The European perspective on the taxation of digital multinational enterprises

Published on 19th Jul 2019

The taxation of multinational enterprises carrying on digital businesses remains a hot topic, with the UK and France last week announcing progress in establishing their own digital services taxes. In a previous edition of our international newsletter, we set out the background to this thorny issue. In this article, we provide an update on recent developments, at an international and an individual Member State level.

What has been happening?

Although the debate has moved on in the past few months, it is not surprising that, given the complexity of the issues involved, there is still much work to be done to reach an international agreement on how to tackle the issue. However, it does seem that, for the most part, countries are moving towards a globally-driven, comprehensive solution led by the OECD work, perhaps encouraged in part by the vocal opposition of the US towards any unilateral action by individual countries.

On 31 May 2019, the OECD published its Programme of Work: a consensus document approved by the 129 members of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS), which aims to resolve the tax challenges arising from the digitalisation of the economy. The Programme of Work draws on the analysis from its consultation document, “Addressing the Tax Challenges of the Digitalisation of the Economy”, which was published in February 2019.

The Programme of Work will explore the technical issues to be resolved through the two main pillars:

  • The first pillar will explore potential solutions for determining where tax should be paid and on what basis ("nexus"), as well as what portion of profits could or should be taxed in the jurisdictions where clients or users are located ("profit allocation");
  • The second pillar will explore the design of a system to ensure that multinational enterprises – in the digital economy and beyond – pay a minimum level of tax. This pillar would provide countries with a new tool to protect their tax base from profit shifting to low/no-tax jurisdictions, and is intended to address remaining issues identified by the OECD/G20 BEPS initiative.

The OECD is aiming to reach a global solution with the publication of its final report in 2020, noting in its recently published Programme of Work that this will require the outline of the architecture to be agreed by January 2020. At the recent G20 meeting of finance ministers and central bank governors on 8-9 June in Japan, the G20 welcomed the recent progress and endorsed this ambitious timetable.

The European Commission had also been involved in progressing the debate and it published its proposals in the form of a draft EU directive comprising a long-term solution (of a digital permanent establishment) and an interim solution (of a digital services tax).

These proposals have, however, stalled with its proposals for a long-term solution being folded into the OECD debate. Some may say this was predictable given that any EU directive would have required unanimity of the Member States, many of whom had voiced their strong opposition to the proposals. Indeed, in failing to reach an agreement on a compromised version of the directive in the ECOFIN Council meeting in March 2019, the EU said it would conduct work on its position in international discussions on digital tax in view of the OECD's report on the issue.

Although it seems, therefore, that there is appetite to wait for a global solution rather than an EU-wide one, some countries, such as Germany have announced that they will abstain from the introduction of a digital services tax (DST) until the publication of the OECD report in 2020. By contrast, other countries have continued to press for their own interim domestic solution until a global solution is found. We highlight below the progress being taken by France, Spain, Italy and the UK in relation to their own domestic DST.


The law creating a tax on digital services was adopted by the French Parliament on 11 July 2019 and is applicable from 1 January 2019. The law aims to more precisely capture the benefit that companies derive from data coming from the active participation of internet users located in France, by introducing a tax on revenue from certain digital services.

The introduction of the DST has prompted the US to announce an investigation into the DST on the basis that it unfairly targets American companies. A public hearing will be held on 19 August. Depending on the outcome of the hearing, this could lead to retaliatory measures through tariffs on French goods or other trade restrictions.

For more detail on the French DST, see this Insight.


Italy introduced its own DST (also known as the Web Tax legislation) via the Italian Budget Law for 2019 (Law No. 145, 30 December 2018). The DST was expected to come into force following the issue of an implementing decree, which should have been issued in April 2019. The implementing decree, however, still remains to be issued and has been held back by the lack of agreement at the European level.

