a whole and adds uncertainty. Moreover, a pat chwork of 
national measures generates new incentives and opportunities for tax arbitrage.  Some Member 
States already have in place targeted regimes, in the areas of both direct and indirect taxation, 
others are planning such taxes.  Section 9.1., 9.3.1 and  Table (1) in Annex 6 provide an 
overview of relevant national taxes/initiatives.     
 
3. WHY SHOULD THE EU ACT? 
 
1.3 Legal basis  
As the nature of this legislative proposal is twofold, encompassing a comprehensive solution 
and an interim solution with slightly di fferent objectives each, the two measures are justified 
on different legal grounds.   
The legal basis for the comprehensive solution is Article  115 of the TFEU. The 
comprehensive solution aims at introducing a comprehensive and modern framework for the 
taxation of the digital economy to address structurally the root -cause of the issue and improve 
the functioning of the single market. It would change the way the taxable nexus is established 
and profit is allocated to the taxable nexus. This approach could al so be integrated into the 
Common Consolidated Corporate Tax Base (CCCTB) to provide for a comprehensive reform 
of the corporate income tax system and improve the functioning of the single market.   
The legal basis for the interim solution is Article 113 of the TFEU. The interim solution 
aims at ensuring that an immediate and harmonised response at EU level is provided to some 
of the identified problems. Additional fragmentation and distortions of competition could 
arise if unilateral actions were implemented  by Member States before a comprehensive 
solution can be agreed. This requires the creation of a harmonised legislative framework 
within the EU concerning a new tax on digital activities. Given its (preferred) features, this 
tax would have more elements of  an indirect tax, so it would need to be treated as an indirect 
tax other than turnover taxes and excise duties.   
1.4 Subsidiarity: Necessity of EU action  
A common and coordinated action at EU level is the only one with real chances to tackle 
the existing problems, rooted in the existing international tax framework, in a 
comprehensive and efficient way.  This is because the problems posed by the current 
corporate tax framework not keeping pace with the digital sector are not particular to a 
specific Member S tate, but constitute a common challenge for the EU as a whole. In fact, such 
problems are of an international dimension because one of the key aspects of digital 
businesses is that they can easily conduct activity remotely and are very active in cross -border 
trade.  
As regards the comprehensive solution, only an EU answer to the challenges posed by 
the digital economy to the corporate tax framework would be coherent with the efforts 
 
21 already made to subject taxpayers to a single set of corporate tax rules ac ross the EU.  
Although at present the corporate taxation framework is only to a limited extent harmonised 
at EU level, there are relevant proposals adopted by the Commission currently on the table of 
the European Council (CCTB and CCCTB). They aim to facili tate business within the EU by 
subjecting taxpayers to a single rulebook of corporate tax legislation across the single market 
and also make the system more robust and resilient to aggressive tax planning. From that 
perspective, uncoordinated action target ing the digital sector would undermine the existing 
work at EU level on the wider corporate taxation rules.  
 
EU action is also necessary to mitigate the fragmentation of the single market and the 
creation of distortions of competition within the EU due to  interim unilateral actions 
adopted by Member States while awaiting the adoption of a comprehensive solution.  
Common and coordinated action at EU level to reform the corporate tax framework so as to 
better reflect the digital activities of companies may ta ke some time to agree so there is a 
further case for common action at EU level in the interim period to avoid distortions to the 
single market from unilateral actions by Member States. Several Member States have already 
introduced, and others have announce d their intention of introducing, a tax regime specifically 
addressing the challenges of taxing digital economy companies, be it in the form of an 
indirect or direct tax. Therefore, to an extent, tax obstacles have been and are being created by 
the existin g and forthcoming legislation of these Member States. As explained in Table 6 of 
Section 9.1, these national experiences vary significantly, and it is unlikely that, without a 
certain degree of coordination, the different Member States concerned will follo w a common 
model. Uncoordinated national actions could aggravate the current situation, further 
contributing to distortions in the single market and the risk of  double taxation. Consequently, 
a common approach at EU -level in the area of taxation of digital ised companies is essential in 
order to avoid distortions that hamper the proper functioning of the single market.  
1.5 Subsidiarity: Added value of EU action  
EU action would be more efficient and would minimise compliance costs . The fact that an 
EU solution ra ther than different national policies is put forward would entail a reduction in 
the compliance burden for businesses subject to the new rules. Instead of fragmenting the 
market and adding cross -border tax obstacles to today's tax systems through unilatera l 
measures, a coordinated EU action would ensure that the issue is addressed without hurting 
the single market and its competitiveness. Moreover, an EU answer to the challenges posed 
by the digital economy to the corporate tax framework would be coherent w ith the efforts 
already made to subject taxpayers to a single set of rules across the EU. Uncoordinated action 
targeting the digital sector would undermine the existing work at EU level on the wider 
corporate taxation rules.  
Another advantage of EU action  is that it would help steer discussions at international 
level on the taxation of the digital economy in a more effective way than action at 
Member States level.  EU action cannot be isolated from the evolution of the international 
corporate tax framework.  In this regard, it is important to ensure the consistency and 
 
22 coherence of the tax rules put forward at EU level with the measures discussed and adopted 
by the OECD. However, as it has so far proved difficult to agree on the solutions at global 
level, the  Commission believes that it is time to promote an ambitious EU agenda on the 
matter and a common EU approach to support global progress towards taxing the digital 
economy effectively and in a way that ensures fairness and supports growth.  
 
4. OBJECTIVES : WHAT IS TO BE ACHIEVED ? 
 
Figure (2) below presents the general and specific objectives of the initiative. The present 
initiative would result in two proposals: one focusing on an interim solution and another one 
focusing on a comprehensive long -term solution,  The general objectives of the two sets of 
proposals are the same, while the specific and operational objectives are different. The 
operational objectives will be described with the preferred option.  
Figure (2): Objective tree  
 
1.6 General objectives  
For both the interim as well as the comprehensive solution, the general objectives of the 
initiative, are:  
 To protect the integrity of the single market and to ensure its proper functioning.   
(see Section 
10) A comprehensive 
and modern 
framework for 
taxation of the 
digital economy   
 
Integrity and proper 
functioning of the 
single market  
Sustainability of public 
finances of MS and the 
EU 
Ensuring fairness and a 
level playing field for all 
business  
Fight against aggresive 
tax planning  Target untaxed 
digital business 
models through a 
solution that is 
easy to 
implement,  
improves the 
level -playing field 
and fair taxation.  Interim 
solution  Comprehensive 
solution  
Operational  
Specific  
General  
 
23  To make sure that the public finances of Member States/ the EU are sustainable and 
that the national tax bases are not eroded in the future.  
 To ensure that social fairnes s is preserved and that there is a level playing field for all 
business operating in the EU. The proposals aim at a more efficient taxation 
framework that properly captures value creation.  
 To fight against aggressive tax planning and to close the gaps that  currently exist in 
the international rules.       
   
1.7 Specific objectives  
4.2.1 Comprehensive solution  
The specific objective of the comprehensive solution is to come forward with a modern 
corporate tax framework which allows for the fair and efficient taxation of the digital 
economy.  Such a framework would be adapted to the economy of the 21st century. It would 
modify the current rules which were mostly designed for a time when companies were not 
digitalised and more physically grounded on the territory of a sta te. As indicated in the 
Communication on Digital Taxation, the ideal solution to taxation of the digital economy 
would be through a global approach. Therefore, our proposal should both reflect what seems 
desirable internationally, but also be easy to align  to any possible emerging international 
solution, i.e. broad and flexible in its approach, while still providing Member States with a 
solid base to effectively tax digital activity.  
4.2.2 Interim solution  
The specific objective of the interim solution is to put forward measures that would 
target certain digital activities as a proxy for the comprehensive solution.   This measure 
should be easier to implement and should level the playing field in the interim period until the 
comprehensive solution is implemented.   
 
5. WHAT ARE THE AVAILABL E COMPREHENSIVE POLI CY OPTIONS ? 
 
1.8 What is the baseline against which options are assessed?  
It is expected that the development of the digital economy will follow a strong growth 
pattern over the next decade. The digital transformation brings significant benefits to 
society. It enables higher productivity across the economy, which leads to lower prices, higher 
real incomes and to higher standards of living. It also facilitates the emergence of new and 
better products and services with fe wer resources, reduces physically demanding efforts and, 
for example, exposure to dangerous activities in the workplace. Much of this is yet to come 
with the completion of the digital single market. The strategy launched in 2015 is defined as a 
space in wh ich the free movement of goods, persons, services and capital is ensured and 
where individuals and businesses can seamlessly access and exercise online activities under 
conditions of fair competition, and a high level of consumer and personal data protecti on, 
 
24 irrespective of their nationality or place of residence. Judging from the exponential trend that 
market value and revenues of the digital economy have followed over the past years, 
significant growth in the years to come seems a reasonable assumption. As a consequence, the 
importance of the digital economy versus the traditional economy will continue to increase.  
Traditional companies will become more and more digital, replacing traditional business 
models, but also creating completely new business oppo rtunities . This assumption is in line 
with most projections of how the digital economy will develop in the future.28 
The dynamic baseline scenario takes into account relevant initiatives at various levels 
(EU, OECD and Member States) and assesses whether they address the tax challenges 
posed by the digital economy.  Two aspects are important in this assessment. First, do the 
initiatives effectively address structural shortcomings  of the current international tax system? 
Second, do they reduce specific tax a voidance opportunities  that businesses of the digital 
economy can apply more easily than other companies.  
EU level  
In the baseline scenario, we expect that all current relevant Commission initiatives will 
be adopted and implemented as planned.  
 The impleme ntation of the Common ( Consolidated) Corporate Tax Base (CCCTB), 
adopted by the Commission in October 2016, is envisaged in two steps. In a first step, 
Member States would adopt common tax base rules by 2019. In a second step, they 
would move to consolidat ion and apportionment of the tax base through a formula by 
2021.   
 The Anti -Tax Avoidance Directive that was adopted in July 2016 and will be 
implemented in most parts as of January 2019.  
 In December 2017, the EU finance ministers adopted a package29 on VAT  in e-
commerce, moving towards the definitive regime.  
The CCCTB in its current scope and form would not offer a structural solution to some 
of the important challenges in taxing businesses of the digital economy.  The CCCT B has 
a limited scope and companies not subject to mandatory application would remain  subject to 
the standard profit allocation rules. However, even for companies applying the CCCTB, 
problems remain. Despite the fact that the profit allocation rules in the CCCTB partly allocate 
the tax base on the basis of sales by destination, when it comes to defining taxable presence 
through a permanent establishment, the CCCTB rules are not different from those applying 
internationally (which only reflect the needs of th e traditional economy and are primarily 
based on a physical presence). For illustration, a company that is not incorporated in the EU 
                                                 
28 Projections for these developments can be found inter alia in the Statista Digital Market Outlook, UNCTAD 
(2017a, 2017b) and OECD Digital Economy Outlook (2017).  
29 One proposal of a directive and two of regulations  
 
25 and does not have an affiliate or a permanent establishment in an EU country, will not be 
subject to tax under the CCCTB r ules, even if it carries out significant economic (digital) 
activity in the EU. Similarly, if it has sales in all Member States but has a physical presence in 
only a few Member States, the consolidated profit will be allocated via a formula only 
between th ose Member States where it has a physical presence, at the exclusion of other 
Member States, even though the company carries out digital activities in their jurisdictions 
(see box in Annex 6).  
A second issue not solved by the CCCTB concerns cases where sa les by destination do 
not capture well the economic activity of the company (and neither do tangible assets or 
employment).  This concerns above all business models such as advertising models that 
operate through indirect revenue generation. They offer thei r services to users for free and 
make their revenues by selling (targeted) advertising space displayed to users. An example 
could be a company group that operates, say, a social network site and makes revenues from 
advertising. It has subsidiaries (i.e., i t is tax resident) in all Member States, but they operate 
with few tangible assets and employees. Further, all its advertising revenues stem from 
companies resident in A or in third countries. The company has a dense user network in all 
Member States and u ses the user data that it collects to target and display advertisements in all 
Member States from which its users  access its website . The formulary apportionment under 
the CCCTB, by considering only assets, labour and sales by destination, would allocate 
(almost) the entire tax base of the company group to Member State A.  
Regarding, tax avoidance opportunities, the CCCTB does help closing important profit 
shifting possibilities, but it does not address the artificial avoidance of permanent 
establishments.  This is because, as explained above, the CCCTB as proposed in 2016 follows 
the definition of permanent establishment currently applied internationally.  
The legally -binding anti -avoidance rules that have been agreed at EU level are not 
expected to deal comp rehensively with the specific challenges of the digital economy. 
Most notably , the new Controlled -Foreign Company rules in the Anti -Tax Avoidance 
Directive only address situations where the ultimate parent company is a taxpayer in the EU. 
The Commission is sued a Recommendation in 2016 on Tax Treaty issues,30 which encourages 
Member States to implement the new provisions on permanent establishments, as agreed in 
the BEPS Action 7 (see discussion below). It includes ensuring that the permanent 
establishment st atus cannot be circumvented through 'commissionaire arrangements' or 
similar structures, and that core activities do not benefit from the exception for 
preparatory/auxiliary activities. However this Recommendation does not address 
comprehensively the avoid ance of permanent establishments by the digital economy. 
Moreover a Recommendation is not a legally binding act and Member States are free to 
decide whether or not to implement it.31  
                                                 
30 Commission Recommendation (EU) 2016/136 of 28 January 2016 on the implementation of measures against 
tax treaty abuse (OJ L 25, 2.2.2016)  
31 Statistics on the implementation of the recommendation are not yet available.  
 
26 OECD level  
The final Action 1 report (OECD, 2015a) discusses the broader direct tax challenges 
raised by the digital economy . It examines three reform options: extending the definition of 
permanent establishment to cover also significant economic presence, a withholding tax on 
digital transactions and a so -called equalisation l evy. The report does not issue any 
recommendation. In March 2017, the G20 Finance Ministers requested that the OECD's Task 
Force on the Taxation of the Digital Economy deliver an interim report on the implications of 
digitalisation for taxation by April 20 18. The OECD has recently published this interim report 
on the taxation of the digital economy and presented it to the G20 Finance Ministers at their 
meeting in March 2018 (OECD, 2018).  A final report is due in 2020, with a progress update 
in 2019.  
Althou gh reaching a consensus on such a complex topic is difficult, the OECD has 
intensified its work to tackle the tax challenges arising in the digital economy.  
Discussions at OECD level are essential in order to address at a global level a challenge 
which is fundamentally a global one. The main elements of the on -going OECD work on 
digital taxation seem largely consistent with those of the Commission. While the final 
outcome of the OECD discussions is uncertain, the recently published interim report (OECD, 
2018) suggests that the focus could be on the comprehensive solution. As explained in the 
final Action 1 report (OECD, 2015a), the broader tax challenges for policy makers relate in 
particular to nexus, data, and characterisation for direct tax purposes. At t his stage, the OECD 
work on a comprehensive solution remains quite open, but clearly includes work on revised 
permanent establishment and profit allocation rules. At the same time there appears little 
appetite for taking any interim measures to bridge the time until comprehensive solutions are 
agreed and implemented.  
Relevant work on anti -abuse rules  initiated by the OECD has started to bear some 
fruits, but there remain important gaps.  The potentially most relevant areas are in the 
proposed amendments to the definition of permanent establishment (BEPS action 7) and to 
transfer pricing rules (BEPS actions 8 -10). Article 5 of the OECD Model Tax Convention has 
been amended to ensure that, where the activities of an intermediary result in the regular  
conclusio n of contracts to be performed by a foreign enterprise, that enterprise should be 
considered to have a sufficient taxable nexus in that country.32 The changes proposed under 
Action 7 limit the exemptions to activities that are of a preparatory or auxiliary  character i.e. 
businesses can only qualify for these exemptions if the activity in question is not a core part of 
their business model. So a large warehouse maintained by online sales business for the 
purpose of storing and delivering goods sold by that b usiness would constitute an essential 
                                                 
32 "For example, where the sales force of a local subsidiary of an online seller of tangible products or an online 
provider of advertising services habitually plays the principal role in the conclusion of contracts with prospective 
large clients for those prod ucts or services, and these contracts are routinely concluded without material 
modification by the parent company, this activity would result in a permanent establishment for the parent 
company." ( OECD, 2015b ). 
 
27 part of the sales and distribution function of that business. As a result the warehousing 
function would no longer qualify for the preparatory and auxiliary activity exemption.  
The revised permanent establishment rule s remain grounded in the concept of physical 
presence and target above all abuse structures used by online retailers of physical goods.  
They do not offer comprehensive solutions to the avoidance of permanent establishments by 
the digital economy. Indeed, t he amendments to the permanent establishment rules target 
primarily artificial avoidance arrangements that have been used by online retailers of physical 
goods that still require some local physical presence, for example for storage and transport of 
physic al goods (Avi -Yonah and Xu, 2017, BEPS Monitoring Group, 201533).  
In addition, there also remain implementation gaps.  The amendments are implemented 
either in the course of bilateral tax treaty negotiations or through the Multilateral Convention 
to Impleme nt Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting 
(known as the ‘Multilateral Instrument’), but some countries have reserved against these. 
However, the amendments are not binding and their effective implementation will largely 
depend on national legislation and revisions to bilateral treaties.  An uncoordinated approach is 
unlikely to lead to a break -through. Many countries will not have the incentive to agree on a 
revision of rules if they cannot be assured that other countries wil l implement similar reforms. 
Moreover, some consider that the lack of properly defined mechanisms in the new transfer 
pricing guidance may increase legal uncertainty regarding the taxation of international 
business models (Olbert and Spengel, 2017).  
In th e context of the anti -Base Erosion and Profit Shifting Project, harmful tax practices 
have been addressed inter alia through action 5 and this is expected to reduce tax 
planning opportunities, notably those involving intellectual property boxes.  The 
overwh elming majority of existing beneficial tax regimes for intellectual property were 
abolished or amended in line with the 'nexus approach', both at EU and at global level 
(through the Inclusive Framework).34 This is expected to reduce tax planning opportuniti es by 
transferring intellectual property to low tax jurisdictions.  
Measures to prevent tax treaty abuse have started to be widely implemented . More than  
70 jurisdictions  signed the Multilateral Convention to Implement Tax Treaty Related 
Measures to Prevent  Base Erosion and Profit Shifting (known as the 'Multilateral 
Instrument'),35 whereby about a third of existing tax treaties will be aligned with the minimum 
standard on action 6. Treaty abuse is relevant given the increased ability to choose the 
location o f resources (e.g. intellectual property) that are key to digital activities.  
Unilateral actions by Member States  
                                                 
33 See comments published by the BEPS Monitoring Group on Action 7 published at 
https://bepsmonitoringgroup.wordpress.com/category/action -7/  
34 All EU Member States except for Cypru s are members of the Inclusive Framework.  
 In the EU, the amendment to the Directive on the automatic exchange of information has made the exchange of 
rulings legally binding.  
35 All EU Member States have already signed except for Estonia, which has express ed its intention to sign the 
Multilateral Convention.  
 
28 In the absence of effective responses to the tax challenges posed by the digitalisation of 
the economy, it is likely that more and more Member  States, but also third countries, 
will take unilateral action . In its conclusions of 5 December, the Council observes that "the 
speed at which the economy is digitalising and the absence of international consensus on the 
modernisation of the rules of dis tribution of taxing rights gives rise to unilateral actions, 
leading to an increase of double taxation disputes between Member States and thereby 
undermining the Internal Market ".36 Going forward and taking into account its dynamic 
growth, the digital econo my will not contribute proportionally to the tax revenues of Member 
States when compared to the traditional economy. If the current trend continues, public 
budgets will likely suffer to an extent that will put increasing pressure on policy makers to act. 
The unfairness of the situation would lead to increased pressure from citizens and traditional 
businesses. In addition, to ensure compliance with EU fiscal rules, governments will need to 
search for compensatory measures. Therefore, it is also assumed that the trend towards 
unilateral solutions will continue in the absence of solutions coordinated at international level. 
An overview of unilateral measures implemented or planned in EU Member States and third 
countries can be found in section 9.1 and Annex 6.  
In the absence of action, the digital single market will not be able to deliver on its 
potential. A digital single market can only deliver on its potential if fair competition is 
guaranteed, including equitable tax treatment for all companies. As larger pa rts of the 
economy become digital, they will have to shoulder a corresponding part of the tax burden 
needed to finance the public services on which they rely, such as educational or the judicial 
system. Yet this is not the case at this moment and is likely  to aggravate if the situation 
remains unchanged.  
To sum up, no significant progress has been made, or is expected within the next couple 
of years, in finding structural and comprehensive solutions to addressing the challenges 
of taxation brought about by  the digitalisation of the economy.  Some progress has been 
made in addressing specific abuse channels, notably in relation to beneficial regimes targeting 
intellectual property. Proposed revisions to permanent establishment rules target primarily 
avoidance  structures employed by online retailers of physical goods and fail to establish a 
nexus based on digital presence instead of physical presence (Olbert and Spengel, 2015, and 
Blum, 2015).  
 
1.9 What are the available comprehensive policy options?  
Table (3): Summary of retained and discarded comprehensive policy options  
                                                 
36 ECOFIN Council conclusion, 'A' Item note 15175/17  
 
29  
 
5.2.1 Options for fundamental reform  
1.9.1.1  Destination -based tax  
The destination -based cash -flow tax was identified in the report of the Expert Group on 
Digital Economy (2014) as a possible holistic op tion to address the challenges of taxing 
the digital economy.  This tax has two distinct features. First, the cash -flow element provides 
that all revenues and expenditures are accounted for at the time as the related payments are 
executed. This includes exp enditures for capital investments which hence would become 
immediately expensed, instead of being deductible over time through depreciation 
allowances. Computing the tax base on a cash -flow basis is not essential to address the 
challenges of taxing profits  from digital business models. Second, the destination principle 
implies that the jurisdiction with the right to tax is the one of the location of the consumer of 
the goods or services sold. This second feature implies a right to tax in jurisdictions where  the 
customers of companies are located, irrespective of whether the company has any taxable 
presence in that jurisdiction (a subsidiary or a permanent establishment). It would thus be a 
far-reaching change to the (international) corporate tax system.  
Comprehensive policy options Short description Further assessment
Destination-based tax Allocates the right to tax exclusively to the jurisdiction where 
the good or service is consumed.Discarded
Unitary tax Worldwide consolidated profits are apportioned according to 
turnover generated in each jurisdiction.Discarded
Residence tax base with destination tax rate Taxing right and profit allocation rules remain as they are 
today, but the tax rate applied to the tax base in a jurisdiction 
is a weighted average of the tax rates of the countries where 
the turnover was generated. Discarded
Intra-EU - narrow scope: Adjustments to the 
CCCTB rulesRevision of permanenet establishment rules and the 
apportionment formula in the CCCTB.Option 1
Intra-EU - wide scope: Directive on new permanent 
establishment and profit allocation principles + 
adjustments to the CCCTB rulesThe Directive would establish new and common permanent 
establishment rules wihtin the EU, applicable to all 
businesses. The new rules would also be incorporated in the 
CCCTB. Option 2
Intra-EU - wide scope + mandatory application vis-
à-vis third countriesIn addition to the previous option (Intra-EU - wide scope), the 
Directive would mandate EU Member States to apply the new 
rules vis-à-vis third countries.Discarded
Intra-EU - wide scope + recommend application vis-
à-vis third countriesIn addition to the option (Intra-EU - wide scope), a separate 
Recommendation would be made to EU Member States to 
revise their double tax treates with third countries to reflect 
the new rules. The Commission would seek a mandate to 
negotiate the revisions vis-a-vis third countries, where this is 
of particular interest.Option 3
Include the online sale of goods Option a1
Exlcude the online sale of goods Option a2
Alternative application of digital activity thresholdsAs soon as one of the thresholds is exceeded, the permanent 
establishment is triggered. This would allow capturing the 
widest range of business models. Option b1
Cumulative application of digital activity thresholdsThis would result in a fairly narrow scope as the test would 
fail as soon as one criterion is not satisfied. Option b2
Revenue thresholds plus alternative application of 
other thresholdsThis would ensure that the revenue threshold is always 
applied, but otherwise allow for wide scope. Option b3Fundamental reforms
Realignment within current 
international tax framework 
(new permanenent 
establishment and profit 
allocation rules)
Design options for a digital 
permanenet establishment
 
30 There are various ways to implement the destination principle and one possibility would 
be to adjust rules within the CCCTB. One possibility is to implement a destination -based 
tax more narrowly within the remits of the CCCTB. It would involve adapting the pe rmanent 
establishment rules in the CCCTB to the digital economy. In addition, the formula would be 
adjusted to be exclusively based on sales by destination.     
1.9.1.2  Unitary tax  
The tax would apply on worldwide profits, allocated on the basis of where the turno ver 
is generated. Each EU Member State would get a share of the world profit of the digital 
companies that corresponds to the share of turnover generated in its country. To be effective 
the tax would also require the introduction of a new digital tax nexus  to levy and collect the 
tax in cases where a company carries out significant digital activities in a country. The 
determination of what constitutes such presence would need to consider also the amount of 
turnover generated in the country.  
The unitary tax  would apply in replacement of the corporate income tax for companies 
that undertake mainly digital activities.  This would require defining the conditions under 
which a company would be considered to carry out mainly digital activities. As such it would 
require a careful assessment of firms' operations to determine under which framework they 
fall.  The rate would be national corporate income tax rates, but could be set at levels that 
differ from the currently applicable rate, at the discretion of Member Sta tes. For companies 
not established in the Member State that would have some taxing right under the unitary tax 
system, the system would most likely require the use of a one -stop shop in order to enforce 
the tax.  
1.9.1.3  Residence tax base with destination tax rat e 
The taxing right would remain with Member States where companies have their tax 
residence, according to current rules.  Also, the rules for computing the tax base in the 
Member State of tax residence would continue to apply. Subsequently the tax base woul d be 
apportioned on the basis of where the turnover is generated; and for each of such portions the 
rate of the country where the turnover is generated would apply. Profits would still be 
declared and taxed (albeit at a weighted average of the rates where the company generates its 
turnover) in the Member State of tax residence.  
The system would apply in replacement of the corporate income tax system for 
companies that undertake mainly digital activities.   As such it would require a careful 
assessment of fir ms' operations to determine under which framework they fall. Different from 
the other comprehensive options, a new nexus definition would not be necessary. The rate 
would vary depending of the origin of the turnover. It would require the use of a one -stop 
shop and the creation of a monitoring authority at the EU level.   
1.9.2 Options for realigning the rules within the current international tax framework  
These options revolve around amending the permanent establishment and profit 
allocation rules.  They differ ma inly with respect to their scope, and in two ways. The first 
 
31 distinction is with regard to company size, i.e. whether the option applies only to the largest 
companies or has a broader scope. The second distinction is with regard to the territorial 
applicat ion, i.e. whether the option applies only intra -EU or also vis -à-vis third countries. 
Section 5.2.2.4 discusses a number of design options that apply to these options.  
1.9.2.1  Realigning profit allocation rules with value creation intra -EU 
These options would over ride the double tax treaties between Member States but would have 
no effect in relation to third countries, except possibly those not having a double tax 
convention with a given Member State.  
(a) Narrow scope: Amend the rules for the Common Consolidated Corporate Tax Base 
(Option 1)  
Rules that trigger a digital permanent establishment would be added to the CCCTB 
Directive.  Once agreed, the CCCTB would provide a competitive, fair and robust framework 
for taxing companies in the single market. A comprehensi ve option would then be to amend 
the current proposal to better capture features of the digital economy. A digital permanent 
establishment of an EU company would be triggered in a Member State and be subject to 
corporate income tax on its digital activitie s once a set of conditions is met. This option would 
, in principle, be broadly in line with the draft European Parliament amendment on the CCTB 
and the CCCTB proposals adopted by the Committee on Economic and Monetary Affairs that 
propose to introduce a d igital presence concept in the CCTB. As the CCCTB applies 
mandatorily to groups of companies with more than EUR 750 million in global turnover, the 
new rules would also mainly apply to these companies. Since the CCCTB cannot override 
double tax treaties be tween Member States and third countries, it would not impact the 
taxation of companies unless they are already tax resident in at least one Member State.   
Companies that exceed certain digital activity thresholds in a given Member State would 
trigger a di gital permanent establishment in that Member State.  The digital activity 
thresholds could be based on revenues from relevant digital services, number of users and/or 
online contracts concluded. Any EU company (or third country  company where there is no 
applicable double tax treaty37) would trigger a digital permanent establishment in a Member 
State, and therefore be subject to taxation on its digital activities,  if it exceeds certain activity 
thresholds in a tax year, such as:  
 revenues from digital services in a Member State exceeds EUR [x];  
 number of active users of the digital service in a Member State exceeds [x];  
 number of online contracts concluded exceeds [x].  
The proxies identified, such as number of active or registered users, number of of clicks or  
contracts, can be identified and linked to a Member State using, for example, the prevailing IP 
address of the user, local domain names, language or local platform criteria.  
 
                                                 
37 See explanation in relation to third countries in the next subsection.  
 
32 In a second step under this option, and for application at the consolidation level, the use 
of the formula currently proposed to attribute profits could be revisited. Options for 
adapting the apportionment formula range from making the formula entirely bas ed on sales by 
destination to adding a fourth factor to the existing CCCTB formula that would capture digital 
activities. This factor could be measured by data such as the number of users or the number of 
page visits.  
(b) Wide scope: Directive on digital permanent establishment (plus adapted CCCTB)(Option 
2) 
This option revolves around a proposal for a standalone directive establishing common 
EU rules for a digital permanent establishment and its profit attribution.  The standalone 
EU Directive would establ ish a common system for a digital permanent establishment and 
principles for allocating profits to digital activities of such permanent establishments. New 
rules on a digital permanent establishment would take the same form as outlined above for the 
CCCTB.  It would override double tax conventions between EU Member States and also apply 
in cross -border situations vis -à-vis third countries that do not have a double tax convention 
with a particular Member State. Double tax conventions with third countries woul d continue 
to apply.  
 
A Member State’s tax authorities also need to be able to attribute profits to permanent 
establishments in that state to reflect the digital activities therein.  This step follows the 
establishment of a taxing right in a Member State th rough changes to the definition of the 
permanent establishment. Therefore, the Directive would also set out the principles for how 
profit would be attributed to the digital permanent establishment.  
The fundamental principle for profit allocation should rem ain that taxation takes place 
in the jurisdiction where value is created.  Considering that in the digital economy, a 
significant part of the value of a business is created where the users are based and data is 
collected and processed, the directive would s et out criteria specifically targeted at attributing 
profit to a digital permanent establishment. For example, these criteria could be based on 
criteria such as:  
 the users' engagements and contributions to the development of a platform;  
 the data collected  from users in a Member State through a digital platform;  
 number of users; and/or  
 user-generated content.  
 
The standalone directive rules would then be included in the CCTB and the CCCTB (as 
it was done with the provisions of the Anti -Tax Avoidance Directive) . In contrast to the 
narrow CCCTB option, the scope of this directive would be wider, applying generally and not 
only to groups of companies above the EUR 750 million turnover threshold.  
 
 
33 1.9.2.2  Realigning profit allocation rules with value creation int ra-EU and vis -à-vis third 
countries  
This option expands the territorial scope of the standalone Directive to apply not only in 
intra -EU situations but also between Member States and third countries.  This would 
oblige Member States to renegotiate their exis ting double tax conventions with third countries 
in accordance with the rules of the Directive. As with the intra -EU solution, it would also lead 
to an adaptation of the CCCTB rules to be consistent with the new rules.  
1.9.2.3  Realigning profit allocation rules w ith value creation intra -EU and recommendation 
to change rules vis -à-vis third countries (Option 3)  
This option would supplement the standalone directive that applies in intra -EU situations (as 
set out in section 5.2.2.1) between Member States with a recom mendation to Member States 
to amend their double tax treaties with third countries setting out the proposed changes to the 
double taxation treaties in relation to Article 5 (Permanent Establishment) and Article 7 
(Business Profits) of the OECD Model Tax Co nvention. This recommendation would be 
addressed to Member States, but it could also influence the debate at international level on 
addressing the challenges of taxing the digital economy. To complement the recommendation, 
the Commission could, without pre judice to the EU and Member States' competences, assist 
Member States in the negotiation of these provisions with selected third countries in a 
coordinated manner at the Union level, if authorised to do so by the Council.  
1.9.2.4  Design options: Type and level of digital activities  
For all options in this category, there are some important design choices to be made 
concerning the type and level of digital activities reflected in the new permanent 
establishment rules. For the type of activities, the two key alterna tives considered are to 
include all types of digital activities, irrespective of whether the activity consists in the supply 
of a physical good ordered online, or to focus on digital activities that are services.  
Option a1 : Including the online sale of go ods.  
Option a2 : Excluding the online sale of goods.  
For the digital activity thresholds, two different types of metrics have been discussed: a 
threshold on revenue earned from digital activities in the jurisdiction or a threshold on 
the activity by users in the jurisdiction (for example, measured by the num ber of users or 
number of online contracts).  A key question is whether to require that these thresholds apply 
cumulatively, so that a permanent establishment is triggered only if all thresholds are 
surpassed, or alternatively, so that it suffices to surpa ss one or a subset of thresholds.  
Option b1 : Operating the different thresholds alternatively (i.e. as soon as one of the 
thresholds is exceeded, the permanent establishment is triggered). This would allow 
capturing the widest range of business models.  
Option b2 : Operating the different thresholds cumulatively. This would result in a 
fairly narrow scope as the test would fail as soon as one criterion is not satisfied.  
 
34 Option b3 : Operating the revenue threshold in combination with other thresholds, 
which can  apply alternatively.  
Further, the level of each digital activity threshold needs to be determined.  
 
1.10 Policy options discarded at an early stage  
Fundamental reforms, such as destination -based cash flow tax, unitary taxation and 
residence tax base with destination tax rates,  would not only fundamentally challenge 
the international tax system, but they also have the potential to address the problems at 
their root s. They however do not yet seem to be a priority of Member States at this stage, 
who prefer to  adapt the current system.  In its conclusions of 5 December 2017, the Council 
underlines instead that 'a globally accepted definition of permanent establishment and the 
related transfer pricing and profit attribution rules should also remain pivotal when 
addressing the challenges of taxation of profits of the digital economy' .38   
As such, it shall be noted that fundamental reforms would not square with the CCCTB 
proposal. They  imply the need to implement a separate tax system for the digital economy (or 
to depart from the CCCTB provisions if the fundamental reform were to be applied to the 
entire economy).  
Even though both unitary tax and residence -tax base with destination tax rate have in 
principle good economic properties, they are discarded at this stag e. The unitary tax 
raises considerable implementation issues, as it challenges today's international corporate tax 
system in a fundamental way. Making tax revenue collected in one Member State directly 
dependent on tax rates set by other countries – the op tion of a residence tax base with a 
destination tax rate - would pose important legal challenges, notably issues of equal treatment 
within Member States. It could also increase tax competition on the definition of the taxable 
base so as to attract more com panies. Furthermore, neither option is coherent with the 
CCCTB and would, if applied only to companies in the digital economy, require Member 
States to operate an additional corporate tax system, next to the CCCTB and their national tax 
systems.  
Despite s ome strong features of the destination -based (cash -flow) tax, only the option of 
implementing the destination -principle within the CCCTB is retained.  Numerous 
contributions in the literature have shown that the destination -based (cash flow) tax can be 
both an efficient tax and effective in addressing tax planning issues ( see Annex 9 for a 
summary) .39 However, as with the other discarded options, implementing the destination -
based tax in full, would not be coherent with the CCCTB and require Member States to 
operate an additional corporate tax system, next to the CCCTB and their national tax systems. 
For this reason, implementing a separate destination -based tax for digital companies is not 
                                                 
38 ECOFIN Council conclusion, 'A' Item note 15175/17  
39 See for example Devere ux and de la Feria (2014),  
 
35 retained. Only the option of implementing the destination principle wi thin the CCCTB will be 
examined.   
Obliging Member States to apply the new permanent establishment and profit allocation 
rules of the standalone Directive also vis -à-vis third countries, thereby  requiring them to 
break their contracts with third countries, is not a viable option. This option would also 
cover digital activity in the EU of companies that are currently not tax residents anywhere in 
the EU. Once fully implemented, it would therefore p rovide for a more level playing field 
between EU companies and companies of third countries. As such, it would also provide for a 
stronger, more positive impact on public finances and be overall fairer. However, it would 
likely contribute to a prolonged pe riod of uncertainty for companies. As long as double tax 
conventions are not re -negotiated, companies would face the uncertainty of which rules a 
Member State would follow: the rules in the Directive or those in the relevant double tax 
convention. Above al l, introducing an obligation on Member States that affects their contracts 
with third countries is not a realistic option. Therefore this approach is rejected.  
6. WHAT ARE THE IMPACTS OF THE COMPREHENSIVE  POLICY 
OPTIONS ? 
 
  
1.11 Realigning profit allocation rules  with value creation intra -EU  -
Options 1 and 2  
1.11.1  Option 1 - Narrow scope: Common Consolidated Corporate Tax Base adapted to the 
digital economy  
This option implies that the solution would affect only companies that apply the 
CCCTB.  Specifically, only compan ies with a global consolidated turnover above EUR 750 
million would be subject to the new rules whereas other companies would apply the new rules 
only if they elect to do so. As a result, the new rules on permanent establishment and 
allocation of profits, would not apply uniformly to all businesses. Moreover, all Member 
States would have to operate two very different sets of permanent establishment rules.  
Examples   
Company X, established in  Member State A and with a global consolidated turnover above 
EUR 7 50 million and thus falling under the mandatory scope of the CCCTB, carries out 
relevant digital activities in Member State B.  The new rules on a significant digital presence 
would trigger a permanent establishment of company X in Member State B. It is en visaged 
that under new profit allocation rules in the CCCTB part of the profits of company X would 
be allocated to Member State B.  
Company Y, established in a Member State and carrying out similar digital activities but with 
a global turnover below EUR 75 0 million would not be subject to the new rules. It would 
however have the possibility to apply the CCCTB on a voluntary basis.  
 
