South African Journal of Accounting Research

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National digital taxes – Lessons from Europe

Stefanie Geringer

To cite this article: Stefanie Geringer (2020): National digital taxes – Lessons from Europe, South
African Journal of Accounting Research, DOI: 10.1080/10291954.2020.1727083

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South African Journal of Accounting Research, 2020
https://doi.org/10.1080/10291954.2020.1727083

National digital taxes – Lessons from Europe

Stefanie Geringer*
Department of Tax Law, University of Vienna, Vienna, Austria

(Received 30 October 2019; accepted 21 January 2020)

Digitalisation has done more to shape the 21st century than virtually any other
phenomenon. However, international tax law has seemingly failed to keep pace with
rapid technological developments, which has likely led to inequalities between the tax
burden of traditional and digital business models. Thus far, there has been no
consensus regarding the issue of fair taxation of the digital economy at the
international and EU level. As European policymakers have begun to experience
noticeable amounts of pressure to act, several EU countries have pushed forward and
introduced unilateral measures to ensure they receive a fair share of the tax revenues pie.
However, it is unclear whether national digital taxes can overcome the tax
challenges stemming from the increasing digitalisation of the economy. Thus, newly
proposed and implemented national digital taxes in Europe are thoroughly elaborated
in the context of their relationship with double tax treaty law, the perils of double/
multiple taxation, their coherence with European law, their global and regional impact
on competition and competitiveness, their contribution to tax revenues and the
establishment of fair taxation conditions. The analysis concludes with a presentation
of pertinent suggestions regarding national and supranational tax policy.
Keywords: Digital Tax; Digital Economy; BEPS; Unilateral Measures; Global
Competition; Double Tax Treaties

1. Introduction
Unlike any other phenomenon, increasing digitalisation has contributed to shaping the 21st
century, which has inevitably led to meaningful changes in our everyday lives. Technologi-
cal progress has created opportunities to offer and provide internet-based services to custo-
mers around the world without having to establish any type of physical presence in other
countries (see Schön, 2018; Olbert & Spengel, 2019; Hidien, 2019, p. 268).
It is evident that international income and corporate taxation regimes have not followed
suit with these developments. Moreover, the increasing tax inequality between traditional
and digital business models and the peril of diminishing tax revenues both loom with a
greater sense of urgency. Current statistical data support these assertions: Within the terri-
tory of the European Union (EU), traditional international business models are burdened
with an average effective tax rate of 23.2%, whereas international digital business
models are taxed at an average rate of only 10.1% (B2C models) and 8.9% (B2B
models) (see European Commission, 2017; PwC, 2017, p. 6 et seq.).

* Corresponding author. Email: stefanie.geringer@univie.ac.at

© 2020 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group
This is an Open Access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/
licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
South African Journal of Accounting Research is co-published by NISC Pty (Ltd) and Informa Limited (trading as Taylor & Francis Group)
2 S. Geringer

Over the past few years, the Organisation for Economic Cooperation and Development
(OECD) and the EU have made several attempts to rebalance the relationship between digi-
talised and traditional businesses. However, neither has succeeded in carving out proposals
that would be acknowledged by a broad consensus. The ineffectiveness of ongoing discus-
sions led European policymakers to unilaterally introduce national measures primarily
aimed at levelling the playing field and grabbing their fair share of the tax revenues pie
(see Schön, 2018; European Commission, 2017; Scientific Advisory Board of the
German Ministry of Finance, 2018). Consequently, these unilateral measures must be scru-
tinised and validated to ensure they achieve their intended purposes.
The aim of this paper is to shed light on the three types of national efforts undertaken by
certain EU member states to address the issue of fair taxation of the digital economy. First, a
comparative analysis of the three categories of national digital taxes is presented, which elu-
cidates the similarities and differences related to the scope (single vs. multiple digital business
models), the base (gross revenues vs. net profits) and qualification for double tax treaty law
purposes (income tax vs. consumption/hybrid tax). Five national measures serve as examples,
which are provided to sufficiently support the arguments presented in the subsequent sections.
The chosen unilateral measures are then explained in the context of their relationship with
double tax treaty law, the peril of double/multiple taxation, their coherence with European
law, as well as their impact on global and regional competition and competitiveness, their con-
tribution to tax revenues and the establishment of fair taxation conditions. Thereafter, sugges-
tions regarding national and supranational tax policies are proposed to address effectively the
issues surrounding the complexities of the digital economy.