The DST provides for a 3% tax rate for companies with over €750 million in revenues, of which at least €5.5 million are from digital services in Italy. The delay in the implementation of the DST triggers the risk of a "shortfall" in the 2019 financial budget in Italy and this is most unlikely to be sustainable for Italy’s finances. The current impasse could have a political impact in the near future.

The DST is designed to target revenues from Digital Services, that underpin “user participation”, such as:

  • Provision of a digital interface for advertising (service 1);
  • Provision of a multilateral digital interface allowing users to interact:
    • which allows users to find other users and to interact with them (service 2.a),
    • and which may also facilitate the provision of underlying supplies of goods or services directly between users (service 2.b);
  • Transmission of data collected from users and generated by the use of the digital interface (service 3).

Relevant revenues from Digital Services are those connected with the user location in Italy. Users are deemed to be located in Italy in different ways for each digital service (above), according to the following guidelines:

Users are located in Italy if:

  • Service 1: the advertising appears on the user's device when the device is being used in Italy in that tax period to access a digital interface.
  • Service 2a: the user has an account allowing the user to access the digital interface and that account was opened with a device in that Member State.
  • Service 2b: the user uses a device in Italy to access the digital interface and concludes a transaction.
  • Service 3: the data generated from a device, which was connected in Italy with a digital interface, whether during that tax period or any previous one, is transmitted in that tax period.


Spain has also shown its eagerness to move forward with its own interpretation of the DST, with draft legislation which largely follows the draft EU directive. Under the proposed draft, Spain would levy a 3% tax on the gross income from each digital transaction where, broadly-speaking, end-users are located in Spain. The digital services subject to the Spanish DST are defined in the same way as in the draft EU directive, namely:

(a) online advertising;
(b) digital intermediary activities allowing users to interact with each other or facilitating the sale of goods and services between them; and
(c) sale of data generated from user-provided information.

The Spanish DST would apply to companies with (i) total annual worldwide revenue in excess of €750 million (consistent with the draft EU directive); and (ii) yearly revenue in Spain obtained from these digital transactions of at least €3 million. This second threshold for the Spanish DST to apply is considerably lower than under the draft EU directive (which suggested €50 million) or to other proposals from Member States (such as the UK and France, as discussed above).
The Spanish draft proposal was approved for referral to Parliament in January 2019. However, final enactment by the Spanish Parliament is not expected in the short term given that general elections took place in April. The formation of a new government and the constitution of the newly elected Parliament will slow the process significantly. It remains to be seen, moreover, whether the new government will be willing to rush this proposal through.


Although the UK government has always said that an international agreement would be the best solution, in the absence of such agreement, the UK is looking to impose its own DST. The government announced in last year's Budget that it would introduce the DST and, following consultation, draft legislation and guidance has been published that outlines how the proposed DST will work.

The UK's is proposing a targeted tax at 2% on VAT-exclusive revenues of certain digital businesses which the government considers derive significant value from UK users. The provisions are only aimed at large businesses, being those which generate more than £500m in global annual revenues from in-scope business activities; and more than £25m in annual revenues from in-scope business activities linked to the participation of UK users.

The DST will apply to three types of in-scope business:

  • social media platforms;
  • internet search engines; and
  • online marketplaces.

For more detail on the UK DST, see this Insight.

Osborne Clarke comment

It seems likely that despite a desire for a global solution to the problem of the taxation of the digital economy, more countries will look at introducing unilateral measures if no consensus is achieved at the OECD level in 2020. However, the threat of US action against such unilateral measures cannot be underestimated. With an investigation already launched by the US against the French DST and a suggestion by US Senator Ron Wyden that a post-Brexit trade agreement between the UK and the US will not happen should the UK implement its DST, other countries (such as Spain and Italy) may pause for thought before finalising any domestic DST measures. In the meantime we await with interest the progress of the OECD's Programme of Work.

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* This article is current as of the date of its publication and does not necessarily reflect the present state of the law or relevant regulation.

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