36 The new rules would never apply to a company Z established outside the European Union 
even if performing digital activities in a Member State. Moreover, in the absence of an 
agreement on the CCCTB, the new rules would not apply to any company, whether it falls 
under the mandatory scope or opts to apply the rules of the CCCTB.   
 (a) Integrity of the single market  
The implementatio n of the CCCTB adapted to the digital economy would limit the risk 
of additional distortions from unilateral actions, but not completely eliminate it.  The 
adapted CCCTB will offer a solution for the largest digitalised businesses and as such relieve 
some o f the pressure for Member States to come up with national measures. However, as the 
scope of the CCCTB is relatively narrow - due to the high global turnover threshold for the 
mandatory scope – there remains a risk that unilateral measures are taken to com plement the 
new rules under the CCCTB.  
Furthermore, introducing a solution that is contingent upon application of the CCCTB 
introduces new distortions in the single market.  Companies that apply the CCCTB would 
be subject to the new rules for a digital permanent establishment, whereas companies with 
digital activities and not subject to the CCCTB would not be captured by the new digital 
permanent establishment rules. In this scenario, it could well be that a company outside the 
CCCTB pays taxes in only one EU Member State whereas the same company would pay 
taxes in all EU Member States if it applied the CCCTB. Apart from introducing new 
distortions between companies within and  outside the CCCTB, this feature would also make 
the decision of whether to opt into the CCCTB system more complicated than before. This 
would possibly impede the attractiveness of the CCCTB. In the amendments made in the draft 
European Parliament reports adopted by the Committee for Economic and Monetary Affairs 
on the  CCTB and CCCTB proposals40, the introduction of new nexus rules for digital 
presence is combined with a phase -out of the mandatory threshold, which would mean the 
new rules would apply gener ally and not only for a subset of companies.  
(b) Sustainability of public finances  
The impact on public finances is primarily about contributing to the long -run 
sustainability of the corporate tax system.  At first, the impact on public finances is likely to 
be small. This is simply due to the still relatively small contribution of the digital economy to 
the economy. UNCTAD (2017c) estimates it to be on average 4.3% of value added in the EU, 
but there is no  consensus estimate (see footnote 42). In addition, average corporate income tax 
revenue is small compared to other taxes, amounting to only 2.5% of GDP in 2015 (European 
Commission, 2017a). However, due to the continued trend towards digitalisation and th e 
expectation that the traditional economy will also become more digitalised, the measure is 
expected to contribute to the sustainability of the corporate income tax system. As the 
                                                 
40 DRAFT EUROPEAN PARLIAMENT LEGISLATIVE RESOLUTION on the proposal for a Council 
directive on a Common Corporate Tax Base (COM(2016)0685 – C8-0472/2016 – 2016/0337(CNS)).  
 
37 corporate income tax also serves as a backstop to personal income tax, ther e is likely a wider 
impact on public finances.  
A significant increase in tax base  at EU level is not expected, but there will likely be a 
certain amount of reallocation of tax revenues across Member States. The main e ffect 
will be one of better -aligned lo cations of value creation and taxing rights. At least at first, a 
significant increase in tax base  at EU level, compared to the baseline scenario, is not 
expected. As the adapted rules would address intra -EU situations, it does not directly tackle 
issues w here a disproportionate amount of tax base is attributed to third countries.41 
Reallocation of tax base would occur in situations where a Member State is a significant 
marketplace for digital companies but none of the digital activities are booked for tax p urpose 
there, because according to current rules they are centralised in one or a few other Member 
States. Thus the Directive would address situations where there is a certain level of digital 
activity, but a lack of physical presence prevents Member State s from taxing it. It would also 
address situations where there is currently a permanent establishment in a Member State but 
that permanent establishment is not taxed on the profits from the digital activity in that 
Member State, because the activity does n ot involve, or only to a disproportionate extent, any 
of the three factors, i.e. tangible assets, labour and sales by destination, considered in the 
profit allocation formula of the CCCTB.  
Due to the new digital permanent establishments created, it is expe cted that companies 
would find it more difficult to do tax planning, increasing tax revenue overall.  As 
companies have less control over where their activities are taxed it would be more difficult to 
artificially attribute profits (for example through arti ficial avoidance of permanent 
establishment rules) to jurisdictions where they benefit from lower taxation.  
(c) Social fairness and level playing field among business  
The revision of the CCCTB rules would ensure that digital activities are effectively 
captured for tax purposes and remove certain competitive distortions between the 
largest companies.  It should reintroduce a level playing field between digital and less digital 
companies applying the CCCTB but also between EU companies active domestically and 
those operating remotely, which is a pre -requisite to the development and growth of digital 
start-ups and scale -ups in the EU. By doing so, the adapted CCCTB would better ensure that 
similar economic activities face similar tax obligations, providing for a  more level playing 
field. It would also secure the corporate tax base, preventing shifting the tax burden on other 
bases and economic agents.  
Due to its limited scope, it is difficult to implement a structural solution only through the 
CCCTB, but it woul d nonetheless improve the perception of social fairness.  In effect, 
there would be two completely different sets of rules on taxable presence (and profit 
allocation) for companies falling under the mandatory application and those outside. This 
                                                 
41 In other words, without revision of tax treaties with t hird countries, one would not expect additional tax base 
from activities of foreign companies that under current tax treaty rules are not considered to have a taxable 
presence in at least one Member State.  
 
38 could make i t harder to seek structural solutions internationally. It may also raise new 
competitive distortions (Schön, 2017).  Nonetheless, by ensuring that large companies with 
significant digital activities do not escape their taxes in the EU, this adapted CCCTB wo uld 
improve the perception of social fairness in the tax system.  
(d) Fight against aggressive tax planning  
First , aggressive tax planning through artificial avoidance of permanent establishment 
would be reduced.  The new CCCTB rules for a digital permanent  establishment would 
establish a taxing right based one significant volume of activities in the scope of the proposal 
(to be defined). Key principles for localising these activities could be the destination of a 
service – that is, where it is consumed – and the location of the user who has contributed to 
the value creation. Both are difficult for the business to manipulate (and with little interest for 
users to do so). As a result, the digital permanent establishment rules would be effective and 
difficult t o avoid.  
Second , the new rules would limit  the emergence of new opportunities for aggressive tax 
planni ng. To the extent that the adapted rules pre -empt Member States pursuing different 
national responses to taxing digital activities, it would also be effe ctive in preventing 
additional inconsistencies between the different approaches. Such differences would only 
further incentivise businesses to engage in aggressive tax planning.  
 (e) Economic impacts  
The macroeconomic impacts of revised CCCTB rules would be small. This is mainly 
because the number of affected companies is small: these are companies with global 
consolidated turnover of more than EUR 750 million with significant digital activities in some 
Member States where they do not have a permanent esta blishment according to current rules.  
The negligible macro -economic impact is confirmed in simulations on the application of 
different formulas in the CCCTB. To simulate the effect, the CORTAX model – a 
computable general equilibrium model – was used (see Annex 4 and 10 for the 
methodological details). Four alternatives to the currently proposed profit allocation formula 
have been modelled.  All formulas use the assumption that digital firms represent 5% of the 
economy.42 In the first three formulas, a 'digit al input factor' was added to the formula, 
                                                 
42 The estimation of the size of value added from d igital products is challenging and no agreed -upon 
methodology is yet available. Estimates  depend on the employed definition of digital economy, for which there 
is no broad consensus. The Boston Consulting Group combines data from the OECD and national stat istical 
agencies to estimate an average direct contribution of the digital economy to GDP in G20 countries of 5.1%, 
with a maximum in UK of 10.4% and a minimum in Indonesia of 1.4%.  Alternative estimates from consulting 
firms and  professional associations (like The Internet Association, which represents the interests of many giant 
companies: Google, Amazon, Airbnb, Salesforce, and many more) point to about 6% of GDP in the U.S. coming 
from purely Web -based businesses. The OECD Internet Economy Outlook 2017 estimates that 5.4% of global 
value added in the OECD area in 2015 directly comes from information and telecommunication (ICT) products 
although this sector encapsulates a wide array of activities going beyond web companies while possibly missing 
significa nt major digital companies (for instance, Amazon is listed under the SIC code 5961 which is not 
included in the OECD definition of ICT). UNCTAD (2017c) estimates that the value added for the EU amounts 
 
 
39 affecting the apportionment of profits for the 'digital companies' representing 5% of the 
economy. The location of digital firm activity by country was proxied using total page views, 
in relative terms, for the to p 50 web sites across the EU. The fourth formula alternative 
models a destinations -based CCCTB by putting all weight for all types of companies on sales 
by destination.  As the detailed results presented in Table (1) of Annex 10 show, there is 
hardly any im pact at the macro -level, irrespective of the formula alternative applied.  
 (f) Administrative burden and compliance costs  
The adapted CCCTB would create limited additional administrative burden for 
companies and administrations compared to the current CCCT B proposal.  Additional 
information items are required, notably concerning the proxies identified to trigger a digital 
permanent establishment (for example, number of active users, local domain names, IP 
addresses, location of the accommodation, transport, or entertainment services provision) , as 
well as for any new factor added to the profit allocation formula. In some cases, these proxies 
are already disclosed and used to split revenues in the current financial reports audited by 
statutory auditors. Overall, only a small increase in the time spent on record keeping, on the 
preparation of tax computation and on dealing with tax authorities is expected.  
Compared to the baseline, in which national administrations would increasingly pursue 
national soluti ons, the compliance burden for companies subject to the new CCCTB 
rules should be lower overall. To the extent that national measures would be deemed 
necessary to capture activities outside the scope of the proposed adapted CCCTB rules,  the 
compliance and administrative burdens should be broadly the same as in the baseline. 
However, a precise comparison with the baseline scenario is difficult as the assessment would 
depend on which measures would have also been taken in the baseline.  
(g) Coherence with oth er Commission policies and global tax agenda  
A digital CCCTB would fall within the ambit of the Commission’s initiatives for fairer 
taxation . It would contribute to the elimination of obstacles which create distortions that 
impede the proper functioning of  the single market. On this premise, it is largely 
complementary to the EU -level legislation in company law and broadly fits with projects such 
as the digital single market and the several initiatives in tax transparency, the exchange of 
information and an ti-money laundering.  
A solution focussing exclusively on revisions to the CCCTB would have limited potential 
to have a positive impact on the global tax agenda. Effectively, the EU would apply two 
completely different sets of rules on taxable presence (and  profit allocation) for companies 
falling under the mandatory application and those outside. This would make it harder to seek 
structural solutions internationally.  
                                                                                                                                                         
to 4.3%.  Taking stock of the lack of a consensus defi nition of the digital economy and absent any data more 
dependable than these, 5% looks like a reasonable estimate that is employed in the CORTAX simulations.  
 
40 1.11.2  Option 2 - Wide scope: Directive on digital permanent establishment (plus adapted 
CCCTB)  
The separate Directive would have a wide scope . Most notably, the mandatory global 
turnover threshold of EUR 750 million applicable to the CCCTB would not apply. In 
addition, the adoption of the directive would not require Member States to agree on the new 
rules in a package with all other rules laid down in the CCCTB. This could make for a faster 
adoption of the new rules.  
Example   
Both companies X and Y from the previous examples (Option 1), established in Member State 
A – and providing digital services wo uld in principle fall under the scope of the directive, 
irrespective of their global turnover. As for Option 1, the question whether the new rules lead 
to an additional digital permanent establishment in Member State B would depend on their 
respective econ omic presence (i.e., whether it exceeds the applicable digital activity 
thresholds). As for option 1, the new rules would not apply to company Z established outside 
the EU but performing digital activities in Member State B assuming that the applicable tax  
treaty between Member State B and country Z overrules Member State B's new digital 
permanent establishment rules.    
a) Integrity of the single market  
Due to its general scope, the Directive would have a stronger positive impact on the 
integrity of the single market than the narrower Option 1. The revision of the rules would 
ensure that digital activities are effectively captured for tax purposes. Once a greed, it would 
remove incentives for unilateral action at Member State level.  It would reintroduce a level 
playing field between digital and less (or non -)digital companies active domestically and 
those operating remotely, and not only for the largest pla yers. By containing the risk of future 
unilateral actions, Option 2 would ensure a single and certain framework for the allocation of 
taxing rights and allocation of profits across EU Member States, which would support the 
development and growth of digital  start-ups and scale -ups in the EU.  
b) Sustainability of public finances  
Implemented together, the changes in permanent establishment  and allocation rules 
would grant Member States taxing rights and tools for profit attribution that reflect 
digital presenc e. As such it would correct the existing misalignment of taxation and value 
creation and contribute to a fairer distribution of tax revenue within the EU.  
Due to the wider scope of this option and its better effectiveness in fighting aggressive 
tax plannin g the impact on public finances is expected to be somewhat larger than for 
the narrower Option 1 . The CCCTB already captures a large share of the turnover by 
multinational companies and is likely to capture those largest digital players that are most 
 
41 relev ant for public finances in individual Member States.43 However, the wider scope option 
is considered to be more effective in the fight against tax planning (see (d) below), 
contributing to additional tax revenue from other companies (not falling under the m andatory 
scope of the CCCTB).  
(c) Social fairness and level playing field among businesses  
Figure  (3) below illustrates for 5 sample companies the mismatch between the location of 
their users and the current place of taxation. It clearly demonstrates the c urrent 
misalignment between profit tax base and places where users contribute to the value of the 
services offered. The maps are based on data of five sample companies. Web visits are used 
here as proxy for the geographical location of users and their cont ribution to the value 
creation process of web services. They are contrasted against the location of profits of these 
five companies.  
Figure (3): Comparison of the geographical allocation of web visits (left -hand side) and 
profit (right -hand side), for fiv e large web companies  
 
 
 
Source: European Commission Joint Research Centre, based on Bureau van Dijk Orbis database  (2016) and 
SimilarWeb (2016, www.similarweb.com) ). Legend: geographical allocation of web visits (left -hand side); 
profits (measured as EBITDA  = Earnings before interest, taxes, depreciation and amortisation , right -hand side).  
The revision of the rules would ensure that all digital activities are effectively captured 
for tax purposes and remov e competitive distortions.  The additional criteria suggested for 
profit attribution in the Directive are targeted to capture more value where the users are based 
and data are collected and processed. By doing so, the adapted rules would better ensure that 
similar economic activities face similar tax obligations. As said above, this would reintroduce 
a level playing field between digital and less (or non -) digital companies, as well as between 
firms active only domestically and those operating remotely. It i s also necessary to create fair 
competition between small and large players, which is a pre -requisite to the development and 
growth of digital start -ups and scale -ups in the EU competing with large multinational 
                                                 
43 See discussion on the impact on public finances for Option 1 above.  

 
42 players. It would also secure the corporate tax base and prevent undue tax burden on other 
bases and economic agents.    
By ensuring that large companies with significant digital activities do not escape their 
taxes in the EU (see next subsection), the directive would improve the perception of 
socia l fairness in the tax system.  It can be expected to have a positive impact on taxpayer 
morale and improve trust in the functioning of the tax systems more generally.  
(d) Fight against aggressive tax planning  
In addition to the positive impacts of the narr ow scope, which would remain valid , 
under the wide scope, companies would have less possibilities to shift profits out to third 
countries.  As it will become significantly more difficult to artificially attribute profits to 
some specific jurisdiction, it wi ll also become more difficult for companies to shift profits 
outside the EU through treaty shopping. This practice is wide -spread and involves shifting 
profits to EU jurisdictions that do not apply source taxation on outbound payments.  
 (e) Economic impac ts 
For the same reasons as for Option 1, the economic impacts are considered to be small 
but could become larger over time as the digital economy grows.  Still, the positive 
economic impact is arguably larger than in Option 1. This is due to the wider scope  of Option 
2, which results in an expected more effective preservation of the single market, as it offers a 
more structural solution (preventing additional unilateral measures) and implies one single 
system within the EU for permanent establishment rules. Moreover, this option is considered 
to be more conducive to arriving eventually at a global solution, which would be the one best 
suited to ensuring a level playing field within the EU and vis -à-vis third countries.  
 (f) Administrative burden and complianc e costs  
In the first instance, the adapted rules would create an additional compliance cost for 
companies and administrative burden for administrations.  Additional compliance 
activities are required in relation to new permanent establishments triggered in Member States 
where companies had not been taxpayers before. This implies dealing with additional tax 
administrations, though this can be avoided by opting for the CCCTB.44 In addition, 
companies also need to collect and record information on the proxies identified to trigger a 
digital establishment and allocate profits to it (for example, number of active users or location 
of the accommodation, transport, or entertainment s ervices provision). The vast majority of  
companies with an online user base have access to this information and some of these proxies 
are already disclosed and used to split revenues in the current financial reports audited by 
statutory auditors. Overall, only small increases are expected in the time spent on record 
keeping, on the preparation of tax computation and on dealing with tax authorities.  
                                                 
44 The administrative burden and compliance costs of the CCCTB have been described in the impact assessment 
of the CCTB and CCCTB (see SWD(2016) 341 final ). 
 
43 Compared to the baseline, in which national administrations would increasingly pursue 
national solutions, the compliance burden for companies subject to the new rules should 
be lower overall.  The requirements would be harmonised in the EU whereas they can 
critically differ across Member States if national solutions are implemented in an 
uncoordinated way. Thus in comparison to a situation where countries increasingly implement 
national measures to tax digital activities, the compliance burden for companies in the digital 
economy would be reduced.  
 (g) Coherence with other Commission policies and global tax agenda  
The revised rules on digital permanent establishment and profit attribution within the 
new Directive and the adapted CCCTB would fall within the ambit of the Commission’s 
initiatives for fairer taxation . It would contribute to the elimination of obstacles which 
create distortions that impede the proper functioning of the single market. On this premise, it 
is largely complementary to the EU -level legislation in corporate taxation and broadly fits 
with projects such as the digital single market and progress a chieved in the areas of tax 
transparency, exchange of information and anti -money laundering.  
Offering a pragmatic and flexible approach is an important aspect if the EU wants to 
make progress and thereby also push progress internationally.  To do so, the pr oposal for 
the long -term should both reflect what the EU would like to see internationally, but also be 
easy to align to any eventual international solution. This will require a careful approach. The 
more specific the EU provisions are, the more difficult will be an alignment with a subsequent 
global agreement. Therefore, the approach should be quite broad and flexible, while still 
providing Member States with a solid base to tax digital activity.  
1.12 Option 3: Realigning profit allocation rules with value crea tion intra -
EU and recommendation to change rules vis -à-vis third countries  
The differential impact compared to Option 2 stems from its potential application vis -à-
vis third countries, which would ensure a more level playing field. An update of all 
bilatera l treaties between Member States and third countries takes time and requires also the 
willingness of all involved parties to follow the recommended approach. The main benefit 
would be in also covering digital activity in the EU of companies that are curren tly not tax 
residents anywhere in the EU. An examination of Orbis firm level data on affiliates of the set 
of 112 large digital companies shows that at least 75% of them have at least one affiliate in 
the EU. For the remaining 25%, there is no information in Orbis, but this does not exclude 
that they are present in the EU. Thus, the immediate impact of an application also vis -à-vis 
third countries might be small. The important effect is that it would provide for a level -
playing field between EU and third -country companies. Compared to Option 2, it would also 
avoid any disincentives to become a tax resident in the EU. As such, it would also provide for 
a stronger, more positive impact on public finances and be overall fairer. Since it is not 
possible to antic ipate which countries will update their treaties, and by when, the possible 
positive effects of the recommendation are only very generally taken into account.  
 
 
44 Example  
The examples for companies X and Y established in the EU are the same as for Option 2.  
Company Z, established in a third country C and carrying out digital activities in Member 
State B, may be subject to the new rules if third country C and Member State B have 
renegotiated their respective bilateral tax treaty accordingly.  
1.13 Type and level of digital activities  
Material scope  
Activities involving the supply of physical goods are relatively less problematic and have 
been dealt with to a larger degree through anti -abuse rules.  First, these activities tend to 
have a balanced international footpri nt as they often require local physical infrastructure – the 
international footprint of online retailers is 0.9 (see Figure 2 in Annex 5). Second, relatively 
more progress has been made within the OECD Base Erosion and Profit Shifting project in 
addressing  issues in this area, notably through the measures that make the permanent 
establishment rules robust against commissionaire arrangements.45 Note that excluding the 
supply of physical goods does not mean that platforms charging fees for facilitating the tra de 
of physical goods would be excluded. These platforms charge fees for a digital service. It 
means, however, that the underlying sale of the physical good would not be within the scope.  
The comprehensive solution  should not ring -fence the digital economy but directly 
address its novel characteristics through a holistic approach that does not require 
singl ing out certain activities.  Many of the stakeholders that replied to the Commission's 
open public consultation have made that point very clearly: "there is no such thing as the 
digital economy . The global economy is digital and should be treated as such for tax 
purposes"46.  
The new rules should proportionately address the current mismatch between taxation 
and value creation.  To the extent that the c omprehensive solution can accommodate in its 
profit allocation rules the different degrees of contribution of digital factors to the process of 
value creation, the scope for the comprehensive solution can be defined broadly to include all 
digital services.  A definition of digital services for the purposes of a revenue threshold could 
be inspired by the definition of electronically supplied services, which exists for VAT 
purposes.47 This would entail covering a broad range of digital services.  
Digital activi ty thresholds  
Ideally the digital activity thresholds should be defined in a way to  
                                                 
45 Notably, activities around local warehouses no longer benefit from the specific activity exemption commonly 
included in the de finition of a permanent establishment, unless they are preparatory and auxiliary in nature.  
46 Opinion expressed in one of the position papers that were sent to the open public consultation.  
47 'Electronically supplied services' include services which are delivered over the Internet or an electronic 
network and the nature of which renders their supply essentially automated and involving minimal human 
intervention, and impossible to ensure in the absence of information technology (Article 7 of VAT Implementi ng 
Regulation).  
 
45 a) Cater for different type of business models  - Digital business models are very 
heterogeneous. Some might rely on online contracts, while others do not. Some might 
have a v ery large user base while others might have a smaller user base, but still have 
significant user contributions as each individual user contributes a large value (users 
that produce content like videos or computer programs);  
b) Ensure that trivial cases are no t covered and that the compliance cost for dealing 
with an additional permanent establishment is safely covered by the profits 
generated through the permanent establishment. This is important for the 
proportionality of the proposed measure; and  
c) Ensure a co mparable treatment in different Member States, irrespective of their 
size. 
 
A number of different types of activity thresholds have been proposed, notably in OECD 
(2015a) and Brauner and Pistone (2017) and Hongler and Pistone (2015). The thresholds most 
often discussed relate to:  
 Revenue  earned from customers/users in the jurisdiction  
 Number of users  (based on a concept of 'monthly average users'): A user is defined as 
any individual or business that registers, logs on or visits a company's digital platform . 
 Number of online contracts  (agreements to terms of service): Online contracts are 
defined as legally binding agreements concluded by accepting (through 'clicks') the 
'terms of service' of the digital service provider.  
The OECD (2015b) and Hongler and Pi stone (2015) envisage to apply the revenue 
threshold in combination with other thresholds (Option b3), but this option does not 
deal effectively with business models that operate through indirect revenue generation.  
Proportionality is a strong rationale fo r the application of a revenue threshold. However, the 
advantage of an alternative application of all thresholds (Option b1) is that it also deals 
effectively with respect to the advertising business model that generates revenue not directly 
from its users  but indirectly through sales to third parties. Option b2 has the same 
disadvantage as Option b3 and has the additional disadvantage that a cumulative application 
of all thresholds could result in a very narrow scope and is not suitable to capture effectiv ely 
different types of business models. For example, some businesses do not apply any online 
contracts and the new rules would hence be of no consequence to them.  
To ensure proportionality of the measure while operating alternative thresholds, it is 
essen tial to set each threshold sufficiently high to safely exclude small cases that would 
not even cover the tax compliance cost for a permanent establishment. Brauner and 
Pistone (2017) propose to make the thresholds flexible for countries to account for sign ificant 
differences between countries, their geographical dimensions, the size of their economies, the 
number of inhabitants and other persons legally established on their territory, the criteria 
based on the number of users and the overall revenue are det ermined in a flexible way. 
However, if the main aim for setting each threshold is to ensure significant economic activity 
 
46 and that compliance cost would be covered by the corresponding profits, it is more natural to 
apply absolute thresholds.  
The starting  point for setting the revenue threshold are the estimated costs for operating 
an additional permanent establishment. A conservative estimate (based on Annex VII of 
the impact assessment accompanying the 2016 CCCTB proposal) puts this figure at 0.55% of 
turnover (or EUR 128 000 on average) per year for medium -sized enterprises and at 0.23% of 
turnover (or EUR 141 000 on a verage) for large enterprises. A recent study on tax compliance 
costs (KPMG and GFK, 2018), points to estimates for direct taxes overall  of 0.2% of turnover 
for medium -sized enterprises and 0.7% for large enterprises (although this estimate is subject 
to large uncertainty). For small enterprises the estimated amount is 0.9% of turnover.  
If compliance costs are indeed proportional to turnover, then even with a profitability of 
only 1%, (which is well below of what we typically see for digital companies), 
compliance costs should be safely covered.  However, it is likely that there are substantial 
fixed compliance costs (that arise from the start and independent from the amount of 
turnover). A conservative assumption is that only transfer pricing documentation is 
proportional to turnover whereas all other costs are fixed. This would give average fixed costs 
of EUR 80 000 for a medium -sized enterprise and EUR 87 000 for a large enterprise (see 
detailed split of costs in the tables provided in Annex 3). A company with turnover of EUR 5 
million and profitability of 2%, would cover these costs. A threshold of EUR 10 million 
would allow for scenarios of even lower profitability and would be in line with the threshold 
for small enterprises in the EU.  
To set the thresh old on the number of users, data for the revenue per user is 
informative.  Estimates for a range of different types of digital services48 give the following 
average revenue per user in Europe49: social media advertising USD 1550,  ride sharing 
services USD 47,  dating services USD 22, hotel rental services USD 47. Revenue per user in 
search advertising (the largest category in online advertising) is estimated at USD 13 for 
mobile users and USD 32 for desktop users in Europe in 2016.51 In order to get a similar va lue 
of threshold in monetary terms as with option (i), the appropriate threshold of number of 
users, if applied alternatively to the revenue threshold, could be 50 000 - 100 000. In that case, 
the average revenue triggering the threshold would range from a pproximately USD 750 000 
for 50 000 users and revenue per user of USD 15 (corresponding to approximately EUR 680 
00052) to USD 4 700 000 for 100 000 users and USD 47 per user (EUR 4 250 000). Even if 
these numbers are somewhat lower than for the revenue thr eshold, this is justified as the data 
available often underestimates actual user figures (based on a comparison with data supplied 
by individual companies). Moreover, the user thresholds only become relevant in the case of 
                                                 
 
49 Based on data published by Statista.  
50 Revenue per user in social media advertising is estimated at USD 16 for mobile users and USD 6 for desktop 
users, with an average of 15 (due to the bigger weight of mobile users): 
https://www.statista.com/download/outlook/whiterpaper/Fullpage/2/220/102/2_220_102.pdf  
51 https://www.statista.com/download/outlook/whiterpaper/Fullpage/2/219/102/2_219_102.pdf  
52 Based on the 2016 annual average USD -EUR exchange rate of 1.11 (AMECO database ). 
 
47 indirect revenue generation, whic h typically either involves advertising models or at least 
large user bases.  
There is a high variability in the type and value of the contracts, depending on the 
business model.  Moreover, also the acceptance of 'terms of service' for the use of an online 
platform could be assimilated to the conclusion of a contract53. If so, a high threshold, very 
similar to the one of the user would be needed. In any case, anybody who agrees to the 'terms 
of service' would also be counted as a user. If relevant for the busi ness, the acceptance of 
'terms of service' could be accepted as a way to measure number of users for a digital service 
rather than a threshold per se.  An alternative threshold on the contracts concluded locally 
could have an added value if it is about busi ness-to-business contracts. For example, a cloud -
computing service might have relatively few 'users' if it offers its services primarily to 
businesses customers, but each contract concluded with such a business customer would 
typically generate more revenu e than revenue generated form a single user that is a natural 
person. Therefore, a threshold on business -to-business contracts should be considerably lower 
than a user -based threshold.   
 
1.14 Impact on small and medium -sized enterprises  
No direct impact is expected on small enterprises, whereas there might be some impact 
on medium -sized enterprises. Option 1 applies mandatorily only to companies with 
consolidated turnover above EUR 750 million and therefore affects directly only the large st 
companies. Due to the application of the digital activity thresholds, the vast majority of small 
enterprises would not be affected by options 2 and 3. Medium -sized companies might fall 
under the scope. However, additional permanent establishments would be triggered only in 
cases of companies being active in at least two countries. The type of company that triggers 
additional permanent establishments can reasonably be expected to exceed the thresholds for 
medium -sized enterprises. In any case, a mitigatin g factor would be the availability of the 
CCCTB, which affected companies could opt for and thereby mitigate their compliance 
burden. However, since regulatory and compliance burden may hurt small and medium -sized 
enterprises to a stronger extent, this bur den will have to be monitored to assess whether such 
firms are disproportionately impacted.  
The comprehensive option is expected to improve the level -playing field for small - and 
medium sized companies.  It would provide for a more coherent digital single market in the 
future, which would in particular benefit small and medium -sized companies. Notably, it 
would improve the level -playing between large multinational digital players and smaller 
companies that are active cross -border less often (and have fewer tax planning opportunities). 
A modern and stable tax framework for the digital economy will set the conditions to 
                                                 
53 See for example the OECD (2015a): Final Report p.110: "online platforms providing free services to their 
users often specify on their websites that by accessing or using the products and services of the company the user 
agrees to the “Terms of Service ” and each use of the platform results in the conclusion of a legally binding 
agreement."  
 
48 stimulate innovation, tackle market fragmentation and allow small domestic businesses to 
become global players.  
 
7. HOW DO THE COMPREHENS IVE OPT IONS COMPARE ? 
Table (4) summarises the assessment presented in section 6 . All comprehensive policy 
options are considered to be to some degree effective in achieving the various objectives set 
out for this initiative. In terms of potential costs, Option 1 might bring additional burdens as it 
is possible Member States would still take unilateral actions in the future. Overall, Option 1 is 
considered to be only moderately effective in achieving the objectives. At the same time, the 
economic impacts expected a re minor and it does not provide a coherent approach for the EU 
to put forward for a global solution. Options 2 and 3 are considered to be similarly effective in 
achieving the objectives of this initiative. Option 3 is, however, more effective due to its 
stronger impact on a more level playing field and fight against tax planning. This effect is 
difficult to evaluate as one would have to anticipate how many Member States would follow 
the recommendation to revise their tax treaties with third countries. Howe ver, Option 3 is 
considered to be the one with the largest coherence, notably by providing a viable path 
towards a global solution to the problem.  
Table (4): Comparison of effectiveness, efficiency and coherence of comprehensive 
options  
 
  Option 1  Option 2  Option 3  
 Intra -EU - narrow 
scope: Adjustments 
to the CCCTB rules  Intra -EU - wide scope: 
Directive on new 
permanent establishment 
and profit allocation 
principles + adjustments 
to the CCCTB rules  Intra -EU - wide 
scope + 
recommend 
application vis -
à-vis third 
countries  
a) Integrity of the Single market  Weak  Medium/Strong  Strong  
b) Sustainability of public finances  Medium  Medium/Strong  Medium/Strong  
c) Social fairness and level -playing 
field  Weak  Strong  Strong  
d) Fight against aggressive tax 
planning  Medium  Medium  Medium/Strong  
e) Economic impacts  neutral  + + 
f) Admin burden and compliance 
costs  - + + 
g) Coherence with EU and global 
tax agenda  neutral  + ++ 
Source: European Commission own analysis  
 
49 A proposal for a digital presence in the EU is the preferred approach for more than half 
of the respondents to the stakeholder consultation.  Table (5) summarises the stakeholders' 
preferences for the comprehensive solutions (see Annex 2 for more details). The preferred 
option coincided for both groups of stakeholders: 14 out of 21 national tax authorities as well 
as 58% of the 446  respondents to the open public consultation believe that the 'digital 
presence in the EU' proposal can best address the current problems related to the international 
taxation rules for the digital economy. Stakeholders were not asked explicitly on their 
preferred approach vis -à-vis third countries.  
Including only digital services in the material scope (Option a2), and not the online sale 
of goods, accompanied by appropriate digital activity thresholds, would be required for 
a proportionate approach. This i s because activities involving the supply of physical goods 
are relatively less problematic and have been dealt with to a larger degree through anti -abuse 
rules. In terms of the digital activity thresholds, setting them in an alternative way (Option b1) 
would ensure capturing important cases where indirect revenue generation is the norm. To 
exclude cases of unjustified compliance burden, a local revenue threshold in the range of EUR 
5-10 million and a user threshold in the range 50 -100 thousand would be app ropriate.  
Table (5): Summary of stakeholder views on comprehensive policy options  
Option name  For Against  No opinion  
Long term, comprehensive solutions   
Modify the Common 
Consolidated Corporate Tax 
Base proposal  44 % of respondents  27% of 
respondents  29% of 
respondents  
9 states  9 states  3 states  
'Digital presence in the EU' 
proposal  58 % of respondents  28% of 
respondents  14% of 
respondents  
14 states  5 states  2 states  
Destination -based corporate tax  54 % of respondents  34% of 
respondents  12% of 
respondents  
6 states  12 states  3 states  
Unitary tax  50 % of respondents  37% of 
respondents  13% of 
respondents  
6 states  13 states  2 states  
Residence tax base with 
destination tax rate  28 % of respondents  53% of 
respondents  19% of 
respondents  
1 state  17 states  3 states  
Source: European Commission stakeholders consultation results  
8. PREFERRED COMPREHENSI VE OPTION  
 
1.15  Description of the preferred comprehensive option  
Overall, and given the lack of significant progress at international level on the issues at 
the root of the problem, ensuring a coordinated EU approach seems warranted (i.e., 'no 
action' is not the preferred option). A coordinated approach would prevent fu rther 
fragmentation of the single market, prevent future complexity and administrative burden for 
 
50 digitalised businesses and would provide companies with a certain degree of certainty about 
the way they will be taxed in the future.  
As there is little appet ite for fundamental reform options,  Option 3 is the most effective 
option to achieve the objectives and with the best efficiency and coherence properties.  It 
offers a structural solution to the identified problems intra -EU, and through the 
recommendation i t would emphasise the need for solutions beyond EU borders, providing the 
ground for the EU contribution to the work at OECD and global level.  
The preferred comprehensive option has two elements: a Directive, which should be included 
in the CCCTB negotiati ons, and a Recommendation.  
1. Directive on digital permanent establishment and profit allocation rules, which should be 
included in the Common Consolidated Corporate Tax Base (CCCTB) negotiations.  
 
The Directive would establish common rules for a digital permanent establishment and 
for allocating profits to digital activities of such permanent establishments.  Member 
States would have to implement the provisions of this Directive in their national corporate 
income tax framework. The principle of the Directi ve entails the application of a corporate tax 
on profits resulting from providing digital services in the EU. Within the EU, a taxing right 
would be triggered through a digital permanent establishment, if it exceeds certain digital 
activity thresholds.  These thresholds would be applicable at Member State level and apply 
alternatively, based on either realised revenues from digital services (broadly defined) of EUR 
5-10 million, or the number of active users of digital services of 50 000 – 100 000 or possibl y 
also the number of online contracts concluded. A definition of digital services for the 
purposes of the revenue criterion could be inspired by the definition of electronically supplied 
services, which exists for VAT purposes54. Considering that in the dig ital economy, a 
significant part of the value of a business is created where the users are based and data is 
collected and processed, additional criteria specifically and exclusively targeted at these 
aspects would be added to profit allocation principles.  Member States would continue to 
apply their national corporate income tax rules with respect to the profits attributable to a 
digital permanent establishment in their jurisdiction.  
Once agreed, the new digital permanent establishment concept should be re flected in the 
CCCTB, along with an adapted formula.  The new rules on permanent establishment could 
be directly inserted in the CCCTB. To adapt the formula in the spirit of the agreed new 
principles for attributing profits, the formula could be amended by a factor that reflects the 
user contribution to the value creation.  
                                                 
54  'Electronically supplied services' shall include services which are delivered over the Internet or an electronic 
network and the nature of which renders their supp ly essentially automated and involving minimal human 
intervention, and impossible to ensure in the absence of information technology (Article 7 of VAT 
Implementing Regulation).   
 
51 2. Recommendation to Member States to implement digital permanent establishment and 
profit allocation rules in their double tax treaties.  
To address situations involving third countries in a way that does not violate Member 
States tax treaties, Option 3 involves a Commission recommendation setting out the 
proposed changes to the double taxation treaties. To facilitate the required renegotiation of 
double tax treaties, the Commission would  issue a recommendation setting out the proposed 
changes to the double taxation treaties of Member States in relation to Article 5 Permanent 
Establishment and Article 7 Business  Profits of the OECD Model Tax Convention. To 
complement the recommendation, th e Commission could, without prejudice to the EU and 
Member States' competences, assist Member States in the negotiation of these provisions with 
selected third countries in a coordinated manner at the Union level, if authorised to do so by 
the Council.  
1.16 Adm inistrative burden and compliance costs  
In principle, all business sizes  could be affected by the additional tax compliance 
burden, but the digital activity thresholds make an application for the smallest 
companies unlikely.  The preferred solution could th erefore also cover relatively smaller 
businesses that have a sufficiently large digital footprint in Member States where they are 
currently not established.  
In a first step, all companies carrying out digital activities  in an EU Member State where 
they are not already tax resident or have a permanent establishment  have to determine 
whether they exceed the digital activity thresholds.  This would involve determining the 
type of digital activities falling under the scope of the comprehensive solution and th eir level 
in a given Member State, such as the revenue derived from that activity and the number of 
active users. This would require splitting revenues issued from the relevant digital activities 
with revenues from other activities and identifying the numb er of active users of the digital 
service in a Member State in a tax year. However, the additional burden of collecting the data 
should be rather limited given the availability of the information (see section 9.3.9).  
In a second step, businesses would face  a one -off costs to set up reporting for new 
permanent establishments as well as recurrent tax compliance costs.  Given the level of 
the digital activity thresholds (which would effectively exclude small enterprises), estimates 
of recurrent costs of an addi tional subsidiary of a large or medium -sized parent can be a basis 
for estimation. In the impact assessment accompanying the 2016  proposal for a CCCTB55, 
Deloitte estimated that under a situation with different tax codes in Member States, the 
additional rec urrent compliance costs for a large representative parent investing in a medium 
sized subsidiary amounts to 0.23% of turnover, while for a medium parent this ratio more than 
doubles to 0.55% of turnover. These figures amount to on average roughly EUR 141 0 00 and 
128 000 respectively, calculated from the estimated compliance time (detailed tables are 
                                                 
55 SWD(2016) 341  
 
52 provided in Annex 3). The two biggest cost items are for the required transfer pricing 
documentation and for dealing with the tax authorities.  
For companies wi thin the mandatory scope of the CCCTB or opting to apply the 
CCCTB, the additional compliance burden would be considerably lower.  Due to the 
elimination or reduction of transfer pricing related compliance tasks, and of those related to 
contacts with tax au thorities, an average decrease in total additional compliance time of 70% 
can be expected if the additional cross -border investment is made under the CCCTB regime.56 
This results in a reduction of compliance costs of 62% for a group with a large parent and of 
67% for a group with a medium -sized parent.57 Companies outside the scope of the CCCTB 
would also have the possibility to opt in.  
National tax administration s would also incur costs for implementing the new system . 
Costs arise notably for  the need of upg rading IT systems and for staff training to be able to 
attribute profits to the permanent establishment and to reflect the digital activities in that 
Member State. The implementation of the CCCTB should already provide a solid framework 
for the tax adminis tration on which to rely on. There will also be a need to coordinate in the 
EU the uniform implementation and practical application of the new rules. Since the 
comprehensive solution would not apply for all firms and in case the interim solution 
continues to run in parallel where the comprehensive solution is not in place, the burden for 
national administrations may overall go up slightly due to the required maintenance of parallel 
systems. National tax administrations may also face additional costs for neg otiating double 
tax treaties.  
1.17 Subsidiarity and proportionality of the preferred option  
The preferred solution is in line with the general understanding of the subsidiarity 
principle.  The nature of the subject requires a common initiative across the single market. 
The preferred solution outlined in this document aims to provide a common framework for 
the taxation of cross -border digital activities in Member States' national corporate t ax systems 
in a coordinated manner. Such aims cannot be sufficiently achieved through action undertaken 
by each Member State while acting on its own. Such an approach would in fact only replicate 
and possibly worsen the existing fragmentation in the single  market and perpetuate the present 
inefficiencies and distortions in the interaction of a patchwork of distinct measures. If the 
objective is to adopt solutions that function for the single market as a whole, the appropriate 
way forward involves coordinate d initiatives at the level of the EU. Furthermore, an EU 
initiative would add value, as compared to what a multitude of national implementation 
methods can attain. Finally, if the rules on the taxation of digital activities are enacted 
according to the acq uis, taxpayers would have the legal certainty that they comply with EU 
law.  
                                                 
56 The individual results by country -pairs range between 11% to  91% savings in additional compliance 
time.  
57 Deloitte's tax experts expect that the group led by a medium parent can realise more savings on time 
spent by external advisors that generally have higher costs per hour than the internal workforce.  
 
53  
The measures to be taken under the present initiative are both suitable and necessary 
for achieving the desired end (i.e. proportionate).  The preferred solution outlined in this 
document does not imply a harmonisation of corporate tax rates in the EU and, therefore, it 
does not restrict Member States' capability to influence their desired amount of corporate tax 
revenues. It does not interfere with national choices in terms of the  size of public sector's 
intervention and composition of tax revenues. It proposes a more efficient way to tax the 
digital activities of companies operating in the EU to secure a more efficient single market. 
Appropriate digital activity thresholds ensure that the additional compliance burden from 
creating additional permanent establishments is limited to non -trivial cases, where companies 
are likely to cover the costs from the local profits.  
 
 
9. INTERIM SOLUTION  
 
For the interim solution, the general object ives remain the same, but the specific objective is 
to create a tax targeting digital business models that is easy to implement and improves the 
level -playing field and fair taxation in the interim period until the comprehensive solution is 
implemented . 
1.18 What is the baseline against which the interim solution is assessed?  
Even though there is only one set of baseline assumptions (as set out in section 5.1), there 
are some relevant considerations when assessing the interim solution and the possibility 
of taki ng no action.  Notably, it is taken as given that the preferred comprehensive solution 
will eventually replace the interim solution. This implies that each of the interim solutions 
will be assessed against a scenario, in which the preferred comprehensive so lution is not yet 
in place and neither would be the CCCTB, as it was proposed in 2016. However, since most 
provisions of the Anti -Tax Avoidance Directive will be applied as of 1 January 2019, the 
assumption is that this directive applies in the baseline.  
It is not possible to concretely anticipate not yet specified unilateral measures, but there 
is a clear risk that unilateral measures will keep expanding in the near future.  Although 
specific indirect taxes affecting businesses in the digital economy are s o far not significant in 
scope and revenue, a certain shift towards introducing new indirect taxes in general is slowly 
continuing at global level.58 Table 6 provides an overview of already implemented or 
concretely planned measures in the EU and third coun tries.  
 
Table (6): Overview of unilateral measures taken/planned  
Country  Planned/ adopted/ Type of tax  
                                                 
58 PWC (2013 ) – Shifting the balance from direct to indirect taxes: bringing new challenges . 
 
54 implemented  
Indirect taxes59 
In the European Union  
Hungary  Implemented (2014), 
amended (2015, 2017)  Tax on advertisement  
UK Planned (2019)  Withholding tax on revenues derived from intermediation 
and the provision of online advertising  
Italy  Planned (2019)  Tax on digital business -to-business transactions of 
electronically supplied services  
France  Implemented (2003), 
amended (2016)  Levy on access to content, including digital content by means 
of a video -on-demand / over -the-top online platform (for the 
cinematography fund)  
Germany  Implemented (2004), 
amended (2010)  Levy on access to content, including digital content by means 
of a video -on-demand / over -the-top online platform (for the 
cinematography fund)  
Romania  Implemented (2005), 
amended (2008)  Levy on access to content, including digital content by means 
of a video -on-demand / over -the-top online platform (for the 
cinematography fund)  
Croatia  Implemented (2007)  Levy on access to content, including digital content by means 
of a video -on-demand online platform (for the 
cinematography fund)  
Portugal  Implemented (2007)  Levy on access to content, including digital content by means 
of a vid eo-on-demand online platform (for the 
cinematography fund)  
Belgium (certain 
regions)  Implemented (2009)  Levy on access to content, including digital content by means 
of a video -on-demand online platform (for the 
cinematography fund)  
Czech Republic  Implemented (2012)  Levy on access to content, including digital content by means 
of a video -on-demand online platform (for the 
cinematography fund)  
In third countries  
United States 
(certain states)  Implemented (2015 -
2016)  Levy on access to digital content and streaming services  
India  Implemented (2016)  Levy on the provision of online advertisement services by 
non-residents  
Canada (certain 
states)  Planned (2018)  Levy on access to digital content and streaming services  
                                                 
59 VAT on digital services is not included here.  
 
55 Brazil (certain 
states)  Planned (2018)  Levy on access to digital content and streaming services  
Direct tax initiatives (anti -abuse and new approaches to define a significant economic presence for tax 
purposes)  
In the European Union   
UK Implemented (2015)  Diverted profits tax  
Italy  Adopted (2017), in force 
(2018)  Administrative procedure for large non -resident 
multinational enterprises  
Slovakia  Adopted (2017), in force 
(2018)  Tax on income derived from intermediation through websites 
and online platforms  
In third countries  
Israel  Implemented (2016)  The significant economic presence test for non -resident 
enterprises  
Australia  Implemented (2017)  Diverted profits tax and additional anti -avoidance rule for 
large non -resident multinational enterprises  
India  Planned (2018)  New concept of significant economic presence  
United States  Adopted (2017), in force 
(2018)  The introduction of the concept of a ' base erosion anti -abuse 
tax' (BEAT) for large multinational enterprises  
Source: European Commission analysis based on various sources, such as national legislations, replies to the 
Member State consultation or other government sources, websites of national film funds, European Film Agency 
Directors (EFADS) website, website of the International Bureau of Fiscal Documentation (IBFD - for most of 
the direct tax initiatives) and Thomson Reuters Tax & Accounting for the US BEAT measure.  
1.19 What are the available interim policy options?  
Focus on taxes on revenue from digital services  
The international debate on solutions for taxing digitalised businesses focusses 
predominantly on revenue taxes. Table 6 shows that almost all unilateral taxes that have 
already been introduced or are being planned are revenue taxes. The OECD in its work has 
also focussed on taxes levied on revenue whenever considering interim solutions to the 
taxation of the digital  economy (OECD, 2015a). Table (6) shows that almost all existing and 
concretely planned taxes are revenue taxes.  
Indeed, other conceivable interim, interim solutions are either difficult to reconcile with 
the current (international) tax framework or their  implementation would be too 
complex for an interim solution . To be implementable within a reasonable time span, any 
feasible solution first needs to respect the boundaries set by the national and international 
legal framework, notably the EU treaties, the  rules implied by membership of the World 
Trade Organisation, and other international commitments, for example through the Inclusive 
Framework or the OECD multilateral instrument, double tax treaties, and the EU rules for 
VAT. Secondly, any feasible interi m solution needs to be implementable in practice within a 
 
56 reasonably short period of time, which excludes options that pose considerable practical 
implementation challenges.  
Raising VAT rates on digital services is not feasible within the EU VAT framework . In 
particular: (i) higher VAT rates for certain digital services would run counter the current 
principle in the VAT Directive60 that all goods or services could only be taxed up to the 
standard rate; (ii) Member States are currently allowed to set up one standard rate only, and 
deviating from this principle would cause major disruptions that the current objectives do not 
justify; and (iii) raising VAT on services supplied digitally, and not on the same services 
which could also be supplied non -digitally, c ould raise concerns from the perspective of the 
principle of fiscal neutrality61. Further, it must be borne in mind that a higher VAT rate would 
have a very limited impact on business -to-business transactions, due to the deduction of  input 
VAT to which the  vast majority of businesses are entitled. Finally, raising VAT rates would 
seem to run counter to the proposal on VAT rates of 18.1.201862 which is intended to give 
more freedom to Member States to set VAT rates.  
A transaction tax on those digital services  that are remunerated by users through the 
provision of data is also discarded, as its implementation would be too difficult . The tax 
would be levied early -on in the value creation process on the provision of a digital service (for 
example, performing a we b search) remunerated by users through the provision of data. In the 
absence of a monetary compensation for the digital service, the tax would have to be levied on 
a deemed turnover or profit on the barter transaction: provision of data for access to a dig ital 
service.63 Therefore a deemed monetary value would have to be attributed to data 
transactions, which is not realistic to implement within a short period of time. Moreover, as 
the Commission Expert Group on the taxation of digital economy (2014) points out – 
gathering of data 'per se', should not constitute a taxable event – it may constitute internal 
know -how of the company and never be transferred. If on the other hand, the data is 
transferred and monetised at a later stage, it would be taxed twice.  
Although a tax on profits may be theoretically more efficient, it does not present a 
realistic option for an interim solution, largely due to its interference with double tax 
conventions.  A new tax on profits within the existing international corporate tax f ramework 
would face exactly the same limitations that are at the root of the problem.  In a model with 
perfect tax enforcement the optimal tax base is pure profits  (preserving production efficiency), 
whereas, e ven at a low rate, revenue taxes can be ineffic ient as they apply multiple times over 
the supply chain and distort input prices ('cascading effect'). However, if profit taxes are 
difficult to enforce , accepting some degree of cascading could improve outcomes, as  the loss 
of production efficiency could be more than compensated for by the increase in revenue 
collection as the broader turnover base is harder to circumvent.  In addition,  levying a specific 
                                                 
60 Council Directive 2006/112/EC of 28  November 2006 (OJ  L 347, 11.12.2006, p.  1). 
61 See, among others, CJEU judgment of 3 May 2 001, Commission v France, C -481/98, EU:C:2001:237, 
paragraphs 21 and 22.  
62 COM(2018) 20 final  
63 Such a tax could be potentially interesting as it could address some negative externalities arising from the 
exploitation of personal data (Bloch and Demange 2018)  
 
57 tax on profits derived from digital services is complex. It requires determining the 
corresponding costs incurred in relation to the digital service as companies in most cases earn 
also other revenues (not falling under the scope of the new tax).  
In its conclusions from 5 December 2017, the ECOFIN Council has invited the 
Commission to also assess tempor ary measures, mentioning explicitly a levy based on 
revenues from digital activities  in the EU that would remain outside the scope of double 
tax conventions.64 Given this increased focus on revenue taxation, the options examined here 
also revolve around var iants of such a tax. The various options examined mainly vary in terms 
of their scope (type of company and type of services covered), their threshold and their 
applicable rate.  
Possible design options of a revenue tax on digital services  
To comply with the  existing legal framework, the tax would need to apply to resident 
and non -resident companies alike, as well as to domestic and cross -border transactions. 
The equal treatment of residents and non -residents is needed to comply with the free 
movement of serv ices case law of the Court of Justice which found that it is discriminatory to 
a apply a specific tax to non -residents, if the comparable activity or income of resident 
taxpayers is not taxed by an analogous tax (with a similar rate and based on a similar tax base 
– see Joined Cases C -344/13 and C -367/13 Blanco and Fabretti). In addition, the fundamental 
freedoms, namely Articles 49 and 56 TFEU as interpreted by the European Court of Justice, 
require that cross -border activities are subject to the same tax treatment than domestic ones.  
See also Schön (2017) for a similar analysis and conclusion.  
Moreover, alleviating double taxation by crediting corporate tax already paid against 
the new tax or vice versa is not a feasible option. Crediting would involve ded ucting one 
tax against the tax liability  of another tax, thereby potentially fully compensating for the tax 
paid. First, crediting the new tax (an indirect tax) against corporate income tax (a direct tax) 
or vice versa would compromise the legal nature of the tax and impact double tax 
conventions. Second, the possibility to credit corporate income tax (or against corporate 
income tax) would in practice only be feasible if a company is established or has an existing 
permanent establishment in a Member State.  If as result only those businesses not established 
in a Member State, or without a permanent establishment in that Member State, would be 
taxed for their digital services in that Member State, the new tax could be seen as a de facto  
restriction on the fre edom to provide services within the EU.  In addition to these legal 
considerations, crediting corporate income tax would also be difficult from a practical 
perspective. It would require determining the share of corporate tax paid that relates to the 
taxable  revenues from the digital service. A feasible option is to allow the deduction of the 
revenue tax against the corporate tax base, an option examined in section 9.3.  
                                                 
64 The Council "INVITES the Commission in responding to the challenges of taxation of profit s of the digital 
economy to take into account paragraphs 13 to 20 of the present conclusions, and however, TAKING NOTE of 
the interest of many Member States for temporary measures, such as for example an equalisation levy based on 
revenues from digital act ivities in the EU that would remain outside the scope of double tax conventions 
concluded by Member States, CONSIDERS that these measures could also be assessed by the Commission;"  
 
58 All other design options are less clear -cut and each 'design dimension'  comes with at 
least two main options to choose from.  To keep the exposition in this impact assessment 
tractable, the assessment within one option dimension is treated largely independent from 
choices in the other dimensions, unless there is a direct cross -impact. For exampl e, to assess 
different options for the tax rate, the expected revenue collected from the tax plays a role, 
which in turn depends on other choices such as the scope of the tax and the threshold applied.  
1.19.1  Options for the material scope (which services are co vered)   
Three main options for the material scope of the tax are being examined, which differ in 
the degree to which they capture user contribution to the creation of the digital service.  
Broad scope  – A first option would be to apply the tax to digital services from all business 
models as described in section 2.1.4, irrespective of the degree of user contribution. This 
would include services provided by marketplaces/intermediary platforms, by busines ses 
employing the social media and advertising model and by digital platforms granting access to 
content/solutions . 
 
Narrow scope  – Another option would be to apply the tax narrowly to those business models 
where the user contribution plays a central role in the sense that the service would not exist if 
the user did not contribute to it (e.g. the advertising model and marketplaces/i ntermediary 
platforms).  
 
Mixed scope  - A third variant would be to levy the tax on a broader scope than the narrow one 
by adding other services where user contribution is significant but maybe not essential (e.g.  
including also some of digital content/sol ution services). This would require an analysis of the 
nature and degree of user contributions for various activities . 
 
1.19.2  Options for the application of a revenue threshold   
One option is to have no threshold and apply the tax to all companies with relevant  services.  
Alternatively, the tax could be applied only to companies that exceed certain revenue 
thresholds.  
Moreover, thresholds could be defined on a worldwide basis, at EU, or at Member State level 
and could either be defined in terms of overall reven ues of a company (irrespective of the 
service generating the revenue) or in terms of revenues from the provision of digital services.  
1.19.3  Options for the tax rate  
Given that it would be applied on turnover and not on profit, a low rate is warranted. Hence, 
options for a tax rate varying between 1% and 5% of the revenues from the relevant services 
will be examined.  
1.19.4  Options for the allocation of the tax  
Where the users involved in digital services are located in different Member States, the 
revenues resulting fr om the supply of the services could either be allocated to each Member 
 
59 State where the users are located , irrespective of whether such users have paid for the 
service they received, or solely to the Member States from where a payment has been made .  
If tax  base is allocated according to where users are located, the revenues resulting from the 
supply of services consisting in the placing of targeted online advertising to users would be 
taxed in the Member State where the users are located (i.e. the Member St ates of the viewer). 
And the revenues resulting from the supply of services consisting in the making available of 
online platforms where users can interact would be taxed in the Member State where such 
users are located.  
1.19.5   Options to relieve double taxation  
The new tax could or could not be deducted against corporate income tax paid to alleviate 
potential cases of double taxation.  
1.19.6  Options for the collection of the tax  
The payment of the tax can be made by the company conducting the digital service (based on 
aggregate gross revenues from the relevant services) using a self -declaration system. For non -
resident companies, this could be administered via a One -Stop Shop. Alternatively, the tax 
could be levied as withholding tax paid by the customers or intermediar ies involved (based on 
individual digital transactions).   
Table (7) Summary table of the description of main option dimensions for the interim 
solution  
1. Services 
covered  2. Revenue 
threshold(s)  3. 
Rate  4. 
Allocation 
of tax  5. Double 
tax relief  6. Collection of the 
tax 
Broad application, 
revenues from 
social 
media/advertising 
model, 
intermediary 
platforms and 
digital 
content/solutions  No threshold  1% Based on the 
distribution of 
users.  No deduction 
from the 
corporate 
income tax 
base.  Tax withheld by customers 
or intermediaries, based on 
individual digital 
transaction  
Narrow 
application, i.e. 
limited to social 
media/advertising 
model and 
intermediary 
platforms  Application of a 
general revenue 
threshold Y/N 
and level  3% Based on the 
distribution of 
revenue.  Deduction 
from the 
corporate 
income tax 
base.  Tax paid by companies on 
aggregate gross revenues 
from the relevant services, 
using a self -declaration 
system. For non -resident 
companies, possible 
administration 
administered via a one -stop 
shop  
Mixed application 
which includes 
social 
media/advertising 
model, 
intermediary Application of a 
specific  
threshold on 
revenues from 
relevant digital 
services Y/N 5%    
 
60 platforms and 
some of digital 
content/solution 
services   and level  
Source: European Commission own analysis  
 
1.20 What are the impacts of interim policy options ? 
Under this section, the interim solution options will be assessed separately on the various 
dimensions for which a decision needs to be taken.  
1.20.1  No action on an interim solutio n 
It is fair to expect that the service -based economy and especially the digital economy will 
continue to develop . The rapid pace, at which this has happened in the recent past, suggests 
that this development will also be relevant in the shorter term, making the challenges related 
to the taxation of digital business models more acute. Based on forecasts by Statista on  the 
developments of revenues in different digital markets, one can expect annual growth rates 
between 6% and 17% for digital markets such as online advertisement, digital media or online 
travel.65 Section 5.1 provides a more detailed discussion.  
As Member  States and the public wish to see that all type of companies contribute 
equally to public budgets, the pressure to act at national level will increase.  Not offering 
any interim solution is therefore likely to result in more unilateral national measures ta rgeting 
by and large the digital economy.  So far only a few specific tax measures are in place or are 
concretely planned in certain Member States  (see Table 6 in section 9.1 ), but the trend has 
been increasing (Figure (4)). Moreover, these measures are rat her different in terms of their 
scope and rationale.  The European Council observed in its conclusions of 5  December that 
"the speed at which the economy is digitalising and the absence of international consensus on 
the modernisation of the rules of distrib ution of taxing rights gives rise to unilateral actions, 
leading to an increase of double taxation disputes between Member States and thereby 
undermining the Internal Market ". This is also a risk that respondents to the open public 
consultations see. More than 80% of the 462 respondents agree (or even strongly agree) that 
the "current situation could push some Member States toward adopting uncoordinated 
measures that would lead to the fragmentation of the Single market". Only 6% disagree with 
this statement .  
 
With an increasing number of unilateral measures, competitive distortions, compliance 
burden and double taxation disputes increase, while it gets more difficult to harmonise 
the variety of taxes or agree on comprehensive solutions in the future. As a s ignificant 
number of digital companies are active in more than one jurisdiction, distortions of 
competition and of the single market can occur . These relate to potential instances of double 
taxation (if two Member States levy, for example, an indirect tax on the same specific digital 
                                                 
65 Statista Digital Economy Outlook 2017.  
 
61 services) or double non -taxation (if neither of two Member States taxes such specific digital 
services). Double taxation could occur, for example, if both countries tax online 
advertisement services, but use different principle s (country A levies the tax if the company 
placing interim online advertising to users is  resident there and country B levies the tax if the 
companies advertising their products in country A are resident in country B). These situations 
are likely to increa se double taxation disputes between Member States. They would 
furthermore most likely remain unresolved because existing international dispute resolution 
rules do not cover these cases.  
 
Figure (4): Development of number of new measures targeting businesse s in the digital 
economy in the EU28  
 
 
Source: European Commission services analysis (see Table (6))  
 
1.20.2  Material scope (which activities are covered)  
Which activities  could be subject to a new tax on revenues derived from digital activities 
is a central question.  Activities  involving the supply of physical goods are excluded from the 
scope of the comprehensive solution and as the interim solutions serves as a proxy measure, 
the same applies here as well (see section 6.1). Again, this does not mean that platforms 
charging fee s for facilitating the trade of physical goods are excluded. These platforms charge 
fees for a digital service.  
A key principle to respect when addressing challenges in taxing the digital economy is 
the taxation of profits where the value is created. Although to different degrees, this 
rationale holds for both a comprehensive solution and an interim solution. Section 2.1 
evidenced the complex nature of value creation in the digital economy. The value creation is 
the result of a combination of several facto rs that are mainly technology (such as an 
algorithm), knowledge and user contribution .  EU - cumulative  Third countries - 
cumulative  
0510152025
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Numbers of unilateral measures taken / planned in...  … the EU  … third countries  
 
62 The interim solution is meant to be a good and simple interim proxy to deal with the 
most extreme cases of mismatches between the location of taxation and value creatio n. 
Since the tax would be based on gross revenues and needs to be simple, it cannot be tailored 
towards different degrees and types of user contribution. Allocating the revenue tax base 
across jurisdictions needs to be based on simple rules, which implies that other components of 
value creation are difficult to take into account.  
The interim solution would thus fully weigh on one factor of value creation – the one 
currently disregarded in profit allocation rules, which is related to user contribution.  As 
a result, central to the definition of the scope, is the role of users in the value creation for 
digital business models. In other words, all digital services should be covered for which the 
users play a central role in the value creation. A test to determi ne whether a certain service 
falls within the scope could be that in absence of user generated content and of user 
participation, the digital service would not exist in its current form. Table 8 summarises a 
qualitative assessment of the relevance of user -based features for the  business models 
identified in section 2.1, except for telecoms and software and for online retailers as far as the 
supply of physical goods is concerned.  
Table (8): Qualitative assessment of users' role in the value creation in dig ital business 
models  
 Business Model  Revenue 
model  USER -BASED FEATURES  
Network 
effects  
 Big Data Relevance  
 
1 Marketplace / Intermediaries  
 Subscription or 
transaction -based 
fees paid to 
platforms  
  
 Reliance:  
Source: user behaviour on 
platform, reviews (both sides).  
Use: matching, reputation/trust 
building  
2 Advertising model  
 Sales of 
advertisement 
space;   
Sales/transmissio
n of data   
(including from 
users to 
advertisers)  Reliance:  
Source: user behaviour on 
platform, websites  
Use: targeted advertising  
3 Digital content/solutions:  
 
i) media/content  
 
ii) gaming  
 
iii) electronic payment  
 
iv)  cloud computing services  
 
v)  other digital solutions / 
software  Pay-per-use, 
subscription or 
transaction -based 
fees.   
 Reliance:   
This category covers many 
services with a wide range of use 
of consumer data in the value 
creation  
Source: from customers' 
behaviour to generation of 
content  
Use: improve quality of service, 
pricing or sales policy, 
development of new products  
Source: European Commission services  
Legend:  Moderate; Strong; Very Strong  
 
63 Note: Network effects occur when the size of the overall network increases users' satisfaction. It encompasses 
both direct and indirect effects.  
The distant sales model/e -commerce is not in the scope of the interim solution.  
All the above business models rely on users to create value, although to a varying extent . 
User data can be used to support the distribution side of the business by defining s ales-, 
marketing - and pricing policies. An example would be online retailers or digital media 
providers analysing consumer preferences to display their products in a more targeted way. 
But user data can also be used to improve consumer experience, develop new products or sell 
user information to third parties. The participation of users can be passive (for example, by 
providing information by clicking on links or doing online search) or more active (for 
example, ensuring the quality control through rating o r reviews, by sharing a playlist or 
creating online content by sharing knowledge, codes or videos, by entering/sharing their 
information and preferences, which allows matchings  them with specific other users, on a 
platform). Where the market value of a bu siness increases with the size of the user network 
(through 'network effects'), users have an additional role in the value creation, either passively 
merely by joining the user base, or more actively, for example by inviting new users.   
Business models wh ich generate revenues from selling advertisement space or selling 
user data as well as intermediary platforms heavily rely on user participation to their 
network.  Indeed, such business models would not exist without user contributions. In the 
case of onlin e advertising, for example by social media and search engines, the revenue is 
entirely based on the exploitation of detailed granular knowledge about user preferences and 
characteristics (including location), either through the offering of in most cases ve ry effective 
targeted advertisements or through the outright sale of this information to third parties. The 
relevant knowledge is generated through the analysis of the user online actions (e.g. web 
browsing, content creation), collected and analysed with b ig data methodologies.  
Strong network effects help to build -up a very large user base, which is a pre -condition 
for both big data analysis and for general company profitability  given the low profit per -
user and the very high fixed costs . In some cases, us ers contribute also to the creation of the 
service in exchange of advertising (e.g. online content for social media). In the case of 
marketplaces, building trust between the buyers and the sellers is essential for the existence of 
the market itself. The bu ild-up of trust is usually attained through a mechanism of user 
reviews, which is a form of user creation of content. In the absence of a trust mechanism, 
transaction costs would be too high for purchases to happen. A significant scale, required for 
big da ta analysis, is also very relevant for obtaining a better match between sellers and buyers, 
thereby improving the service , which in turn helps attracting new users.  
The nature and degree of user contributions vary considerably across and within 
different d igital content/solution services.  The latter can be further broken down as follows:  
 digital media/content  
 gaming  
 electronic payments  
 cloud computing  
 
64  other solutions    
For most of these sub -categories,  user-generated content and user participation is not 
central to value creation, although there are significant variations  from one service to 
another and across  companies.  Gaming is a clear example. Users can play against a 
computer. But they can also play against each other (hence the importance of the netwo rk) 
and even create new features of the game. Similarly, looking at cloud computing services, 
which generally rely only to a limited extent on user participation, there are cases in which 
companies rely on users to extend their scale (e.g. by offering extr a free space to a user in 
exchange of inviting potential new user to join the network or to share some content). E -
payment may involve intermediary platforms but in such cases, the digital service offers a 
solution that allows two or several users that are  already in contact to finalise a transaction. In 
such case, the e -payment platform does not require user data to enable them to find each other 
and meet on the platform.   
Pinning down the level of user contribution for each sub -category and company would  
require a case -by-case assessment based on a solid methodology, which would add 
complexity to the new tax. However, the more complex the composition of services subject 
to the new tax is, the higher is the risk that companies plan around it by putting in place 
arrangements to avoid paying the tax. Capturing a large variety of different services in legal 
text is difficult. It may even require a detailed definition of criteria and/or a nomenclature to 
assess whether a company falls under the scope. This in t urn implies increased administration 
and compliance costs, including elevated risks for disputes. Such complexity would be likely 
with the mixed scope, but to some extent also for the broad scope, for which exemptions 
would likely be necessary  (for example  excluding the sale of software).  Moreover, in the 
absence of solid methodology, the tax risks also capturing services for which the user 
contribution is rather limited. Hence it would not be a good proxy for the comprehensive 
solution and therefore not a coherent measure.  
The narrow scope has the lowest risk of taxing too heavily services that play a key role 
for the development of the digital single market . For example, a number of digital solutions 
and cloud services, but also Information and Communication Technology services are 
important in the business -to-business segment that helps both younger, more innovative 
companies to develop, but also more traditional companies to benefit from digitalisation of 
their processes. It would also avoid th e double taxation of digital content that could already be 
subject to a specific levy (e.g. audio -visual media services as envisaged in the review of the 
Audio -visual Media Services Directive, which are already subject to a tax in a number of 
Member States ). 
In terms of potential revenue impact there is little reason to include or exclude certain 
services.  Sections 9.3.3. - 9.3.5 discuss the revenue potential of the measure for different 
assumptions on the scope. Overall, the tax revenue potential is limited in the short term, the 
key advantage of the interim measure rather lying in the prevention of a mush rooming of 
unilateral measures.  
 
65 To improve fair taxation, it is important that the interim solution has a clear and strong 
rationale for attributing tax base across jurisdictions . If the tax is allocated based on a 
fairly simple allocation key that capture s mainly user contributions, the best and fairest 
outcome can be expected with the narrow scope or a very well targeted (and functioning) 
mixed scope. Attributing revenues based on user contributions which rely heavily on other 
types of input would not res ult in a fair allocation of the tax and could overall hurt the fairness 
of the system.  
Both the narrow scope as well as a (selective) mixed scope would improve the level -
playing field compared to the baseline scenario.  The key improvement would happen by 
preventing further fragmentations of the single market. Irrespective of the option chosen for 
the material scope, it can be expected that a new harmonised tax on revenues from digital 
services would largely stop the trend towards additional unilateral meas ures. However, a too 
broad scope could at the same time risk putting an extra burden on services which today's tax 
system already captures more satisfactorily as user contributions play a more limited role. For 
example, online platforms offering digital co ntent will often target this content based on an 
analysis of user data, but they may also use very substantial 'traditional' inputs to create 
content (for example, producing a movie) or tailor their services requiring local staff (for 
example, digital busi ness-to-business solutions).  
Table (9): Summary of assessment on the material scope  
 
Broad scope – all 
services  Mixed scope  Narrow scope  
Improving fairness  
- + ++ 
Improving the level -playing 
field  + ++ ++ 
Economic impacts (revenue 
potential, impact on 
digitalisation, distortions 
caused)  - + ++ 
Administrative and 
compliance burden (including 
ease of implementation)  + - ++ 
Coherence (notably with 
comprehensive solution)  - + +++ 
Source: European Commission  own analysis  
Notes: The assessment is done against the baseline scenario. The number of 'plusses' signify the degree of 
improvement compared to the baseline scenario. The number of 'minuses' signify the degree of worsening 
compared to the baseline scenari o.   
 
Summing up, a (selective) mixed or narrow scope would be the most effective scope 
options to improve fairness and the level playing field in the interim period.  At the same 
time, the narrow scope is also expected to have the best economic impact, notably as it 
minimises additional distortions, while still having broadly the same revenue potential as the 
mixed scope. Due to its simpler nature and clear link with u ser contributions, a narrow scope 
 
66 is also the option that is expected to have the best impact on the compliance and 
administrative burden while being coherent with the comprehensive solution.  
A tax on revenues from certain digital services (for example, fr om the sales of online 
advertising) received a larger support from respondents to the public consultation  and 
Member States consultation than a tax on revenues generated from all digital services 
although the difference is not large (see summary in Annex 2 ).66 
1.20.3  Application of a revenue threshold  
Revenue threshold Yes/No  
There are good reasons to apply some form of revenue threshold. The first important 
reason is that larger companies are more easily able to engage in aggressive tax planning, 
which was also one rationale for the CCCTB threshold and the threshold for country -by-
country reporting (of EUR 750 million).67 A second very important reason is that a certain 
scale is necessary for companies to benefit from user contributions and network effects. This 
is also why younger and smaller companies with innovative business models often go through 
a phase of building their user base, and would be less able to compete with the large 
marketplayers, who are relatively less impacted by the tax. These companies are also more 
often loss -making and could be particularly hit by a tax on gross revenue. In particular for the 
two business models covered in the preferred material scope of the tax, advertising and 
marketplaces/intermediaries, there are strong winner -takes -most dynamics. Benefitting from 
strong (direct and indirect) network effects, large market players have had a tendency to buy 
smaller competitors. Ultimately, this can hurt innovation and make for less dynamic 
developments.68 Third, the turnover threshold wou ld serve to ensure an acceptable cost -
benefit ratio for the sake of proportionality of the measure. It would capture the most 
problematic situations in the interim period, keeping the measure simple with an acceptable 
cost-benefit ratio.  
Revenue  threshold on all revenue or only revenue from relevant digital services   
A global turnover threshold on all revenue would make it easier for companies to 
determine whether they need to pay the tax.  Since companies may not already record 
separately revenues from the services falling under the material scope of the new tax, and 
certainly smaller companies might not generally do so, a threshold on general turnover would 
greatly limit the extra burden imposed on companies and provide important legal certainty.  
                                                 
66 54% of the respondents to the pu blic consultation and 10 Member States that responded to the targeted 
consultation believe that a tax on the revenues from certain digital services would solve the current problems to a 
great extent or somehow as compared to 46% of respondents and 8 Member  States for the tax on revenues from 
digital services in a broader scope.  
67 See section 5.2 of SWD(2016) 341 final.  
68 See discussions on this point in UNCTAD (2017c, pages 12 and 81) and evidence on the rise of 'superstar 
firms', including in the digital sector, in Autor et al. (2017). The latter paper shows, by exploiting US firm level 
data, that if globalisation or technological changes advantage the most productive firms, industries become 
increasingly dominated by superstar firms with high profits and a low share of labour.  
 
67 At the sam e time, it seems unreasonable to impose a tax on a company above the general 
threshold, which has only minor relevant digital services in the EU.  For example, a large 
retailer might earn advertising revenues by placing online ads on its website for goods t hat are 
complements to its own goods but sold by a non -associated company. But if so, it may still 
not be worth including the revenues as long as they are relatively minor given the extra 
burden on companies and tax administrations this entails.  
As a resul t, there are good reasons to operate both types of thresholds, each with their 
own rationale . The global turnover threshold would serve as a first, easily applicable filter to 
safely exclude, and provide legal certainty, for companies below the threshold. The specific 
threshold on turnover from relevant digital services would serve to exclude cases that are 
relatively small and where the benefit of taxing them, might not be justify the extra effort 
required by tax administrations or the companies. In additi on, it would serve to exclude 
companies in more traditional sectors that have started to become more digitalised and may 
have relevant digital services revenues that still play a relatively minor part in their business 
operations.  
1.20.4  Level of the thresholds  
a. General turnover threshold  
There are a number of relevant considerations for determining the level of the general 
turnover threshold. First, one should consider the additional burden imposed on companies. 
Second, the impact on tax revenue is a relevant.  Third , the threshold should be such that the 
aim of preserving the single market in the interim period and improving the level playing field 
is well served. This should take into account that only companies of a certain scale provide 
digital services for which user contributions play a central role. Lastly, in setting the threshold 
one should be mindful of not hurting the development of the digital single market in the EU. 
Except for the second item, all of these considerations point to a rather high threshold, though 
it gives little guidance for the precise lev el. 
A high threshold would allow concentrating more on firms with dominant market 
positions (see section 2.1.3 (d) on winner -takes -most dynamics) . Most of digital platforms 
tend to privilege fast growth an d reinvest available funds, including those from separate 
business segments, to build a sizeable users base which, in the long term, will make the 
company profitable. Indeed, to survive, such business models need to build a large user base 
in the first pha se of their life. Adopting a high threshold would allow preserving investment 
and growth dynamics in digital markets. In addition, a global turnover threshold of EUR 750 
million would also be coherent with other proposals such as the CCCTB or the public 
country -by country reporting. The last feature is expected to contribute to a higher degree of 
compliance since companies beyond this threshold have detailed reporting obligations also on 
services in third countries.  
Reliable data showing the full distributi on of annual turnover by digital economy 
companies is not available, but some inference can be taken from general firm -level data  
(not specific to the digital economy). Table (10) shows that for the general economy in the EU 
 
68 some two -thirds of turnover is captured by applying a revenue threshold of EUR 750 million. 
The data suggests that reducing the threshold to EUR 500 million could more than double the 
number of companies affected, with only about 7% increase in revenues. Reducing the 
turnover threshold to EUR 50 million could more than triple the number of companies 
affected, while increasing revenues by about 25%. Data provided in the last column of Table 
12 also shows that the variation in the share of entities with EU or third country global 
ultimate owner is reasonably small. On the other hand, when moving from the 500 million 
threshold to 50 million, the share of purely domestic groups (with subsidiaries in only one 
Member State) increases considerably, more than doubling from 24.5% to 51%.  
Table (1 0): Trade -off between potential revenue and number of companies  
Consolidated 
turnover  Share of 
entities in the 
EU Corresponding 
share of 
turnover  Share of groups 
active only 
domestically 
compared to 
total number of 
groups in this 
bracket69 Share of entitie s 
with global 
ultimate owner 
located in the 
EU-28 
<= 
EUR  50 million  92.8%  19.9%  95.2%  88.0%  
> EUR  50 million  7.2%  81.1%  51.0%  79.6%  
> EUR  500 million  4.8%  68.6%  24.5%  78.4%  
> EUR  750 million  2.0%  64.2%  19.2%  74.2%  
Source:  Adaptation of table 8 in the Impact Assessment accompanying the proposal for a Council Directive on Common 
Corporate Tax Base and a Common Consolidated Corporate Tax Base (SWD (2016)341) based on Bureau van Dijk Orbis 
data. In the CCCTB impact assessment, the share of groups was reported in column 1. Here we report the share of entities, 
which is more relevant for the purpose of this impact assessment.  
 
b. Specific turnover threshold   
A complementary specific threshold set at EU level on the annual revenue s from the 
provision of taxable digital services could further limit the application to the most 
significant cases.  The main argument for such a complementary threshold is that it would 
limit the application of the tax to cases where there is a significant  level of revenues derived 
from a digital service ('the digital footprint') carried out in the EU.  
In addition , the specific threshold could serve to target more effectively the most 
relevant cases. As explained in section 2.2.1, there is only a difficult y to tax profits or issues 
of corporate tax avoidance if a company is active in several jurisdictions (in the sense that its 
users are located in several jurisdictions).  Based on the data presented in Table 10, and in 
principle for all the general  turnove r thresholds considered here, there still remains a sizeable 
                                                 
69  This ratio has been computed for groups that have their global ultimate owner (GUO) in the EU. In other 
words, groups active in the EU but with GUO outside the EU are not reflected in this ratio. This ratio therefore 
gives an uppe r estimate of the share of purely domestic groups.  
 
69 share of purely domestic groups captured by the measure. For large companies (exceeding the 
general revenue threshold) with significant revenues from online advertising and 
marketplaces/intermedi ary services it can reasonably be expected that they would not be 
purely domestic. This becomes even less likely if we apply a sizeable specific revenue 
threshold. A minimum bound could be EUR 10 million for the EU as a whole .  
At the same  time, for the tax not to be discriminatory,  the specific revenue threshold 
should not be designed in a way that effectively excludes EU companies . In other words, 
very high revenue thresholds that would restrict the application of the new tax only to foreign 
business wo uld not be allowed from a legal perspective.  Based on the data presented in Table 
10, it seems safe to conclude that for all the general revenue thresholds considered here, a 
sizeable share of EU entities would be captured by the measure. However, data on the biggest 
global companies with sizeable revenues from the relevant digital services suggests that a 
specific threshold above EUR 50 million could risk a de -facto discrimination. From the subset 
of 112 companies examined in this impact assessment, less t han a quarter would have their 
main business activity  falling under the scope of the new tax and have revenues in the EU 
exceeding EUR 50 million. Generally, the determination of the specific revenue threshold 
within the range of EUR 10 -50 million should b alance the risk of discrimination against the 
risk of damaging digitalisation of the EU economy.   
1.20.5  Tax rate  
The tax would need to be levied at a single rate.  Compatibility with the freedom of 
establishment and free movement of services call for the tax to b e levied at a single rate to not 
contradict the case law of the Court of Justice of the European Union (CJEU) (e.g. Hervis 
Sport70) that declared steeply progressive tax rates contrary to the freedom of establishment.  
Two  angles are particularly important in assessing different tax rate options: 1) the tax 
revenue potential and 2) the level of additional tax imposed on companies.   
Tax revenue potential  
Both a top -down and  a bottom -up estimation of expected tax revenue conclude that the 
expected additional revenue collected from the tax would be rather moderate, but with 
significant growth potential over the next years. Table (11) summarises top -down revenue 
estimates for different tax rates. Underlying these estimates are data (and forecasts) from 
Statista on revenue earned from different type of digital services in the EU ( Annex 8  provides 
the full details on the methodology). The forecasts for 2019 have been used for the estimates. 
For a tax of 1% on digital advertising services and services provided by on line 
marketplaces/intermediaries applied to companies with a global consolidated turnover of 
more than EUR 750 million, the expected gross  tax revenue is about EUR 1.6 billion, or about 
0.4% of current corporate income tax revenue. If one assumed deductibi lity of the revenue tax 
from the local corporate tax base at the EU average corporate tax rate, these estimates would 
                                                 
70 CJEU, judgment of 5 February 2014, Hervis Sport , C-385/12, ECLI:EU:C:2014:47.  
 
70 reduce to a net figure of EUR 1.2 billion. This corresponds to an increase in total corporate 
income tax revenue of 0.3%. Three times as m uch is collected if the tax rate is 3% and five 
times as much at a tax rate of 5%. If one factors in annual growth rates between 6% and 17% 
(see section 9.3.1), one could expect these figures to grow by 20 -60% over the next 3 years.  
The top -down estimates  are overall broadly consistent with  the more elaborate bottom -
up estimates; the latter however indicate that the top -down estimate for advertising is 
likely too low.  These latter estimates are done on a sample of 112 companies, which almost 
all have globa l turnover above US $ 1 billion (around EUR 0.8 billion) and have publicly 
available financial accounts. They are classified in five separate categories (more detail on the 
methodology is provided in Annex 4). A major difference to the top down estimates i s that the 
revenue of these companies was allocated to EU Member States based on web traffic statistics 
from the web domains operated by each company. This is a major improvement of the 
estimation since it would mirror a tax on revenues allocated across ju risdictions according to 
some statistic on user contributions. Overall this alternative methodology results in an 
estimate of about one third of the top down estimate (table (12) below). Given that this 
estimate is done only on a subsample the lower value is not surprising. For advertisement the 
bottom -up estimate shows that the top -down approach might underestimate potential 
revenues. For marketplaces/intermediaries, the top -down results might be on the high side, 
considering that the estimate from the bot tom-up approach is 8 times higher. However, this 
might be explained by the bottom -up estimates are only based on the largest companies whose 
major business activity is based on advertising or being a marketplace/intermediary. It thus 
ignores the mixed busi ness models that many companies have.  
There is a certain trade -off between thresholds and the revenue potential, but  the 
precise threshold, as long as it is high enough to safely exclude start -ups, is not very 
relevant. Using turnover data from the ORBIS d ata base from all companies (that is, 
irrespective of the type of business) indicates that reducing the turnover threshold to EUR 500 
million would increase the revenue estimates by about 7%, but more than double the number 
of companies (entities) affected  (Table (10) above ). A reduction in the turnover threshold to 
EUR 50 million would increase revenue by about 25% and affect more than three times as 
many companies than under the EUR 750 million threshold. Given the fairly small revenue 
expected overall, l ower thresholds have a very limited added value.  
Table (11): Top down revenue estimates for a tax on gross revenue for the EU -2871 
        in EUR 
billion  % of CIT 
revenue  
Tax 
rate 1%   Advertising  0.3 0.1%  
      Marketplace/intermediaries  1.3 0.3%  
      Cloud services*  0.3 0.1%  
                                                 
71 Base year for the estimates is 2019. Without the UK all estimates would decrease by about 30%, but this high 
figure might b e related to the underlying data being allocated to jurisdictions according to either where the 
company providing the service is located or where the revenue payment originates from.  
 
71       Digital media*  0.1 0.03%  
            
  3%   Advertising  0.8 0.2%  
      Marketplace/intermediaries  3.9 0.9%  
      Cloud services*  0.9 0.2%  
      Digital media*  0.4 0.1%  
            
          
  5%   Advertising  1.3 0.3%  
      Marketplace/intermediaries  6.5 1.6%  
      Cloud services*  1.4 0.4%  
      Digital media*  0.6 0.2%  
            
Source: European Commission, own computations based on data from Statista, Bureau van Dijk Orbis database , 
the Ameco database and Taxation Trends, 2017 edition. Notes: Estimates are based on a global revenue 
threshold of EUR 750 million and on corporate income tax collected in EU -28 in 2015 of 2.5% of GDP.  
Note: Cloud services and digital media are not withi n the scope.  
Table (12): Bottom -up revenue estimates for a tax on revenue from digital services (in 
EUR billion).  
Tax rate  1% 3% 5% 
Advertising  0.4 1.1 1.8 
Marketplace/intermediary  0.2 0.5 0.8 
Digital content  1.0 3.1 5.2 
Source: European Commission, own computations based on data from UNCTAD (2017b), SimilarWeb and 
Bureau van Dijk Orbis database .  Notes: Estimates are based on a set of 112 global multinational companies, 
including the top 100 digital MNEs identified in UNCTAD (2017b) that all earned revenue of more than $ 1 
billion in 2015.  
Level of additional tax imposed o n companies  
Since costs are not taken into account, the corresponding tax on profits implied by the 
tax on revenue, even at a low rate, could be substantial  for individual companies . For 
example, a company that has EUR 100 of gross revenue and EUR 85 of (d eductible) costs, 
has a mark -up of 15%.72 If it pays a tax on gross revenue of 2%, it has to pay EUR 2 in 
revenue tax, which corresponds to a profit tax of 2/15 = 13%. If tax on revenues from digital 
services is deductible from the corporate tax base, the i mplied profit tax rate reduces to about 
10%.73 
The rate should be decided taking into account both the amount of revenue generated 
from the tax and possible distortions from a business perspective. Since the revenue 
                                                 
72 A mark -up of 15% corresponds to the median we observe for a selection o f 21 large companies with relevant 
digital activities.  
73 Based on the average EU statutory corporate income tax rate of 23%.  
 
72 potential of a tax on revenues from digit al advertising and from offering 
marketplace/intermediary services is in any case rather limited, imposing the tax with a high 
tax rate that might considerably hurt companies with lower profitability does not seem 
justified. Also, considering the fact that  crediting of the tax would not be possible and that in 
some cases it may therefore lead to tax being paid in addition to corporate tax, the tax rate 
should not exceed 3%. On the other hand going below 1% would not justify (in terms of tax 
revenue gained) the additional burden of introducing a new tax.   
1.20.6  Allocation of the tax  
By allocating the tax according to the revenue earned in a jurisdiction, the tax would in 
many cases not capture well the local user contribution. The rationale for the interim 
solution  is to be a good and simple interim proxy to deal with the most extreme cases where 
users contribute a very significant share of the value. Revenues from selling online 
advertising space will often not be earned in the jurisdiction where the user is located. For 
example, company A located in country X might buy advertising space from company B 
whose users are mostly located in B. In this case, an allocation of revenue according to the 
origin of the payment would attribute all revenue to country A, which is not where the users 
are located. A similar, though more complex, issue arises where the supply of services 
consists in the making available of a multi -sided electronic interface such as a marketplace, 
platform, portal or similar means to users, which allow users to find other users and to interact 
with them. Typically, users of both or all si des of the market are located in different Member 
States. But often multi -sided platforms apply reduced or no fees on the side of the network 
that is less developed or more elastic, but necessary for the company to run its activity (and 
where they want to grow or maintain a large user base). Allocating revenues solely to the 
Member States from where a payment has been made would be rather straightforward and 
easily trackable both for companies and tax administration. However, it would defeat the 
purpose of the solution that is to tax where the value contributed by users is created.  
If using the location of the user to allocate tax base, it seems appropriate, where possible, 
to take into account the nature of the service for the proxy used to allocate the ta x. 
Where the users of a digital service are located in different Member States, a possibility is to 
allocate the revenues derived from such a digital service to the Member States where the users 
are located in a proportional way. Rather than using the same  allocation key for all services 
(e.g. simply the number of users), it seems more appropriate to take into account the nature of 
each of the digital services within the scope of the tax, so that the final allocation of taxing 
rights better reflects where t he revenues have been generated through user contributions.  
For online advertising services , in most of the cases the revenues are linked to the number of 
times an advertisement is displayed on a users' device (other allocation keys could be the 
number of  times a user accesses a displayed advertisement).  
Where the supply of services consists in the making available of an online platform , it 
seems that a distinction could be made between cases involving an underlying supply of 
services or goods directly be tween the users of the platform. In such scenarios, it is usually 
 
73 the conclusion of that underlying supply the element which triggers the payment from the 
users to the platform in the form of a commission (but they can usually access the platform 
free of c harge). Therefore, it seems that the number of users having concluded such 
underlying transactions could be the allocation key to be taken into account. However, if the 
revenues for the platform simply come from fees that the user have to pay in order to a ccess 
the platform, it seems more suitable to allocate taxing rights to a Member State according to 
the number of users from that Member State with an account allowing them to access that 
online platform.  
1.20.7  Relief of double taxation  
Allowing the deduction o f the new tax as a business expense from the corporate tax base 
would alleviate double taxation issues.  The new tax is an expense for a company that arises 
in the course of it business. As such it is natural to allow it to be deducted from the corporate 
tax base. To see how this would affect taxation, take a company with relevant digital services 
that is tax resident in country A and pays all its corporate tax there. The user base of the 
company is spread evenly across countries A, B and C. After the new ta x is introduced, the 
company pays the new tax on its revenues from digital services in Member States A, B and C. 
By making the tax deductible from the corporate tax base in A, the corporate tax liability in A 
is reduced.  
In the absence of the possibility t o credit the new tax against corporate income tax paid on the 
same revenue (or vice versa, see section 9.2.4)), allowing the deduction of the tax from the 
corporate tax base would contribute to a fairer outcome overall.  
There is no risk of taxing the same service twice under the new tax.  Revenue received for 
a certain type of service would always be accounted for only once. In the theoretically 
conceivable case that a revenue stream could be associated to, for example, an online 
advertising service and an o nline marketplace service, one should take precedent over the 
other to ensure that the same revenue cannot be taxed twice.  
1.20.8  Collection of the tax  
Withholding the tax on payments  
Withholding the tax when a payment is issued may appear straightforward and the  
calculation relatively easy  (Brauner and Pistone, 2017), but there are several 
shortcomings linked to this option . First, when the user of a service is not the payer of the 
transaction,74 the collection is not feasible. As such, withholding the tax would make it very 
difficult to include business models indirectly generating revenues as in the social media and 
advertising model. Another shortcoming relates to the insufficient information h eld by the 
                                                 
74 A concrete example is a situation where a social platform sells advertisement spaces to a company based in 
country A, on the basis of user data located in country B – the ad targeting the users in this country B. The 
location of the users will determine the allocation of the tax revenue, i.e. country B. However, in such case, the 
tax would be withheld in country A. This will mak e challenging enforcing the application and collection of the 
tax in particular with third countries.  
 
74 collectors. For the financial intermediaries – the collectors – to be able to identify to which 
transaction the tax should apply, they would need to have information on the nature of the 
underlying supplies triggering the payment. This implies a verage -to-high set -up and recurrent 
costs for the collection system. The existence of thresholds to the application of the tax will 
further render complex the use of a withholding system, which is by nature based on 
individual transactions. Again, the coll ector does not have sufficient information whether the 
company receiving the payment is above the threshold. Last but not least, the increase in peer -
to-peer payments (without intermediaries, for example using block -chain technology) as well 
as the use of virtual currencies may increase the possibility to escape this kind of tax. 
Considering all these difficulties, Schön (2017) concludes that "the technical and procedural 
difficulties for withholding taxation seem to be next to insurmountable".  
Self-declar ation system  
Such a system implies relatively low set -up costs for both the taxpayers and the tax 
administrations. It is generally familiar to businesses as it is used, with positive experiences, 
for several other taxes, notably VAT and should be considere d as the preferred/default 
solution, especially having in mind that the tax revenues collected will be relatively modest. 
Businesses would have to identify and declare to the tax authorities the gross revenues 
derived from its digital services for the purp oses of calculating the amount due – for instance 
by submitting a tax return during the month following the one of the taxable services – and 
pay the tax due. However, there are risks of under -reporting, which need to be properly 
addressed by the tax admin istration through cross -checks with information from third parties 
(for example, users, statistic providers) and audits. An easy registration and payment feature 
in the form of a one -stop-shop for non-resident taxpayers could be envisaged, especially since  
a significant part of the tax revenue is expected to come from abroad.  
1.20.9  Other economic impacts of a tax on revenues from digital services  
Despite generally lower tax rates for revenue taxes, their distortionary effects can be 
significant if the tax is coll ected on business purchases. As the revenue tax base is broader 
than corporate income, revenue taxes generally involve lower tax rates. Hence, the change in 
real production incentives and in market equilibrium prices might be small. However, if a 
significa nt share of the revenue tax is collected on business purchases, the distortionary 
effects can be substantial even under a 'broad base and low rate' tax due to cascading effects, 
i.e. taxing the same items multiple times through the supply chain (Keen, 2013 ).  
Cascading issues are expected to be of a relatively minor concern.  First, because the tax 
would have a fairly narrow scope and because it affects business models with a large user 
base, it is relatively unlikely that several relevant transactions are t axed in a row. Only in the 
case of the advertising model, where this might happen, additional safeguard might need to be 
taken to reduce the likelihood of taxing more than once. In addition, cascading can be 
mitigated by eliminating intra -group / related p arty transactions, that is by levying the tax only 
on revenues from third parties (be it individuals or businesses).  
 
75 Levying a tax on revenues can be efficient under a number of circumstances.  In the 
presence of tax avoidance and evasion, the optimal tax b ase may optimally sacrifice some 
production efficiency (Emran and Stiglitz 2005; Gordon and Li 2009). Indeed, Best et al. 
(2015) study the trade -off between preserving production efficiency and preventing the 
corrosion of tax collection due to tax avoidanc e and evasion. Using administrative tax records 
on corporations in Pakistan, they find that a switch from profit taxation to turnover taxation 
(at a much lower tax rate) reduces evasion levels by up to 60 –70 percent of corporate income 
and can increase cor porate tax revenues by 74 percent without decreasing aggregate profits 
(hence representing a welfare gain). This suggests that a pure turnover tax can be better than a 
profit tax in terms of social welfare. The reason is that the loss of production efficie ncy is 
more than compensated for by the increase in revenue efficiency due to larger compliance. 
Furthermore, in cases where variable costs are negligible – as is often the case for online 
platforms that rely on advertising or act as marketplaces/intermedi aries – marginal profits are 
similar to marginal revenues. It can therefore be efficient to levy a tax on revenue as a second -
best option (France Stratégie, 2015).   Moreover, given that the levels of data exploitation are 
often excessive, a tax on digital  activities that exploit data can improve consumer welfare 
(Bloch and Demange, 2017).  
There is scarce evidence on the pass -on effect of a new tax on turnover, but economic 
theory and experiences with VAT indicate that there is no uniform answer for the 
variety of digital services considered.  As a proxy, one could look into the effect of an 
increase in the VAT rate on consumer prices. Economic theory suggests that the pass -through 
of a VAT increase on consumer prices is influenced by several factors: competition setting, 
the elasticity of dema nd and other factors ( e.g country -specific ones) . The higher the price 
elasticity of demand, the lower the degree to which a VAT rate increase can be shifted into 
final consumer prices. An increase in the VAT rate would thus translate to different degrees in 
higher consumer prices or reductions in suppliers’ profit margins, depending on the market 
conditions.  On average, for a rather broad range of goods and services, Benedek et al. (2015) 
found that only around one -third of a VAT change is passed on to con sumer prices.75 In the 
case of paper -based books and e -books, a Commission -ordered study documented a pass -on 
rate of one -half, which was however considered imprecise.76 
For online retail, there is some evidence that consumers purchasing online are price 
sensitive and react strongly to price increases – this would limit the possibility for 
companies to pass additional tax onto consumer prices.  Existing work on internet tax 
sensitivity dates back to the influential work of Goolsbee (2000). Sales taxes that are  directly 
passed onto prices of products sold online have been shown to strongly reduce demand. More 
recently, Einav et al (2014), using data from eBay which accounts for 11 -13 percent of 
                                                 
75 See Benedek et al. (2015), p.16 , https://www.imf.org/external/pubs/ft/wp/2015/w p15214.pdf .  
76 See European Commission (2012) – Economic Study on Publications on all Physical Means of Support and 
Electronic Publications in the context of VAT, p. 98  
(https://ec.europa.eu/taxation_customs/sites/taxation/files/docs/body/economic_study_vat_on_publications_final
report.pdf ). The pass -on rates vary also country -wise – op. cit., pp. 95 -96. 
 
76 Internet retail commerce in the U.S., estimate that on average, the application of a 10 percent 
sales tax reduces purchases by 15 percent among buyers who have clicked on an item.  
1.20.10 Administrative burden and compliance costs  
Businesses must identify gross revenues resulting from supplying digital services and 
relevant user statistics, requiring additional reporting requirements . This could require 
adapting the financial reporting to split revenues issued from digital services with revenues 
issued from non -digital services. The business must declare and pay the tax to the Mem ber 
State that has the taxing right (for example, where the users are located).  The threshold 
proposed will restrict the number of businesses subject to the tax. In particular, it will have no 
impact on SMEs. Since it might cover several different busines s models even for the same 
enterprise, taxpayers will have to further allocate internally revenues to various proxies ( for 
example, number of active users and monetisation by user, local domain names, IP 
addresses,77 number of visits, number of clicks, numb er of ad displays, location of the 
accommodation, transport, entertainment services provision)  according to the requirements to 
be laid down in the text of the EU directive.  In doing so, the data collected from the user 
needs to  be limited to data indicati ng the Member State in which they are located, without 
allowing for identification of the user, in accordance with Regulation (EU) No 2016/679 on 
data protection. Whenever possible, personal data shall be rendered anonymous.   
Although a quantitative estima te of the cost of collecting data is not available, the type of 
data -driven businesses subject to the new tax  would in most cases be able to retrieve the 
data without much difficulty . The EU’s consumer and marketing legislation already require 
information obligations about the provided services, the identity of the provider, the contract 
conclusion and its execution. Also, the examples of voluntary cooperation between some of 
the large st platforms and the tax administrations to exchange information related to the 
underlying services the platform facilitate show that the information is available and can be 
processed at a limited cost (e.g. Uber with the Estonian tax authorities or Airbnb  with major 
cities for the tourist tax) ( Dondena & IHS, 2017) . The draft regulation to ban unjustified geo -
blocking between member states agreed by the Council in November 2016 is an additional 
example that locating services is not issue and common practic e. Finally, traffic and 
engagement metrics are accessible online allowing to benchmark websites in terms of overall 
visits, time on site, bounce rate and page views per visit. An example is SimilarWeb .  
Total additional tax compliance costs are expected to  be rather limited, taking into 
account the fairly simple structure of the tax.  A forthcoming study on tax compliance costs 
estimates that total indirect compliance costs for large enterprises amount to about 0.1% of 
turnover (KPMG and GFK, 2018 ). This  provides an order of magnitude in perspective of the 
new tax.  Given that the tax would be applied on gross revenues without the possibility to 
                                                 
77 An Internet Protocol address  (IP address ) is a numerical label assigned to each device connected to a computer 
network that uses the Internet Protocol for communication (developed as early a s the 1980s). While some of 
these proxies can be subject to errors, manipulation or abuse by end -users or third parties, they still constitute a 
reliable means to locate the user.  
 
77 deduct any costs, the compliance burden in percentage of turnover should be rather 
substantially below the estimated  0.1% of turnover.  
The compliance costs and administrative burden for non -resident taxpayers would be 
slightly higher and also the assessment and collection will be more challenging compared 
to resident ones . The use of a one -stop-shop would ensure relatively low overall costs78. 
These costs could be further reduced by means of harmonising registration, filing, accounting, 
data/record maintenance and payment requirements, for example by means of delegated acts.  
For national tax administration, the int erim solution has initial set up costs limited to 
reporting adjustments, declaration and payment (in terms of both procedures and IT 
systems) and the corresponding staff and training costs.  The recurrent costs will cover 
maintenance and IT systems, staff a nd continuous training.  The use of a one stop shop for the 
preferred interim solution would lower the administrative costs for the tax administrations 
and, at the same time, allow for better compliance and higher tax revenues collected from 
abroad. A first  evaluation of the mini -one stop shop in place in EU Member States reports an 
average IT cost of about EUR 2.5 million for a Member State to implement the portal. Such 
estimate could be a solid basis to estimate the IT cost that a similar system would impl y79.    
Also, the administrative costs related to audio -visual levies as identified in table (6) on 
unilateral measures taken by Member States could be a reliable basis to estimate further 
the administrative cost.  Although the material scope may differ from  the interim options, 
they are levies set on revenues from certain digital activities. Parallel in the functioning and 
administration may be drawn. The impact assessment of a proposal for an updated audio -
visual media services directive estimated the admin istrative costs (borne both by businesses 
and regulators) associated with the audio -visual levy set at an average rate of 2% on revenues 
at an upper value of 600 thousand EUR for the entire EU (and all the actors).80 
The implementation of the tax would be relatively challenging for tax administrations in 
relation to taxpayers that are not resident . Tax administrations can make use of the 
administrative tools available at EU81 or OECD82 levels for both the interim and 
comprehensive solutions.  
                                                 
78 For instance, the overall costs that businesses face when engaging in cros s-border B2C e -Commerce of 
electronic services under the 2015 place of supply rules (but not using the mini one -stop-shop/MOSS) amount to 
about an average of EUR 5 200 per business per each Member State they sell to cross -border, which is less than 
the ove rall average cost for businesses engaged in cross border e -Commerce (around EUR 8 000). By 
comparison, the overall costs that businesses face when engaging in similar activities using the MOSS amount to 
an average of EUR 2 200 per business per year. For de tails, see 
https://ec.europa.eu/taxation_customs/sites/taxation/files/swd_2016_379.pdf . 
79 https://ec.europa.eu/taxation_customs/sites/taxation/files/swd_2016_379.pd f 
80 See https://ec.europa.eu/digital -single -market/en/news/impact -assessment -accompanying -proposal -updated -
audiovisual -media -services -directive  
81 Administrative cooperation in the field of (direct) taxation - Council Directive 2011/16/EU and mutual 
assistance in the field of recovery of claims - Council Directive 2010/24/EU and Commission Implementing 
Regulation (EU) No 1189/2011.  
 
78 1.20.11 Coherence and art iculation with the comprehensive solution  
With a narrow scope that is based on the centrality of the user contribution for the 
service provided, the tax would be most coherent with the comprehensive approach. 
Given that the user contribution is so central  for online advertising and 
marketplaces/intermediaries, the result of an allocation of the tax according to user location is 
that the outcome of the interim tax would well approximate the outcome of the 
comprehensive solution.  
The new tax on digital serv ices would apply only until the comprehensive solution is in 
place.  After significant progress towards implementation of the comprehensive solution, i.e. 
the Directive on digital permanent establishment and profit allocation rules, adoption of the 
adapted CCCTB and Recommendation to revise double tax treaties, the interim solution 
would cease to exist. As such, there may be elements of the comprehensive solution that are 
in place at the same time as the interim solution. But there is no risk of applying two  taxes at 
once, as the comprehensive solution does not imply a new tax, but a re -allocation of corporate 
taxation rights.  
  
1.21 Preferred interim option  
1.21.1  Conclusion and description of the preferred interim solution  
The preferred interim solution is a Directiv e on a common system of a tax on certain 
digital services.  To ensure simplicity and coherence with the comprehensive solution, it 
would be a tax with a narrow scope, levied on the gross revenues of a business resulting from 
the exploitation  of digital acti vities characterised by user value creation, namely advertising 
revenue and revenue from services provided by online marketplaces/intermediaries. To be not 
discriminatory, the tax would apply both to non -resident and domestic companies and both to 
domestic  and cross -border transactions.  
To ensure proportionality of the measure, avoid hurting the digitalisation of the 
economy and not be discriminatory against non -resident companies, the   tax would 
apply to businesses being above both of two thresholds and at a single rate . The tax 
would apply to businesses being above both of two thresholds:  
1. an annual worldwide total revenue above EUR 750 million, at the level of the 
multinational group to which the business belong, if applicable.  
2. revenue from the provision of digital services above a threshold of EUR 10 -50 million  
                                                                                                                                                         
82 The Multilatera l Convention on Mutual Administrative Assistance in Tax Matters, the OECD Model 
Tax Convention Article 26 (Information Exchange) and the OECD Model Agreement on Exchange of 
Information in Tax Matters.  
 
79 There would be a single rate across the EU in the region 1 -3%. It would not be feasible to 
make the tax creditable, but to alleviate double taxation it should be deducti ble from the 
corporate tax base.  
It is not rare that companies run several business activities/services in parallel and mix 
business models.  In such cases, revenues to take into account for the specific revenue 
threshold and the taxable base would be limit ed to those falling under the material scope. For 
example, a company X running in parallel a business segment A providing digital content in 
exchange for a fee and a business segment B providing access to content for free but financed 
through the sale of a dvertising space might be subject to the interim solution. Only the 
revenue generated through the business segment B would be taken into consideration for the 
purpose of the tax.     
To align more the locations of value creation and taxation, the principle  for assign ing 
taxing rights should also be based on the location where the user has contributed to the 
value creation. Several attribution keys are possible, but essentially this will require some 
sort of apportionment of revenue across jurisdictions base d on geographical user statistics. For 
the making available of multi -sided digital platforms which act as intermediaries that facilitate 
underlying transactions directly between users, the allocation of taxable revenues should be 
carried out on the basis o f the place from where the users having concluded such a transaction 
are. Specific rules could be envisaged depending on the type of underlying transaction 
concluded in such a marketplace (e.g. accommodation services involving immovable 
property, where tax ing rights are assigned to the jurisdiction where the property is), but the 
risk of increasing the complexity of the tax by having many place of taxation rules would 
need to be taken into account. For other intermediation services where revenues are typica lly 
obtained through periodic payments after having registered or opened an account, it is more 
appropriate to take into account the place from where the users have opened an account.  As 
regards the transmission of data collected about users, the allocati on of taxable revenues could 
take into account the place where a user has generated the data which will be sold.    
A simplification mechanism should be made available, based on the one-stop-shop  
model, which would be particularly important for non -resident  taxpayers. . The taxpayer 
can register in the one -stop-shop and declare and pay the tax due in several Member States via 
one Member State.  
Annex 12 provides concrete examples of how the tax would work in practice.  
1.21.2  Subsidiarity, proportionality and compat ibility with EU law  
Until the implementation of a common and coordinated action at EU level, which may 
take some time to agree, Member States introduce unilateral measures to address the 
challenges of taxing the digital economy companies.  As it can be obs erved in Table (6) of 
Section 9.1, some of such measures, which can be of a very diverse nature, are already in 
place. EU action is necessary in order to mitigate the fragmentation of the single market and 
the creation of distortions of competition within the EU due to the adoption of such unilateral 
actions at national level.   
 
80 The preferred option would be consistent with the principle of proportionality, that is, it 
does not go beyond what is necessary to meet the objectives of the Treaties, in particula r 
the smooth functioning of the single market.  As follows from the subsidiarity test, it is not 
possible for Member States to address the problem without hampering the single market. 
Moreover, the present proposal aims at setting a common structure of the tax, narrowly 
defined with thresholds not to unjustifiably hurt companies, while leaving sufficient margin of 
manoeuvre for Member States when it comes to actual setting of certain administrative 
aspects related to the measure, such as accounting and repor ting obligations, and also 
concerning the prevention of evasion, avoidance, and abuse.  
 
Compatibility with EU law (notably fundamental freedoms of the TFEU and with VAT law) 
are discussed in Annex 11.  
 
10. HOW WILL ACTUAL IMPAC TS BE MONITORED AND 
EVALUATED ? 
1.22 Monitoring arrangements  
The Commission will monitor the implementation of the legal proposal and its 
application in close cooperation with the Member States.  Monitoring in a continuous and 
systematic way will allow identifying whether the policy proposal i s applied as expected and 
addressing implementation problems in a timely manner. Tables (13) and (14) suggest a range 
of monitoring indicators derived from operational objectives for the comprehensive and the 
interim solutions. Collection of factual data o f the suggested monitoring indicators will also 
provide the basis for the future evaluation of the proposal. In compliance with the principle of 
subsidiarity, the relevant information should be gathered primarily by the Member States' tax 
administrations w hen data on tax compliance and the use of the system is concerned.  
Table (13):  Potential monitoring indicators for the preferred comprehensive solution  
General 
Objective  Operational Objective  Indicator  
Sustainability 
of public 
finances of EU 
Member State s 
and the EU  
 Raising additional revenues  
 Revenues collected annually by national tax 
administrations from the allocation to the digital 
parameter in the profit allocation formula.    
 
Number of digital permanent establishments 
created  
 
Increase in profits booked through digital 
permanent establishments  
 
Contextual information: residence, sector and 
size of the company  
Integrity and 
proper 
functioning of 
the single Ensuring certainty and stable tax 
frameworks in the single market  
 
Stopping on going fragmentation Number of unilateral measures related to digital 
taxation and applying to EU tax payers/different 
from the interim solution still in place in EU 
Member States  
 
81 market  of the Single market through the 
multiplication of tax schemes  
Ensuring 
fairness and a 
level playing 
field  Ensuring that similar 
activities/firms receive similar 
tax treatment  Evolution of the effective corporate income tax 
rate: 
- between similar companies with and 
without digital permanent 
establishments  
- between EU and non-EU companies  
Effective tax rates of companies subject to 
mandatory application of the comprehensive 
solution relative to companies not applying the 
comprehensive solution with similar 
characteristics  
 
Fight against 
aggressive tax 
planning  Ensuring tha t profits are taxed 
where the value is created  Alignment between geographical location of 
users (as measured by web visit/data from 
Member States) and location of profits  
 
Reallocation of profits between Member States  
 
Table (14):  Potential monitoring indicators for the preferred interim solution  
General 
Objective  Operational Objective  Indicator  
Sustainability 
of public 
finances of EU 
Member States 
and the EU  
 Raising annual additional 
revenues  Revenues collected annually by national tax 
administratio ns, from the interim tax on digital 
services  
 
Contextual information: residence, sector and 
size of the company  
Integrity and 
proper 
functioning of 
the single 
market  Ensuring certainty and stable tax 
frameworks in the Single market  
 
Stopping ongoing fragmentation 
of the Single market through the 
multiplication of tax schemes  Number of unilateral measures related to digital 
taxation in EU Member States  
- creation  
- abolition/harmonisation  
Ensuring 
fairness and a 
level playing 
field  Ensuring that significant digital 
services relying on user 
participation are taxed/ Taxing 
user-based value creation  Alignment between geographical location of 
users (as measured by web visit/data from 
Member States) and location of tax base  
 
Change in the ratio web vis it/profits  
Fight against 
aggressive tax 
planning  n/a n/a 
 
In addition, for the recommendation, the number of double taxation treaties that have been 
negotiated or are under renegotiation should be monitored.  
 
82 1.23 Evaluation  
The evaluation of the proposals should assess the extent to which the outlined objectives have 
been met. It will also assess the related administrative and regulatory burden. Considering the 
multiple approaches for the solutions and allowing for impacts to materialise and to be 
observed after the implementation of the policy, an evaluation should be carried out five years 
after the implementation of each stream of the proposal (i.e. the interim solution, the 
comprehensive solution and the recommendation). The Commission will report on the  
evaluation results in the form of an evaluation report.   
 
83 ANNEX 1: PROCEDURAL INFORMATIO N 
 
1. Lead DG, Decide Planning/CWP references  
 
The lead Directorate General is the Directorate General for Taxation and the Customs Union 
(DG TAXUD).  
This initiative got the following political agreements:  
- Agenda Planning: Fair taxation of the digital economy (PLAN/2017/1873.)  
- Inception Impact Assessment : Fair t axation of the digital economy (Ref. 
Ares(2017)5253058 - 27/10/2017)  
- Commission Work Programme  2018 Annex I , initiative 7  
 
2. Organisation and timing  
 
The works for this initia tive have been launched in September 2017.  
The following Directorates General were invited to the Inter -Service Steering Group (ISSG): 
BUDG, CNECT, COMM, COMP, DGT, ECFIN, FISMA, GROW, JRC, OLAF, SJ, TRADE, 
EPSC.  
The Inter -Service Steering Group awas chai red by the Secretariat General.  
The Inter -Service Steering Group has met for a number of 4 times to discuss the file. The last 
meeting of the steering group took place on the 10th of January 2018.  
 
3. Consultation of the RSB  
 
The Impact Assessment report was examined by the Regulatory Scrutiny Board on 
07/02/2018.  
The Board issued a positive opinion with reservations, on the 9th of February 2018.  
According to the opinion:  
 
"The Board acknowledges the good and clear presentation of the report.  However, the 
report contains significant shortcomings that need to be addressed. As a result, the Board 
expresses reservations and gives a positive opinion only on the understanding th at the 
report shall be adjusted in order to integrate the Board's recommendations on the 
following key aspects:  
(1) The report does not clearly explain the context of the initiative and the rationale for a 
two-pronged approach. It does not show the urgenc y for the EU to act, before global 
progress is achieved at the OECD/G20 level.  
(2) The projection of the implications of the baseline scenario is incomplete; the content 
of the options is not sufficiently detailed. And the transition between the short -term and 
long-term solutions lacks clarity.  
 
84 (3) The analysis of impacts is insufficiently developed, especially as regards the 
thresholds, compliance costs and thus does not demonstrate the proportionality of the 
preferred option.  
 
Following the comments re ceived from the Board, the Impact Assesment report has been 
significantly revised, in order to address the issues raised:  
 
(1) The two -step approach as well as the urgency of the EU action have been better 
explained and the relevant sections  have been exp anded.  
(2) The baseline has been expanded in order to take into account all the relevant 
initiatives currently adopted. The switch from the interim solution to the comprehnesive 
as well as the consequences have been better described.  
(3) The analysis of im pacts sections, in particular the administrative and compliance 
costs, have been further develped both for the comprehensive solution as well as the 
interim one.    
 
The current version of the report thus contains the revised text in which the Board's com ments 
were addressed.  
 
 
 
  
 
85 ANNEX 2: STAKEHOLDER CONSULTAT ION 
Fair taxation of the digital economy proposal  
Synopsis report  
 
Consultation activities carried out  
The consultation strategy has focused on three main groups of stakeholders: Member States’ 
tax administrations, businesses and citizens. The two main consultation activities consisted in 
the open public consultation and a targeted survey sent to all EU tax  administrations. The 
members of the Platform for Tax Good Governance  (made up of all EU tax authorities and 15 
organizations rep resenting business, civil society and tax practitioners ) have also been 
informed about this initiative and their opinions sought out.  In addition to these, stakeholders 
had the opportunity to give feedback on the inception impact assessment and send their  
position papers directly to the dedicated functional mailbox  for this initiative.       
Stakeholder participation  
The open public consultation has been launched on the 26th of October 2017 and was closed 
on the 3rd of January 2018. Given the short timeline of the overall project, a derogation from 
the 3 month period mentioned in the Better Regulation Guidelines was granted by the 
Secretariat General of the European Commission. The consultation was available  in all 
official EU languages (except Gaelic).   
There were a total of 446 replies  to the public consultation and 121 positions papers uploaded 
along with the replies. The open public consultation was published on the general consultation 
website  of the European Commission and has been advertised through newsletters, at the 
meeting of the Platform for Tax Good Governance and through a Twitter campaign .   
A separate, targeted consultation was carried out in parallel to the open public consultation. 
The consultation ran from the 23rd of November until the 20th of December and was sent to all 
the national tax administration in th e EU. Out of 28 Member States, 21 national tax 
administrations have replied directly to this consultation and 1 Member State chose to send its 
contribution in the form of a position paper.  
A number of 14 position papers have been sent directly to the funct ional mailbox for this 
initiative.  
2 contributions have been received as part of the feedback mechanism on the inception impact 
assessment.  
 
  
 
86 CONSULTATION RESULTS  
 
1. Open public consultation  
 
a. Description of the respondents  
 
The vast majority of contributions came from respondents based in the EU 28. Only 16 
contributions from outside the EU have been submitted. The top 6 countries, based on the 
location of the respondent were: Spain (75 replies) and Germany (75 replies), Ital y (45 
replies), Belgium (38 replies) and France (30 replies) and the United Kingdom (30 replies).  
Based on the language used for replying to the questionnaire, most of the respondents chose 
the English version (315 replies) followed by Spanish (42 replies), German (39 replies), 
French (19 replies) and Italian (17 replies). The remaining 14 replies were  in the other official 
EU languages.  
Table (1). Type of respondents to the public consultation  
 
Based on the type of respondent, as can be seen in the figure above, 49% of replies came from 
individuals, 24% from business organizations such as trade assoc iations or consultancies and 
18 % came from businesses. The remaining 10% is spread between civil society organizations 
(10 replies), academic/research institutions (12 replies), public authorities (2 replies), 
international organizations (1 reply) and oth er types of organizations (14).        
The majority of businesses that replied to the survey were Small and Medium Enterprises 
(SMEs): 41, while the remaining 38 replies came from large enterprises, having over 250 
employees. About two thirds of companies (55 respondents out of 79) operate in more than 
one country.  

 
87 b. Current problems  
 
In this section the respondents were asked about the current rules of international taxation and 
their applicability for the digital economy. The respondents were also asked to  choose the 3 
main challenges that digitalization brings for companies and tax authorities. They were 
quizzed about the need to act and the most appropriate level for action.  The last part of this 
section asked the respondents to rank the objectives that the European Commission should 
pursue in relation to any possible future policy action.   
65 % of respondents (291 replies) believe that the current international tax rules are to a little 
extent or not at all adapted to the digital economy. 30 % of respon dents (136 replies) were of 
the opposite opinion, that the rules are adapted to some or to a great extent. The remainder 
had either no opinion or didn’t know.  
A series of 5 statements about the current tax rules were tested, in order to see to what extent  
they could be used to describe the existing situation.  
1. The current international taxation rules do not allow for fair competition between 
traditional and digital companies. 65 % of respondents agreed or strongly agreed with 
this statement, while 20 % of r espondents disagreed or strongly disagreed with it.   
2. The current situation could push some Member States toward adopting uncoordinated 
measures that would lead to the fragmentation of the Single market. 82% of 
respondents agreed or strongly agreed with th is statement, while only 6 % of 
respondents disagreed or strongly disagreed with it.   
3. The current international taxation rules allow digital companies to benefit from certain 
tax regimes and push down their tax contributions. 73% of respondents agreed or 
strongly agreed with this statement, while 15 % of respondents disagreed or strongly 
disagreed with it.   
4. States are not able to collect taxes on the value that some digital companies create on 
their territory. 67% of respondents agreed or strongly agreed with this statement, while 
18 % of respondents disagreed or strongly disagreed with it.   
5. Social fairness is impacted because some digital companies do not pay their fair share 
of taxes. The same numbers appear for the last of the 5 statements: 67% of 
respondents agreed or strongly agreed with this statement, while 18 % of respondents 
disagreed or strongly disagreed with it.   
The main challenges that the digital economy poses for businesses are:  
 Uncertainty related to tax obligations when operating in different countries (selected 
by 63 % of respondents);  
 Uncertainty on the exact allocation per jurisdiction of the business' value creation 
(selected by 61 % of respondents);  
 Uncertainty related to future taxation solutions for new business models (selecte d by 
44 % of respondents).  
 The respondents were also given the possibility to name other challenges for 
companies, and some of the most quoted were: “risk of overregulation, especially for 
EU-based businesses. Already too complex taxation scheme exist.”, “ a huge risk of 
double taxation; unilateral EU -action will trigger countermeasures by trade partners” 
and ”the main challenge is to devise simple, quantifiable and easy to administer keys 
to allocate profits”.  
 
 
88 The main challenges that the digital economy p oses for national tax systems are:  
 Companies can access customers in national markets without being effectively taxed 
in the market country (selected by 64 % of respondents);  
 Unfair advantage of companies operating cross -border over local companies, due to  
lower taxation (selected by 61 % of respondents);  
 Difficulties to establish the tax liability of a company due to the complex value chain 
(selected by 55 % of respondents).  
 The respondents were also given the possibility to name other challenges for natio nal 
tax systems, and some of the most quoted were: “ascertaining and policing the tax 
liability of companies in other countries”, “keeping pace with advances in ways of 
doing business given continuing technological evolution”, “OECD guidelines and 
European  Union’s fundamental freedoms should be respected by governments.”  
 
An overwhelming majority of 82% of respondents (366 replies) believe that something should 
be done about the current international tax rules in what concerns the digital economy. When 
they were asked to identify the most appropriate level for action, 41% (182 replies) indicated 
that they would like to see action taken at international level, while 33 % (146 replies) 
preferred action to be taken at the European Union level. Only 2% (8 replie s) believe that the 
national level is an adequate one for action concerning the digital economy.   
A series of 4 objectives have been identified by the European Commission. They were tested 
with the respondents, who were asked to rank them and choose the m ost important ones.  
 The objective of ensuring a level playing field so that all companies pay their fair 
share of taxes (whether large/small, more/less digitalized, EU/non -EU based ) was 
considered to be the most important one by a number of 176 respondents .  
 Ranked second was the objective of ensuring a competitive tax environment in the 
EU for the scaling -up of start -ups and all business to flourish chosen by  153 
respondents .  
 Ranked third, the objective of ensuring the sustainability of the corporation ta x 
system and the tax bases of EU Member States  was selected by 129 respondents.  
 Ranked 4 was the objective of ensuring the integrity and proper functioning of the 
Single market with 115 replies . 
 
The respondents also had the possibility to suggest other o bjectives that should be pursued. 
Some of the other objectives suggested have been : “increased transparency on data use and 
incomes derived”, “social fairness”, “reducing all regulative and tax burdens for all 
companies” or “global level playing field for  all companies (big & small) and competitive tax 
environment in the EU”  
 
c. Possible solutions  
 
The section on possible solutions was centered around the two sets of options which have 
been identified early on in the policy design stage: the short term, inter im solutions and the 
long term, comprehensive solutions and their possible impacts.  
The two step approach (namely the interim option first, followed by the comprehensive 
option) was tested with the respondents. 54% (239 replies) of them believed that an in terim 
 
89 option should be adopted until a more comprehensive solution is reached, while 35 % (154) 
did not agree to that.  
Next, the respondents were asked to identify to what extent each of the short term, interim 
solutions would solve current problems relat ed to the international taxation rules for the 
digital economy.  
 
 Tax on revenues from digital activities:  Introduce a tax based on revenues generated 
from "digital activities": 45 % of respondents (201 replies) believe this option would 
solve the current problems to a great extent or somehow, while 41% of respondents ( 
181 replies) believed that this option w ould not solve the problems at all or only to a 
little extent.   
 Withholding tax on certain types of digital transactions : Introduce a withholding 
tax based on payments to non -resident providers of goods/services ordered online: 45 
% of respondents (202 re plies) believe this option would solve the current problems to 
a great extent or somehow, while 39% of respondents (172 replies) believed that this 
option would not solve the problems at all or only to a little extent.    
 Tax on revenues from certain digita l services : Introduce a tax based on the revenue 
from digital transactions concluded remotely with a non -resident entity that has a 
significant economic presence (e.g. revenue from the sale of online advertising): 53 % 
of respondents (238 replies) believe this option would solve the current problems to a 
great extent or somehow, while 34% of respondents (151 replies) believed that this 
option would not solve the problems at all or only to a little extent.     
 Digital transaction tax:  Introduce a tax that app lies early in the value creation 
process (collection of personal and other data): 33 % of respondents (147 replies) 
believe this option would solve the current problems to a great extent or somehow, 
while 51% of respondents (228 replies) believed that this  option would not solve the 
problems at all or only to a little extent.   
 Other options that have been identified by the respondents have been: “tax on quantity 
of internet traffic in a MS, tax on advertising profits and fines/taxes for geoblocking, 
dependi ng on the legislation in the area (fines if not complied with, fees if allowed)”, 
“only a coordinated approach in line with OECD principles can solve both: An 
appropriate taxation of digitalized business models and preventing double taxation.”,” 
tax data p er volume provided in streamed or downloaded content, for instance 
YouTube provides 20 gigabytes worth of songs to a user in EU, charge tax per 
megabyte, (Google's revenue is from ads)”  
 
Next, the respondents were asked to identify to what extent each of the long term, 
comprehensive solutions would solve current problems related to the international taxation 
rules for the digital economy.  
 
 Modify the Common Consolidated Corporate Tax Base proposal : Implement new 
permanent establishment and profit attribut ion rules through modifications to the 
CCCTB proposal: 44 % of respondents (195 replies) believe this option would solve 
the current problems to a great extent or somehow, while 27% of respondents (120 
replies) believed that this option would not solve the  problems at all or only to a little 
extent.   
 "Digital presence in the EU" proposal : Implement new EU rules for permanent 
establishment and profit attribution to capture digital activities of businesses in a 
stand -alone EU Directive: 58 % of respondents (2 59 replies) believe this option would 
 
90 solve the current problems to a great extent or somehow, while 28% of respondents 
(123 replies) believed that this option would not solve the problems at all or only to a 
little extent.  
 Destination -based corporate tax : Introduce the destination -principle to corporate 
taxation, according to which the jurisdiction to tax is based on the location of the 
consumer: 54 % of respondents (241 replies) believe this option would solve the 
current problems to a great extent or som ehow, while 34% of respondents (152 
replies) believed that this option would not solve the problems at all or only to a little 
extent.  
 Unitary tax : Introduce a tax on a share of the world profit of digital companies which 
would be attributed to each countr y on the basis of the percentage of revenue earned in 
that country: 50 % of respondents (221 replies) believe this option would solve the 
current problems to a great extent or somehow, while 37% of respondents (165 
replies) believed that this option would not solve the problems at all or only to a little 
extent.  
 Residence tax base with destination tax rate : Introduce a system where profits of a 
company are declared and taxed in the Member State of establishment (as is the case 
today), but the applicable rat e is the turnover -weighted average of the tax rates of the 
countries where the turnover is generated: 28 % of respondents (124 replies) believe 
this option would solve the current problems to a great extent or somehow, while 53% 
of respondents (235 replies ) believed that this option would not solve the problems at 
all or only to a little extent.  
 Other options that have been identified by the respondents have been: “it would be 
useful to use the definition of big data to individuate also the market and the v alue of 
the transactions non -resident company”, “the tax must be paid immediately with the 
transaction to consumer.”, “different solutions for taxing revenues coming from final 
consumer or from companies may be needed. Clients that are companies may establ ish 
themselves in a low tax country more easily than citizens.”  
 
To sum up the preference of respondents for the different options, the figure below presents 
he results, in a very simplified manner. Those who “somehow” believe or believe “to a great 
extent ” that an option would solve the current problems have been considered supporters of 
the respective option and included under the “For” column. Those who believe “to a little 
extent ” or “not at all” that an option would solve the current problems have been  considered 
opponents of the respective option and included under the “Against” column.  
Table (2). Respondents' preferences for the options – open public consultation  
Option name  For Against  No opinion  
Interim,  temporary solutions   
Tax on revenues from 
digital activities  45 % of respondents  41% of respondents  14% of respondents  
Withholding tax on 
certain types of 
digital transactions  45 % of respondents  
 39% of respondents  
 16% of respondents  
Tax on revenues from 
certain digital 
services  53 % of respondents  
 34% of respondents  
 13% of respondents  
Digital transaction 33 % of respondents  51% of respondents  16% of respondents  
 
91 tax 
Long term, comprehensive solutions   
Modify the Common 
Consolidated 
Corporate Tax Base 
proposal  44 % of respondents  27% of respondents  29% of respondents  
“Digital presence in 
the EU" proposal  58 % of respondents  28% of respondents  14% of respondents  
Destination -based 
corporate tax  54 % of respondents  34% of respondents  12% of respondents  
Unitary tax  50 % of respondents  37% of respondents  13% of respondents  
Residence tax base 
with destination tax 
rate 28 % of respondents  53% of respondents  19% of respondents  
 
The final question was if Small and Medium Enterprises (SMEs) should be exempt from a 
possible digital tax. Ther e was no clear split between those for and those against such an 
exemption. 167 respondents (38%) believed that they should be exempted, while 173 
respondents (representing 39%) opposed this.    
All respondents were given the possibility to attach a positi on paper to better express their 
views and support their arguments. A total of 121 position papers have been uploaded. Their 
content ranges from only a few lines expressing the author's views to full -fledged reports a 
few tens of pages long. The views expr essed vary to a very large extent and show that there is 
no consensus among stakeholders on what should be done next. There are however a few 
points which have strongly came out of the positions papers received, and which have been 
integrated in the Commis sion analysis:  
 the digital economy should not be ring fenced from the rest of the economy. As one 
respondent put it: " there is no such thing as  the digital economy . The global economy 
is digital and such be treated as such for tax purposes ". 
 the solutions chosen should not impose any administrative or compliance burden as 
they might risk to "disproportionately affect the ability of smaller enterprises to carry 
out and expand their business domestically and cross -border".  
 
2. Member States’ questionnaire  
 
a. Description of the respondents  
 
 
The questionnaire was structured into two parts: the first one was addressed to those 
administrations which have introduced laws that specifically target the digital economy. The 
second part included the same  questions that were used in the open public consultation, with 
slight adaptations, whenever appropriate.  
Only two Member State replied to the questions on their legislation in place targeting digital 
companies. One of those has adopted a law that entered into force only recently, in September 
2017. In the case of the other state, the law would only come into effect in 2019. None of the 
remaining 19 Member States that answered had in place legislation targeted at digital 
companies.  
 
92 When asked about their i ntention of introducing legislation to target the digital economy, 3 
states replied positively, 12 replied negatively and 6 states were not decided.  
b.  Current problems  
 
Similar to the open public consultation,  the national administrations were asked about t he 
current rules of international taxation and their applicability for the digital economy. They 
were also asked to choose the 3 main challenges that digitalization brings for companies and 
their tax authorities. They were quizzed about the need to act and  the most appropriate level 
for action.  The last part of this section asked the respondents to rank the objectives that the 
European Commission should pursue in relation to any possible future policy action.   
The majority of countries (13) believed that the current rules are not at all or only to a little 
extent adapted to the digital economy. The remaining 8 countries believed that the rules are to 
some extent or to a great extent adapted to the digital economy.   
A series of 5 statements about the curre nt tax rules were tested, in order to see to what extent 
they could be used to describe the existing situation.  
1. The current international taxation rules do not allow for fair competition between 
traditional and digital companies. 13 countries agreed or str ongly agreed with this 
statement, while 8 countries disagreed or strongly disagreed with it.   
2. The current situation could push some Member States toward adopting uncoordinated 
measures that would lead to the fragmentation of the Single market. 15 countrie s 
agreed or strongly agreed with this statement, 1 country disagreed, 4 countries were 
neutral and one had no opinion.    
3. The current international taxation rules allow digital companies to benefit from certain 
tax regimes and push down their tax contribut ions. 14 countries agreed or strongly 
agreed with this statement, 1 country disagreed and 6 countries were neutral.   
4. States are not able to collect taxes on the value that some digital companies create on 
their territory. 15 countries agreed or strongly a greed with this statement, 2 countries 
disagreed with it, 3 were neutral and 1 had no opinion.     
5. Social fairness is impacted because some digital companies do not pay their fair share 
of taxes. 14 countries agreed or strongly agreed with this statement, 2 countries 
disagreed with it, 4 were neutral and 1 had no opinion.     
An overwhelming majority of states (16) believe that something should be done about the 
current international tax rules in what concerns the digital economy. The remaining 5 states 
had no opinion on this issue.  
When they were asked to identify the most appropriate level for action, only one country 
believed that the EU level is the appropriate one ("as there is the Single market"), while the 
remaining 20 respondents believed that the i nternational level is the right one.   
The main challenges that the digital economy poses for businesses are:  
 Valuation of data / exploitation of data (i.e. quantifying how much the information that 
a company has about its clients is worth) selected by 13 respondents;  
 Uncertainty on the exact allocation per jurisdiction of the business' value creation 
(selected by 13 respondents);  
 Uncertainty related to tax obligations when operating in different countries (selected 
by 12 respondents);  
 
93  One state mentioned o ne other challenge for companies: “for business, the main 
challenge is double taxation that may potentially arise.  This double taxation can arise 
due to different approaches being adopted by different countries both in terms of 
interpretation or from the introduction of new taxes either unilaterally or multilaterally 
where those taxes sit outside the existing corporation tax framework”.  
  
The main challenges that the digital economy poses for national tax systems are:  
 Difficulties to establish the tax liab ility of a company due to the complex value chain 
(selected by 15 respondents);  
 Businesses acquire new sources of revenue (e.g. through exploitation of data) which 
are not properly taxed (selected by 14 respondents);  
 Companies can access customers in natio nal markets without being effectively taxed 
in the market country (selected by 10 respondents);  
 
The respondents were also given the possibility to name other challenges for national tax 
systems, and they quoted: “a significant challenge is the possibility  of double non -taxation.  
This challenge is what led to the BEPS project and related EU action, such as agreement of 
ATAD.  Given that implementation of these significant agreements has not yet taken place, it 
remains to be seen to what extent this risk/ch allenge will remain after BEPS Implementation”, 
“asymmetric level of information between global MNEs vs national tax authorities. eg; 
sharing economy platforms operating locally have valuable data which would be helpful in 
ensuring compliance of both the p latform as well as possibly other taxpayers (eg; users)” and 
“companies can develop massive and profitable activities on a territory without being taxed 
by this country”.  
A series of 4 objectives have been identified by the European Commission. They were t ested 
with the national administrations, who were asked to rank them and choose the most 
important ones.  
 Similar to the result of the open public consultation, the objective of ensuring a level 
playing field so that all companies pay their fair share of ta xes (whether 
large/small, more/less digitalized, EU/non -EU based ) was considered to be the most 
important one by a number of 12 respondents;  
 Ranked second, the objectives of ensuring a level playing field so that all 
companies pay their fair share of taxe s and the one on ensuring the sustainability 
of the corporation tax system and the tax bases of EU Member States  were 
selected both by 6 respondents each;  
 Ranked third, the objective of ensuring the sustainability of the corporation tax 
system and the tax  bases of EU Member States  was selected by 6 respondents;  
 The 4th position was split equally between the objective of ensuring the integrity 
and proper functioning of the Single market  and the objective of ensuring a 
competitive tax environment in the EU f or the scaling -up of start -ups and all 
business to flourish . with 7 replies each;  
 The national administrations also had the possibility to suggest other objectives that 
should be pursued. Some of the other objectives suggested have been: “the European 
Council Conclusions agreed by leaders clearly set out that it is important that a 
taxation system fit for the digital era ensures a global level playing field in line with 
the work at the OECD. The European Council Conclusions also note it is important to 
 
94 ensure that all companies pay their fair share of taxes. Focus should also be on the 
overriding objective of tax reform efforts globally to eliminate double non -taxation, 
while not creating double taxation”, “we consider all objectives of equal importance.  
Creating a tax system where a fair share paid by all companies is ensured without 
affecting, distorting or shifting the development of innovative activities or ideas” and 
“in close cooperation with OECD ensuring that EU solution should be a part of the 
global solution”.  
 
c.  Possible solutions  
 
The section on possible solutions was centered around the two sets of options which have 
been identified early on in the policy design stage: the short term, interim solutions and the 
long term, comprehensive solutions  and their possible impacts.  
The two step approach (namely the interim option first, followed by the comprehensive 
option) was tested with the respondents. 11 states believed that a interim option should be 
adopted until a more comprehensive solution is re ached, 7 states did not agree to that and 3 
had no opinion.  
Next, the national tax administrations were asked to identify to what extent each of the short 
term, interim solutions would solve current problems related to the international taxation rules 
for the digital economy.  
 
 Tax on revenues from digital activities:  Introduce a tax based on revenues generated 
from "digital activities": 9 respondents believe this option would solve the current 
problems to a great extent or somehow, 7 respondents believed that this option would 
not solve the problems at all or only to a little extent. 3 respondents didn’t know and 2 
gave no answer;   
 Withholding tax on certain types of digital transactions : Introduce a withholding 
tax based on payments to non -resident provid ers of goods/services ordered online: 7 
believe this option would solve the current problems to a great extent or somehow, 
while 8 believed that this option would not solve the problems at all or only to a little 
extent. 4 respondents didn’t know and 2 gav e no answer;    
 Tax on revenues from certain digital services : Introduce a tax based on the revenue 
from digital transactions concluded remotely with a non -resident entity that has a 
significant economic presence (e.g. revenue from the sale of online advert ising): 10 
respondents believe this option would solve the current problems to a great extent or 
somehow, 7 respondents believed that this option would not solve the problems at all 
or only to a little extent. 2 respondents didn’t know and 2 gave no answer ;  
 Digital transaction tax:  Introduce a tax that applies early in the value creation 
process (collection of personal and other data): only 4 respondents believe this option 
would solve the current problems to a great extent or somehow, while 9 respondents 
believed that this option would not solve the problems at all or only to a little extent. 6 
respondents didn’t know and 2 gave no answer;    
 
The national tax administrations were also asked to identify to what extent each of the long 
term, comprehensive so lutions would solve current problems related to the international 
taxation rules for the digital economy.  
 
 
95  Modify the Common Consolidated Corporate Tax Base proposal : Implement new 
permanent establishment and profit attribution rules through modifications  to the 
CCCTB proposal: 9 respondents believe this option would solve the current problems 
to a great extent or somehow, while 9 other respondents believed that this option 
would not solve the problems at all or only to a little extent. 3 had no opinion.   
 "Digital presence in the EU" proposal : Implement new EU rules for permanent 
establishment and profit attribution to capture digital activities of businesses in a 
stand -alone EU Directive: 14 respondents believe this option would solve the current 
problems  to a great extent or somehow, while 5 respondents believed that this option 
would not solve the problems at all or only to a little extent. 2 states had no opinion.  
 Destination -based corporate tax : Introduce the destination -principle to corporate 
taxation , according to which the jurisdiction to tax is based on the location of the 
consumer: 6 respondents believe this option would solve the current problems to a 
great extent or somehow, while a majority of 12 respondents believed that this option 
would not s olve the problems at all or only to a little extent. 3 administration had no 
opinion.  
 Unitary tax : Introduce a tax on a share of the world profit of digital companies which 
would be attributed to each country on the basis of the percentage of revenue earne d in 
that country: 6 respondents believe this option would solve the current problems to a 
great extent or somehow, while a majority of 13 respondents believed that this option 
would not solve the problems at all or only to a little extent. 2 states had no  opinion.  
 Residence tax base with destination tax rate : Introduce a system where profits of a 
company are declared and taxed in the Member State of establishment (as is the case 
today), but the applicable rate is the turnover -weighted average of the tax ra tes of the 
countries where the turnover is generated: only one respondent believes that this 
option would somehow solve the current problems, while an overwhelming majority 
of 17 states believed that this option would not solve the problems at all or only to a 
little extent. 3 states had no opinion.  
 Other options that have been identified by the respondents have been: “any problems 
that remain post BEPS implementation will be global problems. Any solution will 
need to be global in nature rather than being E U focused. Any long term measures 
must be evidence based and in line with global consensus”, “instead of location of the 
consumer, elements such as the user server capacity could also be used”, “the global 
discussion on the options to address the taxation of the digital economy is still 
unfinished and ongoing. Once the direction of the global solution is known the options 
presented as the long term solutions should be reassessed. Overall, the entire global 
value chain and its impact on how taxes should be p aid to different jurisdictions 
should be born in mind when considering different options. It would also be essential 
to recognize the different business models within the digitalized economy. The legal 
and technical feasibility as well as economic impact o f the possible responses should 
be assessed. Further, it should be noted that due to the development of the digital 
economy and to ensure effective taxation of cross -border e -commerce the EU VAT 
system has been modernized considerably during the last years . Based on this cross -
border e -commerce sales of services and goods are taxed extensively in the Member 
State of consumption”.  
 
To sum up the preference of respondents for the different options, in a similar manner as done 
for the open public consultation,  the figure below presents the results of the Member States' 
questionnaire, in a very simplified manner. Those who “somehow” believe or believe “to a 
 
96 great extent ” that an option would solve the current problems have been considered 
supporters of the respe ctive option and included under the “For” column. Those   who believe 
“to a little extent ” or “not at all” that an option would solve the current problems have been 
considered opponents of the respective option and included under the “Against” column. 
Give n the relatively big number of those that either had no opinion or chose “no” to answer 
some of the questions, a third column was added in order to represent their choice.   
Table (3). Respondents' preferences for the options - Member States' questionnaire  
Option name  For Against  No opinion  
Interim,  temporary solutions  
Tax on revenues from 
digital activities  9 states  7 states  5 states  
Withholding tax on 
certain types of digital 
transactions  7 states  8 states  6 states  
Tax on revenues from 
certain digital  services  10 states  7 states  4states  
Digital transaction tax  4 states  9 states  8 states  
Long term, comprehensive solutions  
Modify the Common 
Consolidated Corporate 
Tax Base proposal  9 states  9 states  3 states  
“Digital presence in the 
EU" proposal  14 states  5 states  2 states  
Destination -based 
corporate tax  6 states  12 states  3 states  
Unitary tax  6 states  13 states  2 states  
Residence tax base with 
destination tax rate  1 state  17 states  3 states  
The final question was if Small and Medium Enterprises (SMEs) should be exempt from a 
possible digital tax. 11 administrations believed that they should be exempted, while 6 
administrations opposed this. 4 administrations had no opinion on this topic.   
3.  Other consultation activities  
 
a. Commission activities  
 
At the beginning of the process, once the Commission published the inception impact 
assessment, the document that established the general lines of the proposal, 2 contributions 
have been received: one  of them asking for more clarifications on the basic concepts used in 
the document and the other one asking to exclude the small and medium enterprises (SMEs) 
from the scope of the proposal. Both of these requests have been dealt with in the analysis 
inclu ded in the report.  
14 position papers have been sent to the functional mailbox of the initiative. They are similar 
in content and to the contributions received as part of the open public consultation, and have 
been analyzed in a similar manner.   
  
 
97 b. OECD r equest for input and public consultation  
Box: OECD public consultation  
The OECD organised a request for input on work regarding the tax challenges of the 
digitalised economy from September to October 2017 in the context of  the ongoing work of 
the Task Forc e on the Digital Economy (TFDE).  
The request for input presented the background on the work regarding the tax challenges of 
digitalisation from the BEPS Action 1 report. The Action 1 report, was released in October 
2015 as part of the OECD/G20 Base Erosion and Profit Shifting (BEPS) package. This report, 
developed by the TFDE, was subsequently endorsed by the G20 Leaders in November 2015 
and by more than 100 countries and jurisdictions participating in the Inclusive Framework on 
BEPS.  
 
The request for input covered the following topics:  
-Digitalisation, business models and value creation: the impact of digitalisation on business 
models, value creation, the role of intangibles and data collection and analysis.  
-Challenges and opportunities for tax systems: unc ertainty and administrative burdens 
associated with the existing international tax framework, implications of highly digitalised 
business models and their value chain on taxation policy, including on existing tax bases and 
the distribution of taxing rights  between countries.  
-Implementation of the BEPS package: the impact of BEPS measures implemented, including 
VAT, on BEPS risks and the broader tax challenges.  
-Options to address the broader direct tax policy challenges: assessment of the pros and cons 
of the options identified in the BEPS Action 1 report, including the tax nexus concept of 
significant economic presence, the withholding tax on certain types of digital transactions and 
the digital equalisation levy.  
 
The form of the request for input relied on open questions.  
The OECD publicly released all 53 written submissions received. The majority of the 
submissions were received from businesses/business associations, academics and law and 
consulting firms.  
 
In addition, the OECD organised a public consultation on 1 November 2017.  
The main views commonly expressed, at least within certain groups of stakeholders, can be 
summarised as follows:  
- Many stakeholders across groups expressed the opinion that digital business models 
first need to be well understood before the tax consequences of digitalisation can be 
determined and any reform proposals can be made.  
- Many businesses expressed the view th at, before acting, it is appropriate to wait to see 
the full effects of the BEPS implementation. Especially given that public 
administrations are only beginning to learn about the ways in which businesses are 
responding to the BEPS package.  
- Long term, comp rehensive and multilateral solutions are preferred to short term 
measures, which risk creating distortions, undermine the existing international tax 
framework and are likely to lead to double taxation.  
- The views expressed showed a lack of agreement concern ing the most suitable long 
term solutions. This was confirmed during the consultation meeting held on 1 
November 2017.  
  
 
98 ANNEX 3: WHO IS AFFECTED AND H OW? 
 
The objective of this annex is to set out the practical implications of the initiative for differen t 
types of companies and for national tax administrations.  
The initiatives directly affect companies falling under the scope of the comprehensive 
solution or of the interim solution in absence of the former.  
I. Overview of Benefits (total for all provisio ns) – Preferred Comprehensive Option  
Description  Amount  Comments  
Direct benefits  
Level the playing 
field ++ Businesses would benefit from a 
more level playing field as the 
revision of the rules would remove 
distortions of competition and fight 
aggressive tax planning.  
Fair distribution 
between national 
administrations  + Correcting the existing misalignment 
of taxation and value creation would 
contribute to a fairer distribution of 
tax revenues between national tax 
administrations.  
Sustainable  public 
finances  + National tax administrations would 
benefit from a positive impact on 
public finances as the solution will 
contribute to the long -run 
sustainability of the corporate tax 
system.  
 
Indirect benefits  
Improve the 
perception of 
fairness  + The solution would improve the 
perception of fairness for citizens  by 
ensuring that large companies with 
significant digital activities do not 
escape their taxes in the EU.  
 
II. Overview of Benefits (total for all provisions) – Preferred Interim Option  
Description  Amount  Comments  
Direct benefits  
Preserve the 
integrity of the 
single market  + By avoiding the fragmentation of the 
single market, it will provide a stable 
tax framework for businesses active 
in the EU.  
Improve public 
finances  + It will be an additional source of 
revenues to national tax 
 
99 administrations, although overall 
revenues are expected to be 
moderate.  
Indirect benefits  
Improve the 
perception of 
fairness  + This would improve the perception 
of fairness for citizens and 
consumers by ensuring a minimum 
level of taxation in the EU for 
companies that rely the most on user 
contributions and data.  
 
 
III. Overview of costs – Preferred options  
 Consumers  Businesses  Administrations  
One-off Recurrent  One-off Recurrent  One-off Recurrent  
Comprehe
nsive 
solution    Direct 
costs  n/a n/a Increase in 
the 
regulatory 
and 
compliance 
burden for 
businesses 
falling under 
the scope of 
the solution 
to set up 
reporting for 
new 
permanent 
establishmen
ts Increase in 
the 
regulatory 
and 
compliance 
burden for 
businesses 
falling under 
the scope of 
the solution.  Costs for 
implemen
ting the 
new 
system, 
notably on 
IT. 
 
Costs for 
negotiatin
g double 
tax 
treaties.  Costs for IT 
maintenanc
e and staff 
training.  
Indirect 
costs  n/a n/a n/a n/a n/a n/a 
Interim 
solution   
Direct 
costs  n/a n/a Large 
companies 
above the 
thresholds 
would face 
one-off cost 
to adapt to 
the reporting 
requirements 
in the 
Member 
States in Large 
companies 
above the 
thresholds 
would have 
to pay the 
tax. 
Reporting 
requirements 
to compute 
the tax base 
in the Costs for 
implemen
ting the  
new 
system, 
notably on 
IT. Costs for IT 
maintenanc
e and staff 
training.  
 
100 which they 
are active.  
 
No costs for 
SMEs  Member 
States in 
which large 
companies 
are active.  
 
No costs for 
SMEs  
Indirect 
costs  Possible 
increase in 
prices if 
companies 
pass on the 
cost of the 
tax, 
although this 
should be 
limited.  n/a n/a n/a n/a National 
tax 
administrati
ons may 
wish to 
invest in 
additional 
resources to 
prevent 
under -
reporting. 
In 
principle, 
the self -
declaration 
system 
would limit 
these 
additional 
costs.  
 
 
 
Comprehensive solution  
All business sizes would be affected by the tax as  there would no group size threshold 
proposed for this Directive. It could therefore also cover smaller businesses that have a large 
digital footprint in one or more Member States.  
In a first step, all companies active in the EU and running digital activi ties would have to 
determine whether they fall under the application, depending on the level of digital activities 
falling under the scope of the comprehensive solution, the number of active users and/or the 
number of online contracts. This would require s ome additional burden e.g. to split revenues 
issued from the relevant digital activities with revenues from other activities, to identify and 
report the number of active users of the digital service in a Member State in a tax year and/or 
the number of onli ne contracts. Businesses falling under the scope of the solution will face an 
increase in the regulatory and compliance burden to set up reporting for new permanent 
establishments (one -off costs).  
Large companies would be affected by the comprehensive sol ution. Recurrent reporting and 
compliance requirements would generate extra costs for large companies. However, it is 
 
101 likely that large companies operating across borders have internal resources to cope with the 
additional administrative requirement.  
Smal l and medium sized enterprises  may be affected by the comprehensive solution as they 
are not de facto excluded from the scope. However, the criteria set to trigger a digital 
permanent establishment would limit the effective application of the tax to larger  companies 
that have significant digital activities. Determining whether they fall under the scope of the 
tax may be quite burdensome as young, seed enterprises and start -ups may not have the 
internal resources already in place to cope with the administrat ive obligations. However, the 
criteria to determine whether a company falls under the scope of application (i.e. triggering of 
a digital permanent establishment are based on observable indicators and available 
information (contracts, IP addresses etc.) whi ch should limit the additional burden.  
National tax administration s would also incur costs for implementing the new system, 
notably on IT and staff training to be able to apply the new  permanent establishment and 
profit allocation rules to reflect the digital activities in that Member State. The 
implementation of the CCCT B should already provide a solid framework for the tax 
administration on which to rely on. There will also be a need to coordinate in the EU the 
uniform implementation and practical application of the new rules.  
National tax administrations may also face additional costs for negotiating double tax treaties.  
Interim solution  
In a first step, all companies active in the EU and conducting digital activities would have to 
determine whether they fall under the application, depending on the threshold on consolid ated 
revenue and the EU threshold on digital activities falling under the scope of the interim 
solution.  
The fairly high revenue threshold envisaged under the preferred option would imply that only 
a small share of groups would be subject to application. B y means of example, for a threshold 
of EUR 750 million the application may be compulsory for an estimated 1.6% of company 
groups. Considering that the digital economy currently constitutes about 5% of the total 
economy and that the EU threshold on relevant  digital activities would also apply, the share of 
affected company groups would be significantly reduced.   
In the case of a self -assessment system, it is expected that the persons liable to pay the tax 
would submit a tax return on a regular basis, for in stance following every month or quarter of 
taxable activities. In general, in the digital economy, transactions are mostly carried out online 
so the taxpayers accounting systems can calculate automatically the amount of tax that is due, 
thus contributing t o lowering the compliance costs. One could also look into the potential for 
market -based solutions and synergies to assist compliance, such as IT software provision and 
database solutions.  
Large companies  above both the global turnover threshold and the threshold on digital 
activities would face additional reporting requirement to compute the tax base in the Member 
States in which they are active, i.e. notably adapting the financial reporting to split revenues 
issued from the relevant digital activities w ith revenues from other activities and allocating 
internally revenues to various proxies such as number of active users, IP addresses. Possibly, 
the general ledger of accounting would need to be adapted to include more granularities. 
However, the additiona l information may not necessarily require additional assurance 
 
102 processes/auditing requirements as annual reports, signed by statutory auditors, already 
disclose financial information split by geographical location and activities.  
Small and medium sized ent erprises  will not be impacted given the existence of the global 
threshold. They will not face additional compliance burden in relation to the application of the 
new tax.  
National tax administration s would also incur costs for implementing the new system, 
notably on IT and staff training. The self -declaration system would in principle limit the 
additional costs.  However, national tax administrations may have to invest on additional 
resources (human and tools) to prevent under -reporting. There will also be a need to 
coordinate in the EU the uniform implementation and practical application of the new rules, 
notably in the view of limiting possible disputes.  
The application of the new tax should generate additional tax revenues for national tax 
administration s.  
Consumer prices are likely to increase following the implementation of the new tax. The 
extent to which the tax will be shifted into final consumer prices depends of the price 
elasticity of the demand. A pass -on rate of one -half has been documented for  paper -based 
books and e -books83. However, evidence from online retail where consumers purchasing 
online are price sensitive and react strongly to price increases, let suggest that the possibility 
for companies to pass additional tax onto consumer prices wi ll be limited.  
 
 
 
 
 
 
 
 
 
 
 
                                                 
83 See European Commission (2012) – Economic Study on Pu blications on all Physical Means of Support and 
Electronic Publications in the context of VAT, p. 98  
(https://ec.europa. eu/taxation_customs/sites/taxation/files/docs/body/economic_study_vat_on_publications_final
report.pdf ). The pass -on rates vary also country -wise – op. cit., pp. 95 -96. 
 
 
103  
Table 1: Compliance time and cost for setting up a new subsidiary (Large parent)  
Large Parent  
  Current regime  CCTB  CCCTB  
  Time  Cost Time  % Diff.  Cost % Diff.  Time  % Diff.  Cost % Diff.  
Record keeping for corporate tax purposes  5 261 3 740.60  3 063 -41.79%  2 992.46  -20.00%  3 592 -31.73%  5 708.94  52.62%  
Transfer pricing documentation  22 255 36 165.74  22 162 -0.42%  36 143.08  -0.06%  0 -100.00%  0.00 -100.00%  
Preparation of corporate tax computations  4 049 2 750.04  1 976 -51.19%  2 190.86  -20.33%  4 256 5.11%  4 761.47  73.14%  
Prepayments for corporate tax  907 965.56  771 -14.99%  793.10  -17.86%  2 450 170.18%  2 662.13  175.71%  
Corporate tax returns and payments  1 080 1 131.27  987 -8.58%  1 005.12  -11.15%  3 085 185.73%  3 505.17  209.84%  
Dealing with the tax authorities for corporate tax  19 009 37 365.70  16 616 -12.59%  35,038.00  -6.23%  10 509 -44.71%  30 200.90  -19.17%  
Mutual agreement procedures on transfer pricing  8 823 17 618.47  8 841 0.20%  17 677.73  0.34%  0 -100.00%  0.00 -100.00%  
Clearances and rulings for corporate tax  14 430 34 912.77  14 541 0.77%  34,928.95  0.05%  1 288 -91.08%  3 996.90  -88.55%  
Learning and education for corporate tax  10 000 5 220.08  8 264 -17.37%  5 388.20  3.22%  1 469 -85.31%  2 104.33  -59.69%  
Any other cross -border corporate tax compliance formality  1 548 733.76  1 548 0.00%  733.02  -0.10%  0 -100.00%  0.00 -100.00%  
Total estimated time spent/cost  87 362 140 603.97  78 768 -9.84%  136 890.52  -2.64%  26 649 -69.50%  52 939.85  -62.35%  
Total estimated cost (% turnover)    0.23%      0.22%        0.09%    
           
 
 
 
104  
Table 2: Compliance time and cost for setting up a new subsidiary (Medium -sized parent)  
Medium -sized Parent  
 Current regime  CCTB  CCCTB  
 Time  Cost Time  % Diff.  Cost % Diff.  Time  % Diff.  Cost % Diff.  
Record keeping for corporate tax purposes  5 147 3 653.23  3 034 -41.05%  2 957.01  -19.06%  3 178 -38.26%  4 490.57  22.92%  
Transfer pricing documentation  19 962 30 192.40  19 337 -3.13%  30 625.38  1.43%  0 -100.00%  0.00 -100.00%  
Preparation of corporate tax computations  4 023 2 253.53  1 954 -51.42%  1 778.82  -21.07%  3 301 -17.94%  2 862.65  27.03%  
Prepayments for corporate tax  896 636.81  760 -15.20%  524.54  -17.63%  1 880 109.73%  1 497.66  135.18%  
Corporate tax returns and payments  1 075 871.48  987 -8.15%  790.31  -9.31%  2 433 126.34%  2 427.03  178.50%  
Dealing with the tax authorities for corporate 
tax 18 686 32 968.18  16 347 -12.51%  30 604.60  -7.17%  10 675 -42.87%  24 889.54  -24.50%  
Mutual agreement procedures on transfer 
pricing  8 609 17 076.44  8 434 -2.03%  17 115.31  0.23%  0 -100.00%  0.00 -100.00%  
Clearances and rulings for corporate tax  13 893 34 175.02  14 083 1.37%  34 188.34  0.04%  1 266 -90.89%  3 958.48  -88.42%  
Learning and education for corporate tax  9 997 5 201.14  8 422 -15.75%  5 579.09  7.27%  1 450 -85.49%  2 064.35  -60.31%  
Any other cross -border corporate tax 
compliance formality  1 459 677.86  1 395 -4.42%  674.05  -0.56%  0 -100.00%  0.00 -100.00%  
Total estimated time spent/cost  83 747 127 706.09  74 754 -10.74%  124 837.45  -2.25%  24 184 -71.12%  42 190.28  -66.96%  
Total estimated cost (% turnover)    0.55%      0.54%        0.18%    
Source for Tables 1 and 2: Impact assessment accompanying the CCCTB proposal (SWD(2016) 341) based on the Deloitte Tax Expert s survey.  
Note:  Time in minutes. Costs in Euros. Average of all investment flows  
 
105 ANNEX 4: ANALYTICAL METHODS  
 
CORTAX:  A MODEL TO SIMULATE CO RPORATE TAX POLICIES   
 
BRIEF DESCRIPTION OF  THE MODEL  
 
The CORTAX model is a computable general equilibrium model designed to evaluate the 
effects of corporate tax reforms in 28 EU countries capturing the optimal behaviour of all 
agents in the economy. In the model, each country is assumed to have the same structure in 
terms of consumption, savings, production and public finances (though the data are country -
specific). Countries are linked to each other via international trade in goods markets, 
international goods markets and investment by multinationals. The model also includes Japan, 
USA and a tax haven.  
Firms are divided into three categori es: multinationals headquarters, their subsidiaries 
located abroad and domestic firms that only produce in their country of residence. 
Multinationals and domestic firms differ to the extent that the former optimise profits globally 
and are engaged in profi t shifting activities across borders. Domestic firms pay their corporate 
taxes in their country of residence according to the revenues generated in this country only. 
Both domestic and multinational firms shift profits to tax haven to reduce their tax burd en. In 
the benchmark, all firms are equal and, whilst on aggregate taxable profits are positive, there 
are random shocks affecting their revenues that can be attributed to, for example, business 
cycle evolutions. These shocks may result in losses that can be carried forward in the model.  
In relation to government, there is a balanced budget where consumption and public debt 
are a fixed proportion of GDP. Tax revenues and/or transfer payments adjust to keep constant 
public budget. The taxes included in CORT AX are consumption taxes and direct taxes on 
income from corporate and labour, dividends, capital gains and interest. Government 
consumption and government debt as a share of GDP are maintained constant after a reform.  
The effects of reforms can be express ed as changes in GDP, household consumption, 
business investment and fiscal revenue. The model is elaborated using data from different 
data sources including Eurostat, the OECD, the United Nations, the IMF and the Orbis firm 
database (see section 4.2 below  for more details). In the present exercise, the model has been 
constructed with a database for the year 2012. The structural description of the model and the 
calibration process borrow heavily from Bettendorf et al. (2009b).  
 
MODEL VALIDATION AND  PEER RE VIEW  
The CORTAX model has acquired a strong reputation among corporate tax experts. As noted, 
the model was originally produced by CPB Netherlands, and has since been used by experts 
affiliated to the Oxford University Centre for Business Taxation, the Era smus University 
Rotterdam, the Tinbergen Institute and CESifo. The model was previously used in an Impact 
Assessment (European Commission, 2011), which drew extensively from a report produced 
 
106 for DG TAXUD (Bettendorf et al., 2009b). Among other policies, t he report analysed both a 
common corporate tax base and a common consolidated corporate tax base for the EU.  
The CORTAX model has been the basis for a number of publications in peer -reviewed 
journals. Of particular note is Bettendorf et al. (2010a) in Economic Policy  which simulates a 
common consolidated corporate tax base (CCCTB) across the EU, with further innovations of 
the ideas subsequently published in Fiscal Studies  (Bettendorf et al., 2010b). The issue of 
using CORTAX to analysis debt bias in corpo rate taxation was addressed in de Mooij and 
Devereux (2011) published in International Tax and Public Finance . An earlier publication in 
The World Economy  used CORTAX to analyse the impact of corporate taxation on the labour 
market (Bettendorf et al., 2009 a). That the model has stood up to the rigorous standards 
required to be accepted by journals of this quality reflects the level of the theoretical and 
empirical work underlying the model, and that it is appropriate for analysing key policy 
questions in th e area of corporate taxation.  
 
 
DISCUSSION WITH EXTE RNAL EXPERTS  
 
As noted in the previous section, the CORTAX model has been accepted within the corporate 
taxation community for some years. The model has been used by leading research institutes 
and universities, and work based around the model has been accepted for publication in high -
level, peer -reviewed academic journals in the area of fiscal policy.  
Since this earlier body of work, the model data has been updated by the Tax Modelling 
Group in JRC -Seville. This extensive recalibration process has been carried out in conjunction 
with external experts, as appropriate. The team has collaborated closely with Leon Bettendorf 
(CPB Netherlands), one of the original authors of the model, and lead author for  many of the 
reports and journal articles. Regarding the calibration, the team has worked with Simon 
Loretz (Institute for Advanced Studies, Vienna), who produced much of the data for the 
previous calibration of the model during his time at the Oxford Univ ersity Centre for Business 
Taxation, and was a co -author for the report that formed the basis of the 2011 Impact 
Assessment (European Commission, 2011).  
 
UNDERLYING ASSUMPTIO NS AND DATA INPUT  
 
a) Baseline and key assumptions  
In CORTAX, we account for two typ es of households: old and young. Their lifetime is 40 -
year periods each and their behaviour remains the same during the whole period.  Households 
maximise their intra -temporal utility function subject to a budget constraint, where net savings 
from young wo rkers (wages, current transfers and negative consumption) are equal to 
negative value of net savings from old households. The effects on welfare are calculated using 
the compensating variation. This is calculated as the difference in transfers received by young 
households required to compensate the change in utility  
 
107 Firms maximise their value subject to the production function and the accumulation 
constraints on physical capital and fiscal depreciation. Total production is calculated as the 
sum of productio n in all firms (domestic and multinationals) net of intermediate inputs in 
foreign subsidiaries. Usually, the production function is a Cobb Douglas combination of the 
fixed factor and the value added, which is a CES aggregate of labour and capital. The mod el 
allows the parent company to charge a transfer price for intra -firm deliveries that deviates 
from the equivalent price that would be charged if it had been an inter -firm transaction (the 
‘arms -length’ price), which reflects profit shifting in multinatio nals. In the case of domestic 
firms, these practices are captures with the existence of a tax haven. Profit shifting to tax 
havens depends on the difference between the statutory rate in their respective countries and 
the tax rate in the tax haven.  
 
b) Key s ources of macroeconomic and socio -economic data  
 
The current calibration largely uses the same data sources as the original calibration of 
CORTAX as outlined in Bettendorf and van der Horst (2006), though in a few cases 
alternatives were used if these were  considered more reliable, or the original source was no 
longer available. The year 2012 data was chosen as reference year for the calibration, as it 
represented a good compromise between timeliness and completeness. The countries covered 
are the 28 EU mem ber states, the United States and Japan.  
Population and employment statistics come from the United Nations and national 
accounts data on income and expenditure are collected from OECD and Eurostat. Purchasing 
power parity (PPPs) exchange rates are from th e IMF and Eurostat and general government 
consolidated gross debt as a percentage of GDP is from DG ECFIN’s Ameco Database. 
Additionally, CORTAX needs bilateral FDI positions as part of the calibration. For these, we 
start with the Eurostat bilateral posit ions. Data on Foreign Direct Investment (FDI) flows by 
country of origin and country of receipt are from Eurostat (financial account, direct 
investment, reporting economy, database table bop_fdi_pos_r2). As a number of countries 
have incomplete information  on the country of origin of the inward FDI stock, we impute 
these values following the practice in Bettendorf and van der Horst (2006), and a correction is 
made when the FDI data represent special purpose entity activity.  
Finally, CIT receipts as a percentage of GDP are from European and the OECD while 
information on balance sheets and ownership structure are extracted from the Orbis database, 
provided by Bureau Van Dijk. Although Orbis is a firm -level database, for the purposes of the 
calibration it  is only used to produce national -level estimates of debt shares and of corporate 
investment shares (by type of asset) so as to calculate relevant corporate tax parameters such 
as the cost of capital (financed via equity or debt).  
 
c) Construction of the base line and core policy simulations   
 
The data described above is entered into the model, which provides a consistent and 
connected framework for firms, household and governments. The data and the current policies 
of each country are used to replicate the cor porate taxation regime, and indeed the production 
structure and household behaviour. The corporate taxation regime is necessarily stylised (for 
 
108 example, not every deduction can be included), though we confirm that at a macro -level the 
CIT regimes are repli cated well.  
The core simulations have been chosen to reflect the potential to build upon the policy 
options for harmonisation of corporate tax bases in the EU. Following the proposal (European 
Commission, 2015), the underlying reform considered is the comm on consolidated corporate 
tax base (CCCTB), which is assumed to be mandatory for multinationals only in these 
simulations. The CCCTB proposal offers a holistic solution to profit shifting. It combines a 
common tax base together with consolidation of each m ultinational group's profit, removing 
the incentive to engage in profit shifting. Further details are available in Álvarez -Martínez et 
al. (2016).  
Building on this basis, the CCCTB formula is adjusted to account for the digital 
presence, which is proxied using web page visits based on data from SimilarWeb.  
 
 
d) Sensitivity of model results and likely robustness to changes in the 
underlying assumptions and/or data input  
 
Extensive sensitivity analysis has been conducted around the CCCTB policy simulations (see  
Álvarez -Martínez et al., 2016). These simulations provide additional insights into the 
consequences of altering the model assumptions or policy choices, and offer a strong test of 
the robustness of the results. The types of sensitivity analysis are as fol lows: (i) implementing 
the common corporate for all firms, rather than just multinationals, (ii) alternative definitions 
of the common tax base, (iii) stricter control on profit shifting, (iv) alternative choices for 
capital -labour substitutability, (v) le ss compliance cost saving from consolidation, (vi) 
compensate revenue with labour taxes, instead of changing transfer payments and (vii) 
discrete location choice for firms.  
Regarding the adjustments to the CCCTB formula to incorporate digital presence, 
various scenarios are presented. These indicate well the scale of the impact of such a policy, 
and the sensitivity of the results to the share of the formula determined by digi tal presence.  
 
 
 
 
 
 
 
 
 
 
109 REFERENCES  
 
Álvarez -Martínez, María T., Salvador Barrios, Diego d'Andria, Maria Gesualdo, Dimitris 
Pontikakis and Jonathan Pycroft (2016), “Modelling corporate tax reform in the EU: New 
calibration and simulations with the CORTAX model,” Taxation Papers No. 66. European 
Commission.  
Bettendorf, Leon and Albert van der Horst (2006), “Documentation of CORTAX”, CPB 
Memorandum, No. 161, Netherlands Bureau for Economic Policy Analysis.  
Bettendorf, Leon, Albert van der Horst and Ruud A. d e Mooij (2009a), "Corporate Tax Policy 
and Unemployment in Europe: An Applied General Equilibrium Analysis," The World 
Economy , p.1319 -1347.  
Bettendorf, L., van der Horst, A., de Mooij, R., Devereux, M and Loretz, S. (2009b), “The 
economic effects of EU -reforms in corporate income systems”, Study for the European 
Commission Directorate General for Taxation and Customs Union, Contract No. 
TAXUD/2007/DE/324, October.  
Bettendorf, Leon, Michael P. Devereux, Albert van der Horst, Simon Loretz and Ruud A. de 
Moo ij (2010a), "Corporate tax harmonization in the EU," Economic Policy , July pp.537 –590. 
Bettendorf, Leon, Albert van der Horst, Ruud A. de Mooij and Hendrik Vrijburg (2010b), 
"Corporate Tax Consolidation and Enhanced Cooperation in the European Union," Fiscal 
Studies , vol. 31, no. 4, pp. 453 –479. 
De Mooij, R.A. and Devereux, M.P. (2011), "An applied analysis of ACE and CBIT reforms 
in the EU," International Tax and Public Finance , 18:1, 93 -120. 
European Commission (2011), Commission Staff Working Document, I mpact Assessment. 
Accompanying document to the Proposal for a Council Directive on a Common Consolidated 
Corporate Tax Base (CCCTB). COM(2011) 121 final. SEC(2011) 316 final. Brussels, March 
16. 
European Commission (2015), “A Fair and Efficient Corporate T ax System in the European 
Union: 5 Key Areas for Action”, Communication from the Commission to the European 
Parliament and The Council, COM(2015) 302 final.  
 
 
 
  
 
110 ANNEX 5: SPECIFICITIES OF DIGI TAL BUSINESS MODELS IN RELATION 
TO TAXATION  
 
 
i. THE DIGITAL 'SECTO R' 
 
There is no well -defined digital sector as such. Notably, the Information and 
Communication Technology (ICT) sector is no synonym for the digital economy. Rather, one 
might consider the ICT sector as the backbone of the digital economy (and driving the  
digitalisation of more traditional industries). T he ICT sector comprises both manufacturing 
activities and services, though services represent more than 90% of the total production. 
Computer and related activities is by far the largest sub -sector, followed by 
Telecommunications. ICT services are also gro wing at much faster rates than the ICT 
manufacturing (European Commission, 2017b).  
Figure (1): Value added in the ICT sector in the EU -28 (2014)  
 
 

 
111 Digital companies should not be considered pre -dominantly as ICT companies. Many 
companies commonly consid ered as digital companies do not actually belong to the ICT 
sector. The 2017 World Investment Report (UNCTAD, 2017a and 2017b) has developed a 
methodology to classify international companies into (1) digital companies, (2) IT and 
telecoms companies (both e nablers of the global digital economy) and (3) 'other multinational 
companies'.  IT and telecoms companies are broadly equivalent to the ICT sector. They are 
either IT hardware manufacturers or software developers/providers of IT services, or they are 
provi ders of telecommunication infrastructure and connectivity. Digital companies are 
characterised by the nature of their operations, which are strongly linked to the internet. The  
report distinguishes between providers of internet platforms, e -commerce, digi tal solutions 
and digital content.  
Focussing on the top companies in each category clearly shows the much more dynamic 
revenue growth in the digital sector.  Based on a unique assignment of companies into one 
of the categories, UNCTAD (2017b) has produced new lists of top 100 multinationals in the 
categories 'IT and telecoms' and 'digital'.84 Table (1) reports summary statistics for the largest 
companies in each category. Average revenue growth was around 14% for the top digital 
firms, compared to around 3% for IT and telecom enterprises and 0.2% for other 
multinational enterprises, although total revenue by the largest digital companies is still 
considerably lower than that of the other sectors. The table also reports the 'international 
footprint' and the re levance of intangible assets, discussed in the next subsection.  
Table (1): Revenue growth, international footprint and relevance of intangible assets of 
largest multinational companies  
Type of MNE  Total revenue  Annual 
revenue 
growth  International 
footprint  Relevance of 
intangible assets  
Digital  872 14.2%  2.1 3.1 
IT&Telecoms  2825  3.1%  2.2 1.2 
Other  5682  0.2%  1.1 1.4 
Source : Own computations based on UNCTAD (2017a and 2017b) and  
Notes: Total revenue for the latest available year for the top companies in each category in $ billion. 'Digital' 
and 'IT&Telecoms' each consist of 100 companies. The category 'Other' only includes 83 companies, since some 
of the companies on UNCTAD's usual list of top 100 global companies belong to the first two categories. Annua l 
average growth is measured over the latest 7 available years. International footprint is the ratio of the share of 
foreign sales in total sales to the share of foreign assets in total assets.  The relevance of intangible assets is 
computed as the market c apitalisation over equity book value minus 1.  
 
 
 
                                                 
84 As the focus in UNCTAD (2017b) is on international investment, only companies which e xceed a certain 
threshold of international activity are considered. Furthermore, the companies need to report certain information 
in their publicly available financial accounts.  
 
112 ii.  SPECIFICITIES OF DIGI TAL BUSINESS MODELS IN RELATION TO TAXAT ION 
 
The main characteristics of digital business models - as compared to more traditional ones - 
are their ability to conduct activities remotel y, the contribution of internet users in their value 
creation and the importance of intangible assets.  
(a) Limited physical presence  
Businesses in the digital economy can easily conduct activity remotely and are therefore 
very active in cross -border trade.  Little  physical presence is required  to sell into a market 
From one click on the computer, consumers can order goods and services from all over the 
world, translating into new market reach. For digital services more specifically, this is even 
more acute a s the delivery of the service itself requires no or little physical presence.  
Digitalisation also changes the nature of exchange by blurring the lines between goods and 
services , transforming products to their digital representation such as e -books or usin g the 
little material as in 3D printing.  
Digitalisation is profoundly changing the structure of businesses.  Primary activities such 
as outbound logistics, marketing, sales and services that traditionally constitute an important 
part of the value chain/syst em (Porter, 1985) are going through a process of dematerialisation. 
Such activities were mostly conducted locally in the destination location, and are now 
conducted remotely in the country of origin (at source), although increasingly relying on 
consumer in formation from the destination country. One observes a disintermediation process 
– also referred as a 'scale without mass'  business structure. The disintermediation no longer 
allows the destination country to tax the profit generated from the sales/marketi ng activities, 
although the consumers/users in the destination country play an important role through their 
provision of data and other user contributions.  
As a result, businesses of the digital economy have a fundamentally different 
international footpri nt, with far fewer assets in the location of their foreign sales. One 
way to measure this phenomenon is by measuring the share of foreign assets in total assets 
against the share of foreign sales in total sales.  
International footprint = (foreign sales/tot al sales)/(foreign assets/total assets)  
Doing so for the three categories of largest global companies (see Table 1 above) shows that, 
compared to the traditional non -IT companies, digital companies, have a much larger share of 
sales earned outside their ho me country relative to the assets they hold abroad compared to 
traditional multinational enterprises. The 2017 World Investment Report provides a more 
detailed breakdown which helps arriving at a clearer picture. Figure 2 reports ratios for the 
different b usiness models used in the report. The international footprint is particularly 
striking, with values exceeding 2.0, for internet platforms (search, social networks or other 
platforms), electronic payment companies and companies classified as 'other e -comme rce', 
which includes for example major travel platforms. In contrast, telecom companies, 
traditional businesses and online retailers, but also providers of digital media have overall a 
balanced ratio of around 1.  
 
113 
Figure (2): The internet intensity matrix and the foreign sales/assets ratio  
Source: ©UNCTAD 2017 World Investment Report (UNCTAD, 2017a), based on UNCTAD’s FDI/MNE 
database, company reports and data from Bureau van Dijk Orbis database and Thomson ONE .  
Most of these remote activities by large gl obal companies are conducted from non -EU 
locations. Only 50% of the affiliates of digital multinational enterprises are foreign -based, 
indicating the reduced need to be physically present abroad – for other (traditional) 
multinationals the share is 80%.85 Large digital multinationals are particularly concentrated in 
the United States. From the top 100 digital multinational enterprises, two -thirds had their 
headquarters in the United States, whereas for tech companies and other multinationals the 
share was only 20%.86 
(b) Disruption in value creation and indirect revenue generation  
The relevance of user contributions is central , materialising through the mass of adopters, 
the production of data and other forms of user contributions to the production process.  
Participating in a platform or a network creates a value.  As opposed to the conventional 'value 
chain' business model where value is generated by the supplier of a product or a service, a 
large part of the value derived by users of an online platform's is created by other users. This 
                                                 
85 In this comparison, digital multinationals are those with business models 'd igital content', 'e -commerce', 
'digital solutions' and 'internet platforms' in the diagram in Figure (3).  
86 UNCTAD 2017 World Investment Report (UNCTAD, 2017a).  
 
114 is particularly true for multi -sided platforms. The effects that one user of a good or service has 
on their value to other users are known as network effects'87 (i.e. the marginal benefit of 
adopting the service increases with t he number of users).  
Digital platform models have moved from the traditional linear structure (from 
production to after -sales services), to the development of an ecosystem.  This involves 
different skills, sources of power, strategic assets, market values a nd sources of growth (see 
Table 2). Instead of monitoring a value chain, digital platforms need to manage a community 
of providers and users to increase their network. In other words, instead of maximising the 
value of individual consumers, the platforms n eed to maximise the value of a network of 
transactions.88 This translates in an increase in the value of the company or service, exceeding 
the proportional increase in the number of users.  
Table (2): Differences in business models in the industrial and digi tal economies  
 Industrial Economy  Digital Economy  
Focus  Product  Platform  
Structure  Value chain  Ecosystem  
Source of 
Power  Monitoring and control 
of the value chain  Governance and 
architecture of the 
platform  
Economic 
model  Economies of scale on 
the supply side  Economies of scale on 
the demand side  
Strategic 
assets  Physical assets  Ecosystem capacity, 
platforms attractiveness  
Market 
value  Return on assets  Return on transactions 
within the ecosystem  
Source of 
growth  Organic growth or 
acquisitions  Network effects  
 
Source: Accenture (2016).  
The concept of 'prosumers' is emerging where the end -user participates in the value 
creation.89 The end -user is no longer solely a consumer but contributes, either actively or 
passively, to the value creation.90 The consumer may receive services for free, but also 
provides data that are valuable for a company or contributes more actively to the service, for 
example by uploading content. This is a phenomenon that Colin (2013) associates to a form of 
                                                 
87 See Commission Staff Working Document on Online Platforms, accompanying the document 
"Communi cation on Online Platforms and the Digital single market" (COM(2016) 288)  
88 https://estrategiaparatodos.wo rdpress.com/2017/01/08/the -digital -economy -and-network -effects -value -chains -
and-multilateral -platforms/  
89 The term was first coined by futurist Alvin Toffler in his work  Future Shock (1970) and later developed in its 
sequel, The Third Wave (1980).  
90 The extent to which digital business models disrupt the value chain varies quite significantly from one model 
to another. For example, network effects will be particularly relevant for business model acting as marketplace 
(two-sided platforms) or social m edia that connect users. Reliance on big data is very strong for social media, 
Internet search services and online advertising platforms while it is moderate for cloud services.  
 
115 work without m onetised compensation (obvious examples are Google or Facebook to which 
access is free but all activities, searches, interactions that reveal interests and preferences are 
recorded and can used to create value). Petruzzi and Buriak (2017) also refer to 'un conscious 
contributor' or 'unconscious employees'. This creates challenges in determining where and by 
whom, value is created.  
Often digital businesses provide certain types of products for free and monetise other 
products, creating a disconnection between  revenues generated and services provided. 
Revenue generation in the digital economy derives from both direct payments (subscription or 
transaction fees) and indirect payments through the generation of value in one activity (e.g. 
social media, search engin es) that is later monetized as input for another activity (e.g. sales of 
advertising space or transmission of data). The generation of income via advertisements 
arguably replicates the selling of advertisement space on television or radio. What does make 
a difference, however, is the unique, almost personalised manner in which advertising 
placements track the user – by responding directly to their search -engine searches or direct 
clicks on to adverts ( Commission Expert Group on Taxation of the Digital Econo my, 2014 ). 
Taken together the disconnection between the consumers of advertisements and the 
advertising companies and the fact that user data are central to the personalisation of 
advertisements result in a particularly stark deviation from the principle o f taxation where the 
value is created.  
 
(c) Importance of intangible assets  
One key feature of intangible assets is that they are difficult to value reliably, while they 
are the essence of a competitive advantage in some businesses.  When generated internal ly, 
generally accounting principles including international accounting standards prohibit the 
recognition of those assets, even though they are a core component of a business model. As a 
consequence, they do not appear on a company's balance sheet until su ch assets are either 
acquired or otherwise transferred to a third party for a consideration (e.g. business 
combination), in which case the financial statements of the acquiring company must generally 
recognise these assets for its fair value.  
There is evi dence that intangible assets are particularly important for companies with 
significant digital activities.  Markets tend to attribute their own value to assets, whether 
recognised or not. Therefore, as a proxy, differences in the importance intangible asset s can 
be derived by comparing differences between a company's equity book value and its market 
valuation (UNCTAD, 2017a).  The increasing importance of intangible assets is shown by a 
widening gap between book and market values of companies. Undisclosed in tangibles of the 
largest digital multinationals are estimated to be on average roughly equal to 3 times the 
company's total equity book value – significantly more than the average recorded for IT & 
telecom companies and other multinational enterprises (see  Table 3 below).  At the same time, 
the excess in market capitalisation over equity book values are of course also an indication of 
the market expectations about future revenue generation.  
 
 
116  
 
Table (3): Overview of physical presence per sector (digital, IC T and other)  
 International footprint  Relevance of IP  
Digital  2.1 3.1 
IT & Telecoms  2.2 1.2 
Other  1.1 1.4 
Source: Based on data from the Buerau van Dijk Orbis database. Notes: The relevance of intangibles is 
computed as the market capitalisation over equity book value minus 1.  
 
The differences in asset profiles indicate a structural shift in the sources of value 
creation, from physical assets to intangibles.  It also illustrates the profound disruption 
brought about by digital multinationals discussed above. The intangible investment offers a 
high competitive advantage. At t he same time it raises a concern over a growing distance 
between highly productive firms at the frontier and the followers. Chen et al. (2016) find that 
intangible capital is significantly more productive in ICT -intensive sectors than in those that 
use lit tle ICT.  
 
(d) Winner takes most dynamics  
 
Digital markets are often dominated by a few 'superstar' firms.  Today's big players of the 
digital economy are fairly young companies that have created new markets and quickly 
become global, dominant players.  Common characteristics include the volatility in the market 
(the rapid gaining and losing of market share), the tendency towards monopoly and oligopoly 
and the relevance of user contributions to the success of the business model (OECD, 2015a).  
Although mod ern technologies such as the internet, software and cloud services, make it 
possible to enter markets at minimal costs and as such threaten a dominant position (Evans 
and Schmalensee, 2016), digitalisation and globalisation  contribute to a trend of 'winner  takes 
most' markets that are dominated by a few 'superstar' firms (Veugelers, 2017).  For digital 
markets this has to do with the relevance of large fixed investments, combined with low 
marginal costs (once developed digital goods can be reproduced at alm ost no cost), network 
and lock -in effects.91 These are strong forces bringing about increasingly concentrated 
markets. Capacity limits, product differentiation and potential for multi -homing (i.e. the 
possibility to be active on several similar platforms) h owever can limit the level of 
concentration (Haucap and Heimeshoff , 2014).  
                                                 
91 See for example Shapiro and Varian (1998). Moreover, the literature on barri ers to market entry recognizes 
the type of lock -in effects that networks can entail as a possible switching barrier, one form of a barrier to market 
entry. Similarly, low taxes, giving a cost advantage to the incumbent firm, are one form of a market barrie r. A 
review of the literature on market barriers and a classification of different forms of barriers is provided in 
McAfee et al. (2003).  
 
 
117 Data on the top 100 global companies by market capitalisation shows the increasing 
dominance of ICT/digital -based firms, notably US firms (see figure below). Within one 
decade, onl y three companies that were in the top -10 ranking of companies by market 
capitalisation have remained in this position, one of them being Microsoft, a technology -
based company closely associated to the digital revolution. In 2016, seven out of the top -10 
companies were associated to the ICT sector, with Apple, Alphabet and Microsoft leading the 
overall ranking.   
Figure 3: Top 100 global companies (1 -15) by market capitalisation, 2017 and 2009  
 
 
 
 
  
       
Figure I.2-A.8  Top 100 global companies (1-15) by market capitalisation, 2017 and 2009  
Company Industry Country 31 March, 2017 31 March, 2009 Change in rank
Rank Market Rank Market between
Capitalisation Capitalisation 31 March, 2009
($bn) ($bn) and
31 March, 2017
Apple Inc Technology United States 1 754 33 94 +32
Alphabet Inc-Cl A Technology United States 2 579 22 110 +20
Microsoft Corp Technology United States 3 509 6 163 +3
Amazon.Com Inc Consumer Services United States 4 423 na 31 -
Berkshire Hathaway Inc-Cl A Financials United States 5 411 12 134 +7
Facebook Inc-A Technology United States 6 411 - - -
Exxon Mobil Corp Oil & Gas United States 7 340 1 337 -6
Johnson & Johnson Health Care United States 8 338 8 145 0
Jpmorgan Chase & Co Financials United States 9 314 28 100 +19
Wells Fargo & Co Financials United States 10 279 55 60 +45
Tencent Holdings Ltd Technology China 11 272 - 13 -
Alibaba Group Holding-Sp Adr Consumer Services China 12 269 - - -
General Electric Co Industrials United States 13 260 24 107 +11
Samsung Electronics Co Ltd Consumer Goods South Korea 14 259 53 61 +39
At&T Inc Telecommunications United States 15 256 7 149 -8
Source: Bloomberg and PwC analysis Science, Research and Innovation performance of the EU 2018
 
118 
 ANNEX 6: DETAILED BASELINE SCE NARIO ON RELEVANT PO LICY 
INITIATIVES  
 
OECD work in progress:  
Progress within the Base Erosion and Profit Shifting project  
The BEPS Action 1 report (OECD, 2015a) concluded that digitalisation did not pr esent 
specific issues in the area of tax avoidance but could exacerbate some.  This is the reason 
why several of the BEPS actions refer explicitly to the challenges posed by digitalisation. 
Four of these actions have led to an agreed minimum standard. The r est of the actions have 
led to recommendations and guidance. The Inclusive Framework of BEPS brings together 
more than 100 jurisdictions, thereby allowing for a widespread implementation of the BEPS 
measures.  
Minimum standards were agreed with respect to Action 5 (Harmful Tax Practices), 
Action 6 (Treaty abuse), Action 13 (Transfer Pricing Documentation) and Action 14 
(Dispute Resolution Mechanisms).  Several of the Anti -Base Erosion and Profit Shifting 
(BEPS) actions refer explicitly to the challenges pose d by digitalisation. Four of these actions 
have led to agreed minimum standards in the areas of harmful tax p ractices  (Action 5 ), treaty 
abuse  (Action 6 ), transfer pricing d ocumentation  (Action 13 ) and dispute resolution 
mechanisms  (Action 14 ). Minimum sta ndards are subject to a peer -review that will take place 
in 2016 -2020 and should ensure consistent implementation. In the light of the challenges 
brought by digitalisation, Actions 5, 6 and 13 are particularly relevant.  Other actions are in the 
form of rec ommendations and guidance. The Inclusive Framework of the BEPS Project brings 
together more than 100 jurisdictions, thereby allowing for a widespread implementation of the 
BEPS measures.  
The implementation of Action 5 is well under way.  The overwhelming ma jority of existing 
intellectual property regimes were abolished or amended in line with the "nexus approach", 
both at EU and at global level (through the Inclusive Framework). Similarly, a high number of 
rulings have been exchanged among member of the Incl usive Framework. In the EU, the 
amendment to the Directive on the automatic exchange of information92 has made the 
exchange of rulings legally binding.  
Measures to prevent treaty abuse start to be widely implemented . Around 70 jurisdictions 
signed the Mult ilateral Convention to Implement Tax Treaty Related Measures to Prevent 
BEPS (MLI), whereby about a third of existing tax treaties will be aligned with the minimum 
standard on action 6.  Countries may also update their bilateral tax treaties though bilater al 
                                                 
92 Council Directive 2014/107/EU of 9 December 2014 amending Directive 2011/16/EU as regards mandatory 
automatic excha nge of information in the field of taxation (OJ L 359, 16.12.2014)  
 
119 negotiations. Finally, the Commission issued a Recommendation in 2016 on Tax Treaty 
issues,93 which advises Member States on how to reinforce their tax treaties in a way that is 
compliant with EU law. Treaty abuse is relevant given the increased ability to choose the 
location of resources (e.g. intellectual property) that are key to digital activities.  
The exchange of country -by-country reports has been made legally binding94 on EU 
Member States with the first exchanges planned in 2018.  More than half of the Inclusive 
Framework members have signed an agreement to operationalise the exchange of reports 
between jurisdictions.  
The amendments to the permanent establishment definition (Action 7) and revisions of 
the Transfer Pricing Guideline s (Actions 8 -10), which are not subject to minimum 
standards, are very relevant to address the challenges of digitalisation . The amendments 
to the permanent establishment definition have been the subject of the 2016 Commission 
Recommendation on Tax Treaty issues, which is non -legally binding, and there have been 
several reserves in the context of the MLI. While the BEPS outcomes have been reflected into 
the OECD Transfer Pricing Guidelines, the effective implementation will largely depend on 
the national le gislation.  
Amendments to the permanent establishment rules in the OECD Model Tax Convention 
were agreed, but these are not legally binding and some countries have made 
reservations against these.  Through the amendments, the regular  conclusion through 
intermediaries of contracts to be performed by a foreign enterprise triggers a sufficient taxable 
nexus in that country.95 Moreover, specific activity exemptions would only apply to activities 
that are of a preparatory or auxiliary  character, that is, only if th e activities do not form part 
of the core business. For example, a large warehouse of an online sales business for storage 
and delivery of goods would constitute an essential part of the sales and distribution function 
of that business. As a result the war ehousing function would not qualify for the preparatory 
and auxiliary activity exemption anymore. The proposed amendments are implemented either 
through bilateral tax treaty negotiations or through the so -called  ‘Multilateral Instrument’ , but 
some countrie s have reserved against these. At EU level, the 2016 Commission 
Recommendation on the implementation of measures against tax treaty abuse encourages 
Member States to implement the proposed provisions.  
                                                 
93 Commission Recommendation (EU) 2016/136 of 28 January 2016 on the implementation of measures against 
tax treaty abuse (OJ L 25, 2.2.2016)  
94 Council Directive (EU) 2016/881 of 25 May 2016 amending Directive 2011/16/EU as regards mandatory 
automatic exchange of information in the field of taxation (OJ L 146, 3.6.2016)  
95 "For example, where the sales force of a local subsidiary of an online seller of tangible products or an online 
provider of advertising services habitually plays the principal role in the conclusion of contracts with prospective 
large clients for those pr oducts or services, and these contracts are routinely concluded without material 
modification by the parent company, this activity would result in a permanent establishment for the parent 
company." (OECD, 2015b).  
 
120 Furthermore, the G20/OECD Base Erosion and Profit Shifting BEPS project96 examined 
a new nexus in the form of a significant economic presence without issuing a 
recommendation. The economic presence would be assessed on the basis of various elements 
such as revenues, digital factors (local domain names, loc al digital platforms, local payment 
options) and users -based factors (such as number of 'monthly active users', online contract 
conclusion or data collected). Although the report did not include this new nexus in its 
recommendation, it made clear that the evolution of the digital economy warranted further 
work on the issue and a monitoring of the developments.  
Legally -binding rules have been agreed at EU level regarding CFC rules (Action 3), 
interest limitation rules (Action 4) and hybrid mismatches (Action  2), which should enter 
into force as from 201997 and 2020.98 However, according to the OECD assessment, there has 
not been great interest from countries to amend the CFC rules with respect to income from 
online sales and services.  Beyond the EU Member Stat es, a number of other countries have 
or will have elements of those rules in their national legislation.  
The OECD is continuing its work on digital taxation and has recently published its 
interim report on the taxation of the digital economy and presented it to the G20 
Finance Ministers at their meeting in March 2018 (OECD, 2018). In the long -term, the 
OECD will also examine reforms related to the nexus and the profit allocation (permanent 
establishment and transfer pricing), the two pillars of the problem.  A final report is due in 
2020.  
EU work in progress  
Corporate taxation  
At EU level, the Commission has launched a new proposal for the CCCTB. The baseline 
scenario assumes that the current CCCTB proposal will be introduced. The box below 
explains the key relevant provisions of the CCCTB proposal.  
The Anti -Tax Avoidance Directive puts forward tax rules aimed at preventing that income 
goes untaxed (or taxed at very low level), inter alia through controlled foreign company rules, 
exit taxation and switch -over rules. It will enter into force in January 2019 (with exceptions).  
                                                 
96 Final report on Action 1 . 
9797 Council Dire ctive (EU) 2016/1164 of 12 July 2016 laying down rules against tax avoidance practices that 
directly affect the functioning of the internal market (OJ L 193 of 19.7.2016). The following derogation is 
foreseen "Member States which have national targeted rul es for preventing BEPS risks at 8 August 2016, which 
are equally effective to the interest limitation rule set out in this Directive, may apply these targeted rules until 
the end of the first full fiscal year following the date of publication of the agreem ent between the OECD 
members on the official website on a minimum standard with regard to BEPS Action 4, but at the latest until 1 
January 2024."  
98 Council Directive (EU) 2017/952 of amending Directive (EU) 2016/1164 as regards hybrid mismatches with 
third  countries  
 
121 As stated in the June 2015 Action Plan99, the Commission is working on improving the 
transfer pricing framework in the EU. For example, a report addressing the challenges of 
valuing intangi bles by using economic valuation methods will be published soon by the EU 
Joint Transfer Pricing Forum, an expert group advising the Commission on TP matters.  
To prevent the harmfulness of these schemes, an agreement was reached in the OECD and in 
the EU on the approach to be taken to ensure that there is a clear link between the tax 
advantage being granted under the patent box and a firm’s R&D activities ('nexus 
approach').100 The EU agreement on a modified nexus approach requires that Member States 
with pa tent boxes that do not meet this condition close them to new entrants by 30 June 2016 
and abolish them by the 30 June 2021.  
Box: CCCTB rules on tax residence and allocation of profits  
 
The CCCTB applies to companies that are established under the laws of a  Member State, 
including their permanent establishments in other Member States. It also applies to 
companies established under the laws of a third country in respect of their permanent 
establishments situated in one or more Member States.  
 
Permanent estab lishment rules  
A permanent establishment is a fixed place of business such as a branch, an office, a 
factory, a place of management, or a construction site if it lasts more than a year. Certain 
activities of preparatory or auxiliary nature may be excluded from the definition of a 
permanent establishment, most notably if facilities are used solely for storage, display or 
delivery of goods, or carrying out for the taxpayer, purchasing activities or collecting of 
information. Under certain circumstances, a per manent establishment is deemed to exist 
where a person on behalf of a taxpayer habitually concludes contracts or plays the 
principal role leading to a conclusion without material modification.101 
 
Resident and non -resident taxpayer  
A company that is a tax re sident in a Member State is a resident taxpayer for the purposes 
of the CCCTB. Normally, this is the case if such a company is incorporated or centrally 
managed in a Member State. A resident taxpayer is in principle subject to tax on all of its 
worldwide i ncome; that is irrespective of whether or not it originates from within the 
Member State of residence. A company that is not resident in a Member State is a non -
resident taxpayer if that company has a permanent establishment in a Member State. A 
non-reside nt taxpayer of a Member State is subject to tax only on income that can be 
attributed to its permanent establishment in said Member State.102 
                                                 
99 COM(2015) 302 final  
100 This does not mean that these schemes are effective in raising R&D efforts.  
101 Article 5 of the Directive on a Common Corporate Tax Base.  
102 Under the rules of the common corporate tax base, that is before consolidation and  apportionment is applied, 
the implications of being a resident and non -resident taxpayer are determined by the bilateral double tax treaties 
between Member States. In essence, they are also based on the principle that resident taxpayers are taxed on their  
worldwide income whereas non -resident taxpayers are taxed only on their domestic income.  These treaties also 
lay down how to avoid double taxation of the same income. Under a territorial approach the taxpayer (whether 
resident or non -resident) is subject to tax only on income earned in that territory.  
 
122  
Mandatory scope  
Only large companies fall under the mandatory scope of the CCCTB. This is the case for 
a company be longing to a consolidated group for financial accounting purposes with total 
consolidated group revenue that exceeded EUR 750 million during the financial year 
preceding the relevant financial year. All other companies can opt to apply the CCCTB.  
 
Allocati on of tax base  
Under the CCCTB all profits within a group are added and then apportioned back to the 
entities of the group through a formula. The formula puts equal weight on three factors: 
two input factors, assets and labour, and a factor capturing the m arket side, namely sales. 
Assets exclude intangible assets and financial assets to make the formula more robust 
against aggressive tax planning, considering their highly mobile nature. The labour factor 
consists of two sub -factors, each with equal weight, which are number of employees and 
payroll. The sales factor consists of sales by destination, that is, a sale of a group is 
attributed to an entity depending on the location of the customer (where transport or 
dispatch ends). Where there is no group member  in the Member State of destination, the 
sales are included in the sales factor of all group members in proportion to their labour 
and asset factors. Similarly, where there is more than one group member in the Member 
State of destination, the sales are inc luded in the sales factor of all group members 
located in that Member State in proportion to their labour and asset factors. For certain 
industries, there are adjusted formulae that better fit the needs of sectors such as financial 
services and insurance, oil and gas as well as shipping and air transport.  
 
 
Value added tax  
The implementation of the destination principle started with new VAT place of supply rules 
for B2C telecommunications, broadcasting and electronically (TBE) supplied services103, 
which came into force in 2015. According to such rules, VAT is due in the Member State 
where the consumer is established. A simplification mechanism is provided – the Mini One 
Stop Shop (MOSS) – allowing businesses to make a single declaration and paymen t in their 
own Member State in respect of sales in other Member States. Other complementary 
legislative proposals, which further implement the destination principle in VAT, have also 
been recently adopted. Notably: (i) the e -Commerce proposal, adopted in D ecember 2017, (ii) 
the proposal on a definitive VAT system for intra -EU cross -border trade, adopted in October 
2017, and (iii) the new proposal on rates of January 2018 which is intended to give more 
freedom for Member States to set VAT rates . 
                                                 
103 For more information on the 2015 rules, see  here. Council Implementing Regulation (EU) No  1042/2013 of 
7 October 2013 amending Implementing Regulation (EU) No  282/2011 as regards the place of supply of services  
(OJ L 284, 26.10.2013, p. 1 ); and Council Regulation (EU) No  967/2012 of 9  October 2012 amending 
Implementing Regulation (EU) No  282/2011 as rega rds the special schemes for non -established taxable persons 
supplying telecommunications services, broadcasting services or electronic services to non -taxable persons ( OJ 
L 290, 20.10.2012, p. 1 ).  
 
123 According to the e -commerce proposal, all cross -border B2C supplies of services, as well as 
imports, will be taxed in the Member State of the consumer. This would replace the current 
regime, where B2C supplies of services other than TBE are generally taxed  in the Member 
State where the supplier is established. The current exemption for the importation of small 
consignments, according to which non -EU suppliers can supply VAT -free goods to 
consumers in the EU, will be abolished.   
According to the proposal on  a definitive VAT system, the current VAT arrangements for 
B2B cross -border supply of goods will also be changed. At present, a B2B cross -border 
supply of goods within the EU is split into two different transactions for VAT purposes: 1) an 
intra-EU supply of goods exempt in the Member State of origin (made by the supplier); 2) an 
intra-EU acquisition of goods taxed in the Member State of destination (made by the 
customer). With the new rules, the exemption for the B2B cross -border supply of goods will 
disap pear and businesses making such supplies will be liable for declaring and paying VAT in 
the Member State of arrival of the goods by means of an extended One Stop Shop (OSS).  
MS work in progress:  
Some MS have introduced national measures to address the taxa tion of the digital economy, 
e.g. Hungary (online advertising tax), Germany and France (access to online digital content) 
or Slovakia (on revenues derived by intermediation through websites and online platforms), 
while the others specifically targeted the profit -shifting issue in the form of a diverted profits 
tax and withholding tax (UK) and a new administrative procedure for large non -resident 
MNEs to disclose hidden permanent establishments (Italy). Based on recent public statements, 
it seems likely that  a few more MS are considering a specific (indirect) tax on revenues 
derived through intermediation and the provision of online advertising (UK)  (HM Treasury, 
2017)  and on digital B2B transactions with electronically -supplied services (Italy), 
respectively , in the absence of coordinated action at EU or international level.  
 
124 
 Table (1): Overview of unilateral measures taken/planned  
 
Country  Planned/ 
adopted/ 
implemented  Type of tax  Brief description of the measure (where available)  
Indirect taxes104  
In the European Union  
Hungary  Implemented 
(2014), 
amended (2015, 
2017)  Tax on 
advertisement  This tax is levied on any advertising activity, whether it is in printed or digital form. The tax is income based: a yearly income 
from advertising activity over HUF 100mn (approximately EUR 322,000) is taxed at the rate of 5.3%.  
An entity can be the subject of the advertising tax if it:  
 publishes advertising for others, providing advertising services  and realising income from such activities;  
 publishes an advertising to promote its own services or products or (irrespective of where it is domiciled) orders 
advertising from a media content provider settled in Hungary.  
UK Planned (2019)  Withholding tax  
on revenues 
derived from 
intermediation 
and the provision 
of online 
advertising  A withholding tax on the revenues that businesses generate from the provision of digital services in the UK market is being 
considered as a possible interim solution for taxin g the digital economy. The tax would be levied on the revenues obtained 
through intermediation and the provision of online advertising. Most probably, the tax would not cover revenue generated 
through electronic sales of goods and from charging customers f or the provision of digital or services.  
De minimis  thresholds and mitigating provisions for loss -making and early -stage businesses are also being contemplated.  
                                                 
104 VAT on digital services is not included here.  
 
125 Italy  Planned (2019)  Tax on digital 
B2B transactions 
with 
electronically -
supplied  services  A 3% equalization tax would be levied on payments (net of value -added tax) made to non -residents by Italian -resident 
purchasers of digital services (such as online advertising) carried out through electronic means ( e.g. the internet or other 
electronic networks), regardless of where the transaction agreement is concluded. The equalization tax would apply only to 
B2B transactions (a threshold of minimum 3,000 transactions is provided in the law), i.e. transactions with com panies, 
partnerships,  professionals and individuals that carry out an economic business in Italy, and on Italian PEs of foreign enti ties. 
B2C transactions would fall outside the scope of the proposed equalization tax.  
In principle, tax crediting for digit al service providers subject to the equalization tax will be allowed.  
France  Implemented 
(2003), 
amended (2016)  Levy on access to 
content, including 
digital content by 
means of a video 
on demand / 
over-the-top 
online platform 
(for the 
cinematography 
fund)  The levy covers activities of making available services giving access (against consideration) to cinematographic or audiovisual 
works, on individual request formulated by an electronic communication method. Services whose audiovisual content is 
secondary,  services whose main purpose is devoted to information and services that mainly provide information related to 
cinematographic and audiovisual works and to their dissemination and promotion, are exempt.  
The taxable amount is the amount paid by advertisers and sponsors, for the dissemination of their advertising services to the 
relevant taxpayers or the directors of advertising messages, excluding value -added tax. These sums are reduced by 4%. The 
reduction goes up to 66% in the case of services giving or al lowing access to audiovisual content created by private users for 
sharing and exchanging within communities of interest.  
Germany  Implemented 
(2004), 
amended (2010)  Levy on access to 
content, including 
digital content by 
means of a video 
on demand / 
over-the-top 
online platform 
(for the 
cinematography 
fund)  The film levy in Germany (Filmabgabe) helps financing the German Federal Film Board.  
The rate of the film levy is between 1.8% and 2.5% of the annual net sales. Video -on-demand providers that coll ect less than 
EUR 500,000 a year through cinematographic works are exempt from the levy  
Private broadcasters with free -to-air programs pay a film royalty on net advertising revenue. The film levy varies between 
0.15% and 0.95% and depends on the share of c inematographic films in the total broadcasting time. Private broadcasters  
whose total net revenue is less than EUR 750,000 for such services are exempt.  
Organizers of pay -tv and program marketers pay a fixed film levy amounting to 0.25% of their net sales  in Germany, either 
with subscription contracts or for individual consideration. Suppliers who show no or only a few films (less than two percent  
of the total time) or whose total net sales with these offers is less than EUR 750,000 are exempt from the fil m levy.  
Romania  Implemented 
(2005), 
amended (2008)  Levy on access to 
content, including 
digital content by 
means of a video -
on-demand / The mandatory contribution to the cinematography fund  is lev ied at 3% on the turnover from audio and video content legally 
downloaded in digital format and at 1% on the turnover from the digital re -transmission of TV shows.  
 
126 over-the-top 
online platform 
(for the 
cinematography 
fund)  
Croatia  Implemented 
(2007)  Levy on access to 
content, including 
digital content by 
means of  a video -
on-demand online 
platform (for the 
cinematography 
fund)  The levy amounts to 2% of the taxable turnover.  
Portugal  Implemented 
(2007)  Levy on access to 
content, including 
digital content by 
means of a video -
on-demand online 
platform (for the 
cinematography 
fund)  The levy amounts to 1% of the taxable turnover. There is an option between contribution to the cinematography fund or 
investment in production.  
Belgium 
(certain 
regions)  Implemented 
(2009)  Levy on access to 
content, including 
digital content by 
means of a video -
on-demand online 
platform (for the 
cinematography 
fund)  In Wallonia and Brussels, contributors can opt either to transfer, respectively, 1.4% and 2.2% of the taxable turnover to the  
film fund or to make an equivalent investment directly in films.  
Czech 
Republic  Implemented 
(2012)  Levy on access to 
content, including 
digital content by 
means of a video -The levy amounts to 0.5% of the respective turnover.  
 
127 on-demand online 
platform (for the 
cinematography 
fund)  
In third countries  
United 
States 
(certain 
states)  Implemented 
(2015 -2016)  Levy on access to 
digital content 
and streaming 
services   
India  Implemented 
(2016)  Levy on the 
provision of 
online 
advertisement 
services by non -
residents  The Indian 'equalisation levy' is imposed on  e-commerce transactions whereby a resident or a non -resident with a permanent 
establishment carrying on a business or profession in India is obliged to withhold 6% equalisation levy from payments made to  
a non -resident service provider for specified servi ces. These services include online advertisements, provision of digital 
advertising space, or any other facility or service for the purpose of online advertisements or any other notified services, except 
where the aggregate consideration for the specified service is l ess than INR 100,000 (EUR 1,300).  
The levy does not apply if the service provider is a non -resident who has a permanent establishment in India to which the 
service is effectively connected and such income is attributable.  
Canada 
(certain 
states)  Planned (2018)  Levy on access to 
digital content 
and streaming 
services   
Brazil 
(certain 
states)  Planned (2018)  Levy on access to 
digital content 
and streaming 
services   
Direct tax initiatives targeting profit -shifting  
In the European Union  
UK Implemented Diverted profits The diverted profits tax does not explicitly target 'digital companies' – it targets contrived arrangements that erode the UK tax 
 
128 (2015)  tax base through abuse of permanent establishment and transfer pricing rules.  
The diverted  profits tax applies to UK and foreign companies using contrived arrangements designed to erode the UK tax base 
in the following two situations:  
 if a foreign company artificially avoids havin g a permanent establishment  in the UK;  
 if a UK company, or a foreign company with a UK permanent establishment, creates a tax advantage by using 
connected entities for transactions that lack economic substance.  
Italy  Adopted (2017), 
in force (2018)  Administrative 
procedure for 
large non -resident 
multinational 
enter prises  This administrative procedure introduces an option for foreign companies that meet certain thresholds to discuss (and agree) in 
advance with the Italian tax authority the existence there of a permanent establishment.  
The terms apply to digital compa nies not headquartered in Italy having:  
 at least EUR 1 billion in global revenue; and  
 sales in Italy of at least EUR 50 million.  
Slovakia  Adopted (2017), 
in force (2018)  Tax on income 
derived from 
intermediation 
through websites 
and online 
platforms  The tax will be levied at a rate of 21 % on the income of 'digital platforms', non -resident in Slovakia, despite the absence of a 
fixed place of business in this country. The proposed legislation defines digital platforms very broadly as 'hardware or soft ware  
platforms required for the creation of applications and their management'.  
In third countries  
Israel  Implemented 
(2016)  The significant 
economic 
presence  test for 
non-resident 
enterprises  Under well -defined circumstances income of foreign corporations from the sale of goods or provision of services via the 
internet may be attributed to a 'deemed permanent establishment' in Israel if:  
 the foreign company maintains an operation in Israel;  
 the foreign company sells directly products or services to clients in Israel or connects with customers in Israel through 
a local website (for instance, by way of a website operated in Hebrew language for Israeli market purposes);  
 representatives in Israel of the foreign company are involved in identifying Israeli custome rs and/or gathering 
information; or  
 the foreign company has provided authority to an Israeli representative to engage in transactions locally which are 
binding on the foreign company.  
 
129 Australia  Implemented 
(2017)  Diverted profits 
tax and additional 
anti-avoidance 
rule for large 
non-resident 
multinational 
enterprises  The diverted profit tax aims to ensure that the tax paid by significant global entities properly reflects the economic substa nce of 
their activities in Australia and aims to prevent the d iversion of profits offshore through contrived arrangements.  
Australia’s diverted profit tax applies to multinational enterprises, which are qualified as 'significant global entities', i .e. with 
annual global income of at least AUD 1 billion, that enter in to a scheme which:  
 has at least one of the parties connected to the scheme being a foreign entity; and  
 results in a 'diverted profit tax benefit', as defined in the law.  
There is also a de minimis  threshold of AUD 25 million (for the local income) aimed at ensuring that the diverted profit tax 
only applies to companies that have sufficiently large operations in Australia.  
India  Planned (2018)  New concept of 
significant 
economic 
presence  The Financ e Minister of India proposed, in the context of the Union Budget 2018, to introduce the concept of a 'significant 
economic presence'. A significant economic presence for this purpose shall mean  
 any transaction in respect of any goods, services or property  carried out by a non -resident in India, including a 
provision of download of data or software in India, if the aggregate of payments arising from such transaction or 
transactions during the previous year exceeds the amount as may be prescribed; or  
 systema tic and continuous soliciting of its business activities or engaging in interaction with such number of users as 
may be prescribed, in India through digital means.  
The proposed amendment in the domestic law aims to enable India to negotiate for inclusion o f the new nexus rule in its 
Double Taxation Agreements. The thresholds of 'revenue' and the 'users' would be decided after consultation with stakeholders . 
United 
States  Adopted (2017), 
in force (2018)  The introduction 
of the concept of 
'base erosion anti -
abuse tax'  for 
large 
multinational 
enterprises  The new provision refers to base erosion as tax reduction strategies employed by multinational corporations that exploit 
differences between the tax laws of different countries in order to m inimise or eliminate the amount of corporate tax paid. With 
respect to base erosion payments paid or accrued in tax years that begin after 31 December 2017, 'applicable taxpayers' are 
now required to pay a tax, the 'base erosion anti -abuse tax' (BEAT), equ al to the 'base erosion minimum tax amount' for the tax 
year.  
Applicable taxpayers are corporations (except for certain type of corporations) with average annual gross receipts of at leas t 
USD 500 million and a 'base erosion percentage' of at least 3% (2%  for certain banks and securities dealers). This percentage is 
equal to the aggregate amount of base erosion tax benefits of the taxpayer for the tax year divided by the aggregate amount o f 
specified deductions allowable to the taxpayer for the tax year. A  base erosion payment, in turn, generally means  
 any amount paid or accrued by a taxpayer to a foreign person that is a related party of the taxpayer; and  
 with respect to which a deduction is allowable, including any amount paid or accrued by the taxpayer to the related 
party in connection with the acquisition by the taxpayer from the related party of property of a character subject to the 
 
130 allowance of depreciation (or amortisation instead of depreciation).  
Source: Commission  analysis based on various sour ces, such as national legislations, replies to the Member State consultation or other government sources, websites of 
national film funds, European Film Agency Directors (EFADS) website, website of the International Bureau of Fiscal Documentat ion (IBFD - for most of the direct tax 
initiatives) and Thomson Reuters Tax & Accounting for the US BEAT measure.  
 
 
 ANNEX  7: WHAT ARE THE CONSEQUE NCES ? 
i. DIFFICULTY TO TAX /OPPORTUNITIES FOR TA X AVOIDANCE  
 
(a) Misalignment of value creation and taxes  
For globally active  companies that do not require physical presence to gather and 
process data there is a misalignment between value creation and taxation.105 The use of 
intangibles and of data knowledg e (including consumer data) and other user contributions to 
improve or develop products and services or to define marketing, sales and pricing policies 
has increased considerably, although it is not a new phenomenon. It does not raise tax issues 
as long as  a company's activities are pre -dominantly domestic, in which case all value 
creation would also be 'domestically' captured for taxing purposes. However, it does raise an 
issue in a global context. The current permanent establishment and transfer pricing r ules that 
address the questions ' where to tax' and 'how much to tax'  do not take into account the user 
contribution in the allocation of taxable profits, which results in a mismatch with the value 
creation. The views of stakeholders have been tested on thi s topic: 67% of respondents to the 
open public consultation as well as 15 out of 21 national tax authorities agree with the 
statement that " states are not able to collect taxes on the value that some digital companies 
create on their territory".  
(b) Avoida nce of permanent establishment rules  
Difficulties to tax and/or opportunities for tax avoidance arise in relation to the current 
permanent establishment rules and transfer pricing rules. First, as the current permanent 
establishment rules are grounded in p hysical presence they often do not capture digital 
activities or can be easily circumvented in relation to such activities. Second, even where 
there is a permanent establishment, tax can be avoided by shifting mobile intellectual property 
to low tax jurisd ictions resulting in intra -group payments for which an objective transfer price 
is difficult to determine.    
Article 5 of the OECD Model Tax Convention provides that the business profits of an 
enterprise which is not resident for tax purposes in a certain  jurisdiction become taxable 
there only to the extent that the enterprise has a permanent establishment in that state.  
The concept of PE requires some physical presence and permanence in a jurisdiction. While 
those two criteria are relevant for the traditional economy, they do not necessarily address the 
stakes of the digital economy. This is notably because the ability t o carry out business 
activities remotely has been increased in the digital economy. As a result, even sizeable 
digital activities in a location do not always result in a permanent establishment in that 
location. And, even if such a permanent establishment is triggered in the absence of tax 
planning, it often is fairly easy for digital economy businesses to find arrangements that 
circumvent the existence of a permanent establishment.  
                                                 
105 That is, the phenomenon of disintermediation due to a process of dematerialisation in the business model of 
digitalised firms.  
 
132 
 In particular, the avoidance of permanenet establishments happens in practi ce through 
the use of commissionaire arrangements and arrangements that escape the PE status by 
treating some critical functions as auxiliary.   Through commissionaire arrangements a 
person sells products in a state in its own name but on behalf of a foreig n enterprise that is the 
owner of these products. In this way, a company is able to avoid the status of a permanent 
establishment and thus escape corporate income tax on the profits generated by the sales in 
that state. Similar results can be achieved thro ugh arrangements where contracts that are 
substantially negotiated in one state are not concluded in that state because they are finalised 
or authorised abroad, or where the person who concludes contracts is an 'independent agent' to 
whom the exception of Article 5(6) is applicable. Moreover, Article 5(4) includes 'specific 
activity exemptions' according to which a permanent establishment is deemed not to exist 
where a place of business is only used to carry out the activities listed in that paragraph. 
Businesses have been able to avoid creating a permanent establishment in a country by 
categorising their business activity as qualifying for one of the exemptions from permanent 
establishment status. Another possibility to trigger the Article 5(4) exemption is  by breaking 
up into several small operations in order to claim that each part is merely engaged in 
preparatory or auxiliary activities.  
In the context of Action 7 of the G20/OECD BEPS project, amendments to the 
permanent establishment rules in the OECD M odel Tax Convention were proposed, but 
these are not legally binding.  Article 5 has been amended to ensure that, where the activities 
of an intermediary result in the regular  conclusion of contracts to be performed by a foreign 
enterprise, that enterprise should be considered to have a sufficient taxable nexus in that 
country.106 The new rules also tighten the definition of independent agent.  The changes 
proposed under Action 7 prevent this by limiting the exemptions to activities that are of a 
preparatory or  auxiliary  character i.e. business can only qualify for these exemptions if this 
activity is not a core part of their business model. So a large warehouse maintained by online 
sales business for the purpose of storing and delivering goods sold by that busi ness would 
constitute an essential part of the sales and distribution function of that business, and so the 
warehousing function would not qualify for the preparatory and auxiliary activity exemption 
from PE status any more. Those amendments are implemente d either in the course of bilateral 
tax treaty negotiations or through the Multilateral Convention to Implement Tax Treaty 
Related Measures to Prevent BEPS (known as the ‘Multilateral Instrument’), but some 
countries have reserved against these. At EU leve l, the 2016 Commission Recommendation 
on the implementation of measures against tax treaty abuse encourages Member States to 
implement the proposed provisions, but it is not a legally -binding tool.  
                                                 
106 "For example, where the sales for ce of a local subsidiary of an online seller of tangible products or an online 
provider of advertising services habitually plays the principal role in the conclusion of contracts with prospective 
large clients for those products or services, and these cont racts are routinely concluded without material 
modification by the parent company, this activity would result in a permanent establishment for the parent 
company." ( OECD, 2015b ). 
 
133 
 Furthermore, the final report on Action 1 of the G20/OECD  Base Erosion and Profit 
Shifting BEPS project examined the relevance of defining a new nexus in the form of a 
significant economic presence. The economic presence would be assessed on the basis of 
various elements such as revenues, digital factors (local domain names, local digital 
platforms, local payment options) and users -based factors (such as number of 'monthly active 
users', online contract conclusion or data collected). This new nexus was not part of the 
recommendation. However, the report made clea r that the evolution of the digital economy 
warranted further work on the issue and a monitoring of the developments.  
 
c) Transfer of intangible assets  
Intangible assets can fairly easily be shifted from one jurisdiction to another, which in 
the absence of  abuse -proof rules opens significant opportunities for aggressive tax 
planning.  The high mobility of intangible assets allows more digitalised companies to benefit 
from certain tax regimes and push down their tax burden. Profits allocation rules follow 
contractual arrangements of transactions between intragroup companies. Indeed, legal 
ownership of intangibles is a decisive factor for determining profits, resulting in entities with 
little business activity potentially benefitting from high profit allocation  (see discussion in 
Olbert and Spengel, 2017).  
Econometric evidence shows the importance of the location of intangible assets, and 
notably intellectual property, in profit shifting strategies. First, intellectual property is 
difficult to value, with often no unrelated third -party transaction to determine an arm's length 
price. This makes it easier to shift profits through transfer -price manipulation. Second, 
corporate taxation, notably the preferential tax treatment of intellectual property, influences 
the location of research activities, of legal patent ownership and of the number of patent 
applications. Dischinger and Riedel (2011) find that a one percentage point increase in the 
average tax difference to all other group affiliates increases the subsidiary 's intellectual 
property  in the balance sheet by about 1.7%.  Skeie et al. (2017) find that a 5 percentage point 
cut in the preferential tax rate on patent income is associated with a 6% increase in patent 
applications. Several contributions evidence more generally the significant effect of corporate 
taxation on the number of patent applications (Karkinsky and Riedel, 2012, Griffith et al., 
2014, Alstadtsaeter et al., 2018). Alstadtsaeter et al. (2018) find that the effect is mostly due to 
the favourable ta x treatment of patent boxes (and not due to a possible favourable impact on 
R&D activities), with quite large differences across sectors. As shown in Böhm et al. (2012) 
the probability of patent relocation to a tax haven is increasing with the value of the  patent. 
Furthermore, the literature provides evidence that controlled foreign company - rules 
 
134 
 effectively reduce this form of profit shifting.107 In general, Beer and Loeprick (2015) find 
that mandatory documentation requirements are effective in reducing p rofit shifting by 
transfer pricing, but this result does not hold for subsidiaries with large intangible assets.   
 
A detailed examination of tax rules confirms the profit shifting opportunities 
multinational enterprises with sizeable intangible assets have. Out of seven important tax 
planning structures identified by Ramboll Management Consulting and Corit Advisory 
(2015), three involve the use of intellectual property. The same study determines the 
prevalence across Member States of tax rules that are necessary or conducive for the set -up of 
aggressive tax planning schemes. It identifies 15 Member States whose tax fram eworks have 
elements that directly promote or prompt an aggressive tax planning structure. All but two 
Member States show a lack of anti -abuse rules. ZEW (2016) estimates the impact of 
aggressive cross -border tax planning schemes on the effective average t ax rates. It shows 
without ambiguity that placing intellectual property in a country with a generous intellectual 
property box allows lowering the effective average tax rate significantly - and more than any 
other tax planning structure. The Anti -Tax Avoid ance Directive, which will enter into force in 
2019 (with some exceptions), should however strengthen the anti -abuse framework in all 
Member States through the introduction of a number of legally binding anti -abuse measures. 
Table 3 summarizes the findings  of recent studies on the use of intangibles for profits shifting 
purposes.  
Table ( 1): Overview of studies evidencing the link between aggressive  tax planning and 
intangible assets   
Dischinger and 
Riedel (2011)  Europe (1995 -
2005)  Intangible 
assets in t he 
balance sheets  - 1 p.p. increase in the average 
tax difference to all other group 
affiliates increases the 
subsidiary's intangible assets in 
the balance sheet by about 1.7%  
Karkinsky and 
Riedel (2012)  Europe (1978 -
2007)  Patent 
holdings  +1 p.p. of CIT rate decreases 
patent applications by about 
3.5% -3.8% (depending on the 
empirical model)  
Griffith et al. 
(2014)  Europe (1985 -
2005)  Patent 
holdings  +1 p.p. of CIT rate decreases 
patent applications by about 
0.5% -3.9% (depending on the 
location)  
Beer and 
Loeprick (2015)  World (ORBIS) 
(2003 -2011)  Tax sensitivity 
of reported 
profits and 
endowment of Tax sensitivity of reported profits 
to 1 p.p. increase of the CIT rate 
increases from 0.76% to 1.2% for 
subsidiaries with  an above 
                                                 
107 A side effect of this may be that stronger anti -avoidance rules result in i ncreased tax sensitivity of real 
investment, the rationale being that tax planning MNEs do not care much about tax levels as anyway they largely 
avoid tax (Sorbe and Johansson, 2016).  
 
135 
 intangible 
assets  median intangible assets 
endowment.  
Böhm et al. 
(2012)  Europe (1978 -
2007)  Probability of 
patent 
relocation to 
tax haven and 
effectiveness 
of CFC 
legislation  An increase of 1 standard 
deviation of patent value 
increases the probability of patent 
relocation in a tax haven by about 
16%. This probability of patent 
relocation in a tax haven is 
reduced by about 1/3 by CFC 
legislation.  
Alstadtsaeter, 
Barrios, 
Nicod eme, 
Skonieczna and 
Vezzani (2018)  World (2000 -
2011) top 2,000 
corporate R&D 
investors  Patent 
holdings  + 1 p.p. of CIT rate decreases 
patent applications by about 
13.1% (pharmaceutical), 1.5% 
(ICT sector) and 5.4% (car 
sector). The presence of patent 
boxes has a strong and significant 
effect on patent applications.  
Skeie et al. 
(2016)   World (ORBIS 
and O ECD -
PATSTAT) 
(2004 -2010)  
 Tax sensitivity 
in patent 
location  5p.p. of preferential tax rate on 
patent income is associated with 
6% increase in patent 
applications.  
Sorbe and 
Johansson 
(2016)  World industry 
level (world 
Input -output 
Database) 
(1995 -2011) and 
firm level 
(ORBIS) (2009)  Impact of 
strong anti -
avoidance 
rules on tax 
sensitivity of 
investment  At the 75th percentile of the 
distribution of industries on 
profit -shifting incentives, moving 
from a moderate anti -avoidance 
strength to a strong stance i s 
associated to about tripling the 
tax sensitivity of investment.  
Source: updated from Table 3 in SWD(2015) 121 final  
Aggressive tax planning opportunities using Intellectual Property are not unique to the 
digital economy, but they are bigger. Given the larger emphasis on intangible assets in the 
digital economy (section 2.1.3) and the role of intellectual property for the sector, as discussed 
above, the opportunities are likely more significant than for traditional businesses.  
 
ii. LACK OF A LEVEL  PLAYING FIELD AND DI STORTION OF COMPETIT ION 
Both the outdated rules that do not properly capture digital activities and the relative 
ease with which more digitalised companies can engage in aggressive tax planning result 
in competitive distortions.  These distortions manifest themselves in various ways. They 
create an unlevel playing field between different types of companies. This is not only true 
between those companies that are more digitalised and those that are less, but also between 
digital companies that pay tax in a given Member State and those that serve the same market 
 
136 
 remotely or minimise payments through aggressive tax planning. They also create an unlevel 
playing field across the Single market, as some Member States feature more prominently in 
tax planning schemes than others. In the worst case, a significantly lower tax burden can 
enable larger digitalised companies to drive out competitors from their markets or hinder 
potential new entrants. This is economically inefficient and hurts innovation , growth and 
welfare.  
Some evidence exists, suggesting that tax planning results in higher mark -ups and 
competitive advantages. Sorbe and Johannson (2016) analyse firm -level data from 46 
countries (mostly OECD and G -20). They find that multinational enterp rises that have access 
to tax planning opportunities have mark -ups that are 13% higher than multinational 
enterprises that do not have this opportunity. Thy also find that restricting their sample to EU 
countries results in an even stronger effect. Industr y concentration is also higher in industries 
with more multinational enterprises, but this may be driven by the fact that multinational 
enterprises tend to be larger. A recent study on the media industry in the Nordic countries 
(PWC, 2017) argues that ther e are considerable differences in the direct tax burden between 
Nordic media players and global players, which result in a competitive advantage for the 
global players.  
Digital businesses models in the EU face a lower effective average tax burden than 
traditional business models. Based on stylised business models, ZEW (2017) finds that a 
cross -border digital business model is subject to an effective average tax rate of only 10% 
compared to a rate of 23% of a cross -border traditional business. Three factors  explain this 
difference. Expenses for the creation of software and other intangible goods, which play a 
much bigger role for digital businesses,108 are often immediately deductible whereas physical 
assets used in the traditional business model are depreciat ed over time. Businesses active in 
digital activities typically spend relatively more on R&D activities, for which many countries 
apply tax incentives. Finally, an important number of countries offer lower tax rates for 
earnings derived from intellectual p roperty ('Intellectual Property boxes'). To a certain extent, 
the lower tax levels simply reflect that modern tax policy recognises the importance of R&D 
and digitalisation for future growth and prosperity. However, beneficial regimes targeting 
very mobile  assets also indicate that countries compete fiercely on this very mobile segment.  
Through aggressive tax planning digital businesses can reduce their effective tax burden 
even further.  By placing intellectual property in an intermediary company located in an EU 
country with an attractive intellectual property box regime, companies can achieve effective 
                                                 
108 By assumption, the digital business owns assets of only three kinds: i ntangible assets, software and IT 
hardware.  
 
137 
 average tax rate levels of zero and below (i.e. their activity is effectively subsidi sed).109 Table 
(2) reports effective average tax rates for different business models and type of companies.  
Table (2): Effective average tax rates of different model companies  
  Domestic 
company  Multinational group  Multinational group engaged in 
aggressive tax planning using most 
beneficial IP box regime  
Traditional business 
model  20.9 23.2 16.2 
Digital business model  8.5 9.5 -2.3 
Source: Own computations based on ZEW (2016, 2017) and ZEW et al.  (2017).  
Notes: 1/ Aggressive tax planning by the multinational group is assumed to be done though exploitation of the 
most beneficial intellectual property regime available in the EU. 2/ For the multinational groups, cross -border 
investments within the EU and with certain third countries (notably: US, Canada, Japan, Norway and 
Switzerland) are considered. 3/ The 9.5% for the multinational group with a digital business model is an average 
of 8.9% for a business -to-business model and 10.1% for a business -to-consumer model.  
 
Both the national tax authorities as well as the wider public that responded to the public 
consultation have confirmed that the com petition between the traditional economy and the 
digital one is not an equal one. 13 out of 21 national tax authorities and 65% of the 
respondents to the public consultation agree that "t he current international taxation rules do 
not allow for fair competi tion between traditional and digital companies".    
 
iii. LESS REVENUE FOR PUBL IC BUDGETS /NEGATIVE IMPACT ON S OCIAL FAIRNESS  
 
Lower (or even no) taxes paid on profits from digital activities puts at risk the 
sustainability of EU Member States' public finances.  It results in unfair burden sharing 
across taxpayers, constraints the financing of our social models and ultimately weakens our 
social contract. Although it is difficult to isolate the share of digital activities, the tax revenue 
shortfalls from aggressive tax planning activities cost billions of euros every year. It has been 
estimated in a study for the European Parliament that within the EU the corporate tax revenue 
losses amount to about EUR 50 -70 billion (Dover et al., 2015).110 This is equivalent on the 
lower bound to around 0.4% of GDP. Governments of countries, whose tax bases are eroded, 
either have to raise revenue from other taxes or have less revenues for growth -enhancing 
reforms and for redistribution purposes to fight inequalities. Recent new estim ates by Tørsløv 
                                                 
109 ZEW (2016)  
110 Their methodology assumes that national deviations from the average corporate tax to gross operating surplus 
of companies ratio are due to tax avoidance.  
 
138 
 et al. (2017) following the Paradise papers scandal show that the aggregated loss to tax havens 
for Germany, France, Italy and Spain would reach over EUR 40 billion per year (Figure 1).  
The perception of the social fairness of the tax syst em suffers if companies do not 
contribute their 'fair share' to budgets.  Digital businesses conducting sizeable activities in 
a jurisdiction will usually also benefit from the public infrastructure offered by that 
jurisdiction. For mostly 'web -based' compa nies, this will include the physical internet 
infrastructure, rule of law and judiciary in the country, but also the education and digital skills 
of potential users. Within the Single market, all companies with cross -border activities benefit 
from the fund amental freedoms. Therefore, a non -contribution to public budgets is seen as 
inherently unfair by many and can undermine taxpayer morale. This perception is widely 
shared by both the national tax administrations as well as the respondents to the public 
consultations. 14 out of 21 tax administrations as well as 67% of respondent agree that " social 
fairness is impacted because some digital companies do not pay their fair share of taxes".     
Figure (1): Tax revenue losses per year to tax havens (in billion EU R) 111 
 
Source: Torslov, Wier and Zucman (2017)  
iv. RISK OF FURTHER SINGL E MARKET FRAGMENTATI ON 
 
As the problem becomes more pressing, Member States face increased pressure to adopt 
national solutions, in the areas of both direct and indirect taxation.  Some Member States 
already have in place targeted regimes, while others are planning to introduce such regimes.   
                                                 
111 https://www.theguardian.com/commentisfree/2017/nov/08/tax -havens -dodging -theft-multinationals -avoiding -
tax  0,0 2,0 4,0 6,0 8,0 10,0 12,0 14,0 16,0 18,0GermanyUnited KingdomFranceItalySpainSwedenAustria
Absolute tax losses ( € billion)  
 
139 
 Most recent national tax measures to address the digital economy are in the area of 
indirect taxation.  Hungary introduced an advertisement ta x in 2014 and further amended it in 
2015), while Slovakia recently started to tax fees resulting from intermediation through 
websites and online platforms (2018). Certain contributions come in the form of para -fiscal 
taxes or levies, such as those imposed in France and Germany on the access to content, 
including digital content.112 In other countries, various legislative initiatives are being 
discussed to target digitalised companies, based either on turnover or on sales stemming from 
certain parts of their b usiness, such as intermediation and the provision of online advertising 
(UK) or digital B2B transactions of electronically supplied services (Italy).113 Furthermore, a 
group of Member States recently called for a new taxation intended to re -capture part of w hat 
the digitalised companies should be paying in terms of corporate income tax in the form of a 
so-called 'equalisation levy' imposed on the turnover of such companies114. 
In the realm of direct taxes,  the measures introduced so far deal with the profit -shifting 
issue in general, and are not specifically targeting digitalised companies.  The United 
Kingdom has introduced a measure in the form of a 'diverted profit tax' as of 2015 and Italy 
has introduced new administrative procedures for large non -resident MN Es as of 2018. Table 
(6) in section 9.1 and Table (1) in Annex 6 provide an overview of relevant national taxes.  
An uncoordinated implementation of national measures  adds distortions to the 
functioning of the single market, also contributing to business un certainty on the future 
tax framework. The introduction of country -specific tax regimes leads to distortions of 
competition and may result in double taxation of digitalised companies that supply cross -
border services in the single market. This hurts the co mpetitiveness of the EU as a whole and 
adds uncertainty. Moreover, a patchwork of national measures generates new incentives and 
opportunities for tax arbitrage. 15 out of the 21 national tax authorities questioned on this 
topic agree that " the current sit uation could push some Member States toward adopting 
uncoordinated measures that would lead to the fragmentation of the Single market". In the 
case of the respondents to the public consultation, this risk has been identified by 82% of 
them, signaling that stakeholders are weary of the possible consequences that the current 
situation might have, in the absence of a coordinated approach.   
                                                 
112 Such levies are used to finance funds dedicated to the support of the development of domestic 
cinematography and content. Also, in the context of the revision of the Audio -visual Media Services Directive, 
the Commission has proposed (COM 2016/0287 final, Art. 13) to allow Member States to impose financial 
contribution s (direct investments or levies allocated to national film funds) to on -demand services in their 
jurisdictions as well as, under certain conditions, to those established in a different Member State but targeting 
their national audiences.  
113 See Annex 6 for further details.  
114 See the Political statement/Joint initiative on the taxation of companies operating in the digital economy – 
http://www.mef.gov.it/inevi denza/banner/170907_joint_initiative_digital_taxation.pdf  submitted by Germany, 
France, Italy and Spain to the Estonian Presidency of the Council in September 2017.  
 
140 
  
ANNEX 8: METHODOLGY BEHIND REVENUE ESTIMATES FOR THE 
INTERIM OPTIONS  
 
TOP -DOWN ESTIMATES  
 
The starting point is data and forecasts published by Statista on revenue in different digital 
markets. Statista classifies the digital market into 8 main categories (e -services115, e-
commerce, digital media, digital advertising, e -travel, connected car, e -health, smart home), 
which are f urther broken down in subcategories. Cloud computing is covered separately. For 
e-payment there has been no reliable data on revenues earned in the sector (only on 
transaction volumes). Note that e -commerce, connected car, e -health, and smart home all 
relate to applications for physical goods and are not within the scope of this exercise. The 
table below shows how these categories relate to the business models used in this impact 
assessment. As reference year, Statista forecasts for 2019 were used. All esti mates are static, 
that is they do not take into account any behavioural responses.  
Classification in this impact assessment  Statista classification  
Advertising  Digital advertising  
Marketplace/intermediary  E-services and e -travel  
Digital content/solutions  Digital media and cloud computing  
  of which digital media    Digital media  
 
Data from the AMECO database on GDP in 2019 and the US dollar/EUR exchange rate were 
used to convert figures into EUR and GDP figures. To arrive at shares of turnover earned by 
companies above the general revenue threshold, an analsyis done for the CCCTB i mpact 
assessment based on firm level data (from the Orbis database) was used. This gave the share 
of entities and share in turnover of companies above a, respectively, EUR 50/500/750 million 
threshold. A caveat is that it may well be that the size distribu tion is different for companies 
in the digital sector.  A specific revenue threshold on relevant digital activities is not explicitly 
accounted for in these estimates. At least for most relevant companies above the EUR 750 
million threshold and with signif icant relevant activities the specific threshold is not expected 
to be binding.  
                                                 
115 E-services is composed mainly of event tickets, restaurant delivery/online takeaway, fitn ess applications, and 
online dating services.  
 
141 
 In the gross revenue estimates, the pure revenue from the new tax is computed. In the net 
revenue estimates, it is assumed that the digital revenue tax would be a deductible b usiness 
expense for corporate income tax purposes, which would reduce corporate income tax 
revenue. To account for this, we used the average statutory corporate income tax rate in the 
EU (about 23%).  
 
BOTTOM -UP ESTIMATES  
The starting point for the analysi s was a list of 112 large multinational companies. These 
include the 100 top global digital multinational companies analysed in UNCTAD (2017b) in 
addition to 12 other companies that were also considered relevant and have not been covered 
in the UNCTAD repo rt, in some cases since they required that companies publish certain 
information in their financial reports. The 12 companies that were added are from each of the 
four business models analysed in this impact assessment.   
Web Visits were obtained from SimilarWeb ( www.similarweb.com ) by adding up all visits 
from residents of a country to a domain, and then summing up all domains and sub -domains 
belonging to the same company. Web visits data were obtained by Simi larWeb for the year 
2016 and the first semester of 2017. Estimates for sales are obtained by allocating global 
consolidated turnover (for 2017 or, if not available, 2016 or 2015) for the 112 companies to 
each country proportionally to the share of Web visi ts. The top companies were selected 
ranking them by global consolidated revenues, based on data published by UNCTAD. The list 
includes a heterogeneous set of companies who mostly operate their business through the 
Internet (i.e. search engines, social netw orks, media content providers, cloud computing 
services, e -commerce companies, providers of financial information and data, payment 
platforms). The largest company included has global consolidated revenues of about US 
dollar 136 billion; the smallest of ab out 0.4 BLN/USD. To convert US dollar to euros, an 
average exchange rate of 0.90 was assumed.  
The measures of web visits to the web domains of these selected companies are used to proxy 
for the amount of sales that would be assigned to a given EU Member co untry according to a 
proportionality criterion. The ratio of total Web visits originated from an EU Member State 
over global Web visits is multiplied by global revenues to obtain the bottom -up tax base 
estimates. These revenue figures are then employed to estimate the gross revenue effects of a 
revenue tax, assuming that the tax is designed in a way that allows to capture the full amount 
of imputed value.  
Some caveats are in order with respect to the calculations:  
1. Some companies use web domains as part of their marketing strategy, differentiating 
between countries and consumer profiles. Often there is no comprehensive list 
 
142 
 available of all the domains belonging to a company, so information from multiple 
sources was exploited (Google, Wikipedia, specialized Web sites) to match Web 
domains to companies. The resulting domain list is very comprehensive but still, 
possibly incomplete.  
2. A comparison of sales figures reported in the financial accounts of some very large e -
commerce companies using Orbis data against  the corresponding measure of web 
visits shows that they positively and significantly correlate. Some of the companies in 
the list though are not as well captured by web visits as a proxy for the location of web 
sales. This is the case for hardware or info rmation providers who might be using IP 
addresses not associated with a web domain. The same holds for videogame 
producers, because games on the internet are often sold and operated through 
intermediaries who may have their own web domains. For these compa nies therefore 
the allocation of sales by country based on Web visits can be less dependable. Note, 
though, that these companies are minority in the list, both in terms of number of 
company appearing in the list, even more so in terms of their overall sale s (about 11% 
of total revenues from all included companies).  
 
 
 
 
 
 
  
 
143 
 ANNEX  9: PROPERTIES OF A DESTI NATION -BASED CASH -FLOW TAX  
 
The destination -based cash flow tax (DBCFT) has the potential to do away with most of 
the significant distortions embedded in traditional corporate tax systems.  Theoretically it 
can address tax induced distortions i) to the amount and type of domestic investment, ii) to the 
financing choice between debt and equity, iii) to the choice of organisational form, iv) to the 
internation al location of real investment, and to v) the international location of tax base 
(Devereux and Sorensen, 2006).  
 
A number of its beneficial properties are not dependent on universal adoption but can 
also be re -aped when implemented unilaterally.  With a ca sh flow tax, marginal 
investments, i.e. those investments that are just worthwhile being undertaken in the absence of 
any tax, are not taxed. As a result the level of investment is the same as if there was no tax at 
all.  Moreover, debt and equity financin g costs receive the same tax treatment. Another 
theoretical advantage is the simplicity of the system as recording of cash flows is easy. A 
destination -based cash flow tax adds an element of border adjustment, which shifts the 
taxation right to the place o f sale of a good or service.  
 
However, in addressing international distortions, it is important to distinguish universal 
adoption by all countries from a unilateral or only partial adoption.  Distortions to the 
location of real investments would only be r emoved if the tax is adopted by all countries. 
Otherwise, there would be a tax induced incentive to locate these investments in the 
jurisdiction that operates the destination -based cash flow tax. Finally, only if it were adopted 
universally, the system is robust against tax avoidance through inter -company transactions 
(Auerbach et al., 2017, Devereux and Sorensen, 2006). Common tax avoidance channels, 
such as the use of inter -company debt, locating intangible property in low tax jurisdictions 
and abuse of i nter-company transfer pricing, would no longer be effective in reducing the tax 
burden of companies. In contrast, adoption of only a subset of countries would lead to 
intensified tax avoidance problems for countries that have not adopted the reform. For th e 
same reason, countries who have not adopted the reform would have an incentive to do so.  
In other words, if the EU was to unilaterally introduce a destination -based cash flow tax 
then there will continue to be incentives to shift profits through manipul ation of transfer 
pricing, but the incentives will pull more towards the EU  (potentially at the expense of the 
EU tax base). The interaction of a destination -based business tax system with traditional 
source -based business tax systems may also create new o pportunities for tax avoidance.  
It should however be noted that to the extent that the DBCFT would apply only to business -
to-business transactions and not to business -to-consumer transactions – given the practical 
difficulty to implement this – the problem s of the definition of a taxable presence and of the 
allocation of profit for the digital sector would remain identical and that the solution would 
 
144 
 still require an adaptation of the definition of a permanent establishment and of its attributed 
profits.   
 
145 
  
ANNEX  10: MACROECONOMIC IMPACT OF CHANGES IN THE CCCTB  
FORMULA  
 
To simulate the effect of changes to the formula, the CORTAX model – a computable 
general equilibrium model – was used (see Annex 4 for the methodological details).  In 
CORTAX there is one mul tinational headquarter per country with subsidiaries in all 28 
Member States, that is multinational enterprises are tax resident in all EU Member States. 
Thus the model in its baseline does not explicitly account for the problem of lack of 
permanent establ ishment. This is instead indirectly captured through the calibration of the 
current distribution of tax revenue across Member States.  
To model the impact of factoring in user contribution in the formula, four alternatives to 
the one currently proposed for mula have been modelled.  All formulas use the assumption 
that digital firms represent 5% of the economy.116 In the first three formulas, a 'digital input 
factor' was added to the formula, affecting the apportionment of profits for the 'digital 
companies' rep resenting 5% of the economy. The location of digital firm activity by country 
was proxied using total page views, in relative terms, for the top 50 web sites across the EU. 
In the absence of data linking page views by multinational location, the same digit al presence 
for all EU multinationals was assumed.117 The first two alternatives keep the formula for all 
other companies the same as before.  
(i) Alternative 1: four factors for the digital.  
0.05 * (1/8 wages, 1/8 employees, 1/4 capital, 1/4 sales, 1/4 user  input) +  
0.95 *(1/6 wages, 1/6 employees, 1/3 capital, 1/3 sales)  
                                                 
116 The estimation of the size of value added from digital products is challenging and no agreed -upon 
methodology is yet available. Estimates  depend on the employed definition of digital economy, for which there  
is no broad consensus. The Boston Consulting Group combines data from the OECD and national statistical 
agencies to estimate an average direct contribution of the digital economy to GDP in G20 countries of 5.1%, 
with a maximum in UK of 10.4% and a minimum  in Indonesia of 1.4%.  Alternative estimates from consulting 
firms and  professional associations (like The Internet Association, which represents the interests of many giant 
companies: Google, Amazon, Airbnb, Salesforce, and many more) point to about 6% of  GDP in the U.S. coming 
from purely Web -based businesses. The OECD Internet Economy Outlook 2017 estimates that 5.4% of global 
value added in the OECD area in 2015 directly comes from information and telecommunication (ICT) products 
although this sector en capsulates a wide array of activities going beyond web companies while possibly missing 
significant major digital companies (for instance, Amazon is listed under the SIC code 5961 which is not 
included in the OECD definition of ICT). UNCTAD (2017c) estimat es that the value added for the EU amounts 
to 4.3%.  Taking stock of the lack of a consensus definition of the digital economy and absent any data more 
dependable than these, 5% looks like a reasonable estimate and we employ it as a conventional figure for  our 
simulations.  
117 This is likely to put additional emphasis on subsidiaries relative to multinational headquarters, as some home 
country bias may exist.  
 
146 
 (ii) Alternative 2: user input for the digital.  
0.05 * (0 wages, 0 employees, 0 capital, 0 sales, 1 user input) +  
0.95 * (1/6 wages, 1/6 employees, 1/3 capital, 1/3 sales)  
(iii) Alternative 3: user input for the digital and sales for the traditional.  
0.05 * (0 wages, 0 employees, 0 capital, 0 sales, 1 user input) +  
0.95 * (0 wages, 0 employees, 0 capital, 1 sales)  
(iv) Alternative 4: sales for the digital and the traditional  
0.05 * (0 wages, 0 employees, 0 capital, 1 sales) +  
0.95 * (0 wages, 0 employees, 0 capital, 1 sales)  
 
As the results in Table (1) show, there is hardly any impact at the macro -level.  Adding a 
digital factor for digital companies while keeping the formula  constant for all other firms 
(Alternatives 3 and 4), results in a negligible additional positive economic impacts at EU 
level. If one applies a 'sales by destination principle' (Alternatives 3 and 4), at least for all 
non-digital companies, there is a neg ligible lower economic impact.118 There are two factors 
that suggest that the overall impact could be slightly larger. First, if one takes into account 
that the share of the digital economy is likely to grow significantly, the impact should grow 
accordingly for Alternatives 1 and 2.  If one assumed growing compliance costs in the 
baseline scenario due to new national measures applied over time, the impact would be more 
positive as well.  
Table (1) : Economic effects of applying different formulas in the CCCTB for the EU aggregate  
                                                 
118 A key advantage, not captured here, is that the destination of sales cannot be easily manipulated b ecause, in 
any case, companies always have an incentive to sell as much as possible in a given location. In the US, where 
states use formulary apportionment to attribute corporate tax base, there has been a trend to increasingly use 
sales in the formula (a nd in parallel, reduce the weight of other factors) (Yonah et al, 2014).  
 
147 
  CCCTB -
MNEs 
Baseline  CCCTB -
MNEs (1)  CCCTB -
MNEs (2)  CCCTB -
MNEs (3)  CCCTB -
MNEs (4)  
Cost of capital  
(% points change)  -0.150  -0.150  -0.151  -0.142  -0.142  
Investment  
(percentage change)  1.578  1.582  1.593  1.569  1.557  
Wage   
(percentage change)  0.720  0.721  0.723  0.699  0.695  
Employment  
 (percentage change)  0.355  0.355  0.357  0.356  0.354  
GDP   
(percentage change)  0.531  0.532  0.535  0.522  0.519  
Revenue CIT (% 
GDP)  -0.478  -0.479  -0.482  -0.474  -0.470  
Welfare  
 (% GDP)  0.120  0.120  0.120  0.117  0.117  
 
Source: European Commission Joint Research Centre, based on the CORTAX model . The baseline corresponds 
to the simulation in Table B.49 of Appendix B in Joint Research Centre of the European Commission (2016).  
  
 
148 
 ANNEX  11: COMPATIBILITY OF PREFERRED INTERIM SO LUTION WITH EU 
LAW  
 
The preferred interim option is compatible with the fundamental freedoms of the TFEU. 
Currently member States are allowed to design their own direct tax systems, however they 
have to respect the obligations imposed b y the Treaties. Considering its main features, the 
interim solution would not infringe t he internal market freedoms of establishment119 (article 
49 TFEU) and to provide services120 (article 56 of TFEU) as interpreted by the CJEU. The 
scope of the tax will incl ude both non -resident and domestic transactions and companies. 
Cross -border activities/companies will be not taxed heavier than similar domestic ones. In the 
light of the CJEU121 only one rate will apply. Thresholds have to be set in such a way as to not 
systematically exclude domestic companies from the scope of the tax.  
The preferred interim option would also be compatible with VAT rules.  According to the 
VAT Directive, any taxes, duties or charges are compatible with VAT as long as they cannot 
be character ised as turnover taxes. As interpreted by the existing case -law of the CJEU, any 
tax, duty or charge is not to be found as qualifying as 'turnover tax' if it does not display at 
least one of the essential characteristics of VAT. Such essential characterist ics of VAT have 
been defined by the CJEU in the following way122: (i) it applies generally  to transactions 
relating to goods or services; (ii) it is proportional to the price  charged by the taxable person 
in return for the goods and services which he has supplied; (iii) it is charged at each stage  of 
the production and distribution process, including that of retail sale, irrespective of the 
number of transactions which have pr eviously taken place; and (iv) the amounts paid during 
the preceding stages of the process are deducted  from the tax payable by a taxable person, 
with the result that the tax applies, at any given stage, only to the value added at that stage and 
the final burden of the tax rests ultimately on the consumer.  
The interim measure could not be seen as having the essential characteristics 1 and 4 of 
VAT , given that it would not be applied to goods and services generally123, and that no 
deduction of tax paid in pre vious stages of the production would be allowed. As regards the 
                                                 
119 CJEU, judgement of 14 September 2017, Trustees of the P Panayi Accumulation & Maintenance Settlements , 
C‑646/15, EU:C:2017:682, paragraph 43" All measures which prohibit, impede or r ender less attractive the 
exercise of the freedom must be considered to be restrictions on freedom of establishment (judgment of 21 May 
2015, Verder LabTec, C ‑657/13, EU:C:2015:331, paragraph 34 and the case -law cited)"   
120 CJEU, judgment of 22 October 2014, Blanco and Fabretti , joined Cases C -344/13 and C -367/13, 
EU:C:2014:2311.   
121 CJEU, judgment of 5 February 2014, Hervis Sport , C-385/12, EU:C:2014:47.  
122 CJEU, judgment of 3 October 2003, Banca popolare di Cremona, C-475/03 , EU:C:2006:629 , paragraph 28; 
CJEU, judgment of 11 October 2007, Kogaz and others , C-283/06, EU:C:2007:598 , paragraph 37. See also 
CJEU, judgment of 8 June 1999, Pelzl and others , C-338/97, EU:C:1999:285,  paragraph 21; and CJEU, 
judgment of 31 March 1992,  Dansk Denkavit, C-200/90,  EU:C:1992:152 , paragraph 11;  
123 See CJEU, judgment of 19 March 1991, Giant v Overijse , C-109/90, EU:C:1991:126, paragraph 14.  
 
149 
 essential characteristic 2 of VAT, where there is a tax based on the gross turnover of a 
business during a specific period, it would not be possible to determine the precise amount of 
that cha rge which may be passed on to the client. Based on the existing case -law of the 
CJEU,124 if it is not certain if and to what extent that tax will be borne by the final consumer, 
the tax cannot be said not to be proportional to the price charged, and  therefo re, the measure 
cannot be seen as having the essential characteristic 2 of VAT.  
Given that at least one of the essential characteristics of VAT is not displayed, it seems safe to 
assume that the interim measure does not jeopardise the functioning of the c ommon system of 
VAT by being levied on the movement of goods or services and on commercial transactions 
in a way comparable to VAT, and that it would not qualify as a 'turnover tax' for the purposes 
of Article 401 of the VAT Directive, thus being VAT -compa tible.  
                                                 
124 See Pelz and others , paragraph 25; and Giant  v Overijse , paragraph 14.  
 
 ANNEX 12: INTERIM SOLUTION – HOW IT WOULD WORK IN  PRACTICE  
 
Example 1 – advertising activities (I)  
This scenario covers the provision of services consisting in the making available of advertising space online, by a third -country taxable person to another third -country party. 
The services target users in the EU. The revenues obtained from the supply of the advertising service are paid from the third  country, but since the targeted users are in the 
Member State 1 and Member State 2, DST is due in those Member States. The DST due is apportioned between Member States 1 and 2 according to the number of times an 
advertisement has been displayed ( we assume one display for each user ). Therefore,  the DST is divided equally between Member State 1 and Member State 2.  
 
 
UserThird country Member State 1 (MS1)
 DST taxable revenues = EUR 1000 
 Place of taxation? Member States where users are located (MS1 and MS2).
 Apportionment in each MS propportional to the number of users in those MS (EUR 500 in each MS) 
 DST due in MS1 (3% x 500) = EUR 15 
 DST due in MS2 (3% x 500) = EUR 15Tax authority MS1
UserMember State 2 (MS2)
Tax authority MS2EUR 1000 DST rate = 3% 
 It is assumed that all payments are in EUR
Taxable 
personSupply of 
digital 
services
“making 
available
advertising
space”online
advertising
online
advertising
DST (MS2) 
= EUR 15DST (MS1) 
= EUR 15
 
151 
 Example 2 – advertising activities (II)  
Same as Example 1, but the taxable person not only targets EU online users, but also users in the third country, and the paym ent cannot be li nked to a specific supply of online 
advertising service but constitutes consideration for all of them. No DST liability arises in respect of users in the third c ountry, although users outside of the EU are taken into 
account for the apportionment of taxabl e revenues to the EU. Another characteristic of this scenario is that the number of users in Member State 1 doubles the numbe r of users 
in Member State 2. That will be reflected in the apportioned DST to be paid in Member State 1 and Member State 2.  
 
 
UserThird country Member State 1 (MS1)
Tax authority MS1
UserMember State 2 (MS2)
Tax authority MS2EUR 1000 DST rate = 3% 
 It is assumed that all payments are in EUR
Taxable 
personSupply of 
digital 
services
“making 
available
advertising
space”online
advertising
online
advertising
DST (MS2) 
= EUR 7.5DST (MS1) 
= EUR 15 User
Useronline
advertisingDST× 
(MS1 has double 
users than MS2)(MS1 has double 
users than MS2)
 DST taxable revenues = EUR 1000 
 Place of taxation? Member States where users are located (MS1 and MS2)
 Apportionment in each MS proportional to the number of users in those MS (EUR 250 in third country, 
EUR 500 in MS1 and EUR 250 in MS2)
 DST due in MS1 (3% x 500) = EUR 15 
 DST due in MS2 (3% x 250) = EUR 7.5
 
152 
 Example 3 – advertising activities (III)  
In this case, the taxable person is established in the EU (Member State 3), unlike in example 2. Because of that, the online advertising targeting "domestic" users in Member 
State 3 must be taken into account, and DST  will be payable in Member State 3 too. Again, the number of times an advertisement has been displayed in each Member State 
will have to be taken into account for the apportionment of DST.    
 
 
UserMember State 3 Member State 1 (MS1)
Tax authority MS1
UserMember State 2 (MS2)
Tax authority MS2EUR 1000 DST rate = 3% 
 It is assumed that all payments are in EUR
Taxable 
personSupply of 
digital 
services
“making 
available
advertising
space”online
advertising
online
advertising
DST (MS2) 
= EUR 7.5DST (MS1) 
= EUR 15 User
Useronline
advertising
(MS1 has double 
users than MS2)(MS1 has double 
users than MS2)
Tax authority MS3
DST (MS3)
= EUR 7.5This (domestic) 
transaction is 
taken into 
account 
(user in EU)(MS1 has double 
users than MS3)
 DST taxable revenues = EUR 1000 
 Place of taxation? Member States where users are located (MS1, MS2 and MS3)
 Apportionment in each MS proportional to the number of users in those MS (EUR 500 in MS1, EUR 250 
in MS2 and EUR 250 in MS3)
 DST due in MS1 (3% x 500) = EUR 15 
 DST due in MS2 (3% x 250) = EUR 7.5
 DST due in MS3 (3% x 250) = EUR 7.5
 
153 
 Example 4 – online platforms (I)  
This scenario covers the pro vision of services consisting in the making available of online platforms allowing its users to meet and interact (we assume that there is an 
underlying supply between the users). That service is provided by a third -country taxable person to users in the E U. In this scenario, both users pay to the online platform for 
being able to access it and to conclude transactions between them. The place of taxation is where the users are (Member State  1 and Member State 2), and DST must be 
apportioned based on the num ber of users having concluded a transaction in a given Member State (in this case, equally divided between Member State 1 and  Member State 
2).  
 
 
UserThird country Member State 1 (MS1)
Tax authority MS1
UserMember State 2 (MS2)
Tax authority MS2 DST rate = 3% 
 It is assumed that all payments are in EUR
Taxable 
personSupplies of
digital 
services
“making
available
online
 platform”
DST (MS2) 
= EUR 1.5DST (MS1) 
= EUR 1.5
Underlying relationship between users (through platform)EUR 50
EUR 50
 DST taxable revenues = EUR 100
 Place of taxation? Member States where users are located (MS1 and MS2)
 Apportionment in each MS proportional to the number of users in those MS (EUR 50 in MS1 and EUR 50 
in MS2)
 DST due in MS1 (3% x 50) = EUR 1.5
 DST due in MS2 (3% x 50) = EUR 1.5
 
154 
 Example 5 – online platforms (II)  
Same as example 4, but only one of the two users of the online platforms pa ys for the digital service received. That does not affect the place where the DST is due (Member 
State 1 and Member State 2), which is determined based on the location of the users having concluded an underlying transactio n, and irrespective of the place w here the 
payment is made. The fact that one of the users accesses the platform and concludes underlying transactions for free has no i mpact.  
 
 
UserThird country Member State 1 (MS1)
Tax authority MS1
UserMember State 2 (MS2)
Tax authority MS2 DST rate = 3% 
 It is assumed that all payments are in EUR
Taxable 
personSupplies of
digital 
services
“making
available
online
 platform”
DST (MS2) 
= EUR 1.5DST (MS1) 
= EUR 1.5
Underlying relationship between users (through platform)EUR 100
NO payment
for use of 
the platform
 DST taxable revenues = EUR 100
 Place of taxation? Member States where users are located (MS1 and MS2)
 Apportionment in each MS proportional to the number of users in those MS (EUR 50 in MS1 and EUR 50 
in MS2)
 DST due in MS1 (3% x 50) = EUR 1.5
 DST due in MS2 (3% x 50) = EUR 1.5
 
155 
 Example 6 – mixed business models  
This scenario illustrates a taxable person established in a third country with  a mixed business model, obtaining revenues from several activities (the making available of an 
online platform, but also the sale of his own goods via a website). In such a case, it is necessary to identify the several r evenue streams that the company has . Those revenues 
corresponding to the online sale of goods would remain out of the scope of the DST (they would not qualify as taxable revenue s), and this is why the DST liability of the 
company would not change in respect of example 4.  
 
UserThird country Member State 1 (MS1)
 TOTAL revenues = EUR 400
 DST taxable revenues = EUR 100 (EUR 300, from supply of goods, out of scope)
 Place of taxation? Member States where users are located (MS1 and MS2)
 DST taxable revenues, apportionment in each MS proportional to the number of users in those MS (EUR 
50 in MS1 and EUR 50 in MS2)
 DST due in MS1 (3% x 50) = EUR 1.5 
 DST due in MS2 (3% x 50) = EUR 1.5Tax authority MS1
UserMember State 2 (MS2)
Tax authority MS2 DST rate = 3% 
 It is assumed that all payments are in EUR
Taxable 
personSupplies of
digital 
services
“making
available
online
 platform”
DST (MS2) 
= EUR 1.5DST (MS1) 
= EUR 1.5
Underlying relationship between users (through platform)EUR 50
EUR 50
UserMember State 3 (MS3)
Tax authority MS3Supply of goods 
(contracted online)
 300 EUR× DST
 
156 
 Example 7 – obligations (OSS)  
The tax envisages the use for taxable persons of a One -Stop-Shop (OSS) in order to register, submit the DST return, and pay DST. That means that he has a single contact 
point ("Member State of identification") through which all these obli gations will be fulfilled. It is for the Member State of identification to exchange the information obtained 
from the taxable person (identification and DST return), as well as to pay the corresponding amounts of DST due in other Memb er States.  
 
Third country Member State 1 (MS1)
 DST liability in MS1, MS2, 
MS3, MS4.Tax authority MS1
Taxable 
personMember State 2 (MS2)
Tax authority MS2
Member State 3 (MS3)
Tax authority MS3
Member State 4 (MS4)
Tax authority MS4registration
+ 
“OSS return”
+ 
pay total DST 
(MS1, MS2, MS3, MS4)Taxable person has chosen MS1 as “MS of identification”
pay
DST (MS2)
pay
DST (MS3)
pay
DST (MS4)
 MS1 will share with MS2, MS3 and MS4 info 
about identification and DST return. 
 
 ANNEX  13: WORK AT THE OECD   
 
Tax Policy Approach and Timeline of the OECD work on the interim report of the 
OECD Task Force for the taxation of the digital economy  
Tax policy approach of the OEC D for the taxation of the digital economy.  
The latest meetings of the Task Force on the Taxation of the Digital Economy (TFDE) were 
held in Paris from 11.12 to 13.12. 2017 and from 13.3. to 15.3. 2018. Before the December 
Paris meeting there were trilateral (EE PR & Council Secretariat General, OEC D and COM) 
and bilateral (OECD and COM) meetings to discuss and coordinate. This close coordination 
is reflected in the ECOFIN Council Conclusions from 5 December 2017 for the taxation of 
the digital economy.  
Main elements covered in the OECD Interim repo rt 
The OECD interim report on the taxation of the digital economy was published and presented 
to the G20 Finance Ministers in March 2018. The interim report reflects different options to 
address these challenges and the OECD intends to seek a consensus bas ed solution by 2020.  
The table below illustrates the main elements of the OECD interim report with a reference and 
comparison to the corresponding elements in the EU project.  
–Element in the OECD interim report  Corresponding EU elements  
Taxation challenges arising from the 
digitalisation of the economy (Chapter 1)  Commission Communication from 21.9.2017 and 
this impact assessment report  
Business models and value creation in the 
digitalised economy (Chapter 2)  This impact assessment report  
Progre ss with BEPS implementation and 
tax policy developments in the taxation of 
the digitalised economy (Chapters 3 and 4)  This impact assessment report (description of the 
dynamic baseline). The main implementation of 
the outcome of the OECD BEPS project is 
included in the two Anti -Tax Avoidance 
Directives adopted in 2016).  
Adapting the international tax system and 
options for interim measures (Chapters 5 
and 6)  EU comprehensive measures consisting of a 
proposal for a Council Directive on digital 
presence an d profit allocation rules for intra EU 
situations and a Recommendation for amending 
Double Tax Conventions concluded between EU 
Member States and third countries.  
 
The EU interim measure will be a proposal for a 
Council Directive on a common system of a ta x on 
certain digital services.  
Impact of digitalisation on other aspects of 
the tax system: opportunities and risks 
(Chapter 7)  Not part of the Commission March package.  
Conclusions & next steps (Chapter 8)  The Bulgarian presidency is planning to treat  the 
 
158 
 EU legislative proposals as a priority. Four 
meetings are scheduled in April. The incoming 
Austrian presidency also has expressed an interest, 
but no decision has been taken.  
 
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