2. Taxation trends in Europe’s digital economy

2.1 Background
The challenges associated with the fair taxation of the digital economy were identified as a
primary focus of the OECD’s base erosion and profit shifting (BEPS) project. The steps
taken by the Task Force for the Digital Economy (TFDE) culminated in the publication
of the OECD BEPS Action 1 Report in 2015, which mapped the importance of digital tech-
nologies for businesses, the characteristics of digital businesses and the challenges associ-
ated with direct and indirect taxation (see OECD, 2015). The TFDE used the Action 1
Report to illustrate options specifically tailored for the digital economy, though they did
not recommend their implementation as they expected a substantial impact from the
implementation of general BEPS measures (see OECD, 2015, nr. 383; see also Wünne-
mann, 2019, p. 135). The countries involved in the OECD’s BEPS project agreed to
further consultations and follow-up work that should result in a solution supported by a
broad political consensus by 2020 (see OECD, 2015, nr. 385; see also Wünnemann,
2019, p. 135; Pinkernell, 2019, p. 339 et seq.).
In March 2018, the TFDE issued an interim report that primarily focused on the impli-
cations of digital transformation, such as the blurred boundaries between traditional and
digital business models and the increasing significance of intangible assets, data and
user-created value. The interim report also described the predominant digital business
models and their fundamental characteristics (see OECD, 2018b, chapter 2).
In their January 2019 policy note, the TFDE scheduled further discussions among par-
ticipating countries regarding their draft proposal, which was based on two pillars. More
specifically, it addressed the modification of profit allocation and nexus (pillar I) and tar-
geted the remaining BEPS issues associated with the digital economy (pillar II; see
 South African Journal of Accounting Research 3

OECD, 2019a, p. 1). A detailed work programme was then issued in May 2019 for the
implementation of three proposed approaches designed to tackle pillar I concerns: the
“user participation” approach (preferred by the UK and France), the “market intangibles”
approach (preferred by the United States) and the “significant economic presence” approach
(preferred by emerging countries like India; see OECD, 2019b; see also Daurer, 2019,
p. 555). Most recently, the TFDE published two public consultation documents containing
the details of a proposed “unified approach” under pillar I (see OECD, 2019c; see also
Mayr, 2019c) and the global anti-base erosion (GloBE) proposal under pillar II (see
OECD, 2019d). As of the time of the publication of this paper, it is unclear whether the
OECD will achieve its ambitious goal to provide the participating countries with a consen-
sus-based solution by January 2020 (see Mayr, 2019c).
Rooted in the preparatory work at the OECD level, the European Commission (EC)
issued two proposed directives in 2018. If they were to become law, they would be incor-
porated into the national tax laws of EU member states (see Kofler, 2018, p. 57).
The first directive centred around the concept of a “significant digital presence”
designed to adjust permanent establishment (PE) criteria to make them fit, which could
effectively address cross-border situations between EU member states in the age of digita-
lisation (see European Commission, 2018a). A company’s digital presence would be
regarded as “significant” if one or more of the following are true:

. The company generates annual revenues of more than 7 million euros in a single EU
member state;
. The company has more than 1,000 users in a single EU member state; or
. The company has more than 3,000 signed agreements for digital services per year in a
single EU member state (see Article 4 of the draft, European Commission, 2018a,
p. 17).

Apparently, the idea of a digital PE would collide with provisions in existing double tax
treaties. Thus, the EC recommended the member states to modify the relevant double tax
treaties accordingly (see European Commission, 2018a, p. 4; see also Kofler, 2018, p. 57).
The draft of the directive regarding the creation of a “significant digital presence” as an
additional anchor for the allocation of revenues was accompanied by a proposed digital ser-
vices tax on revenues generated from providing certain digital services (see European Com-
mission, 2018b). Regarding its design, the EU digital services tax (EU DST) can be
characterized as a “hybrid tax” that embodies elements of an income tax and a consumption
tax. While the tax addresses revenues gained from value creation in a particular member
state, it would be prone to being passed on to consumers and is triggered by providing ser-
vices. Three types of digital services would fall under the scope of the EU DST:

. The placement of advertising on a digital interface that targets users of that interface;
. Making a multi-sided digital interface available to users that allows users to find other
users and interact with them, which may also facilitate the provision of underlying
supplies of goods or services directly between users;
. The transmission of data collected about users and generated from users’ activities on
digital interfaces (see Article 3 of the draft, European Commission, 2018b, p. 28 et
seq.).

Accordingly, the EU DST is clearly focused on large corporations, as only those EU

companies with worldwide revenues exceeding 750 million euros and taxable revenues
4 S. Geringer

of more than 50 million euros would be subject to the EU DST (see Article 4 of the draft,
European Commission, 2018b, p. 31).
The tax rate is set at 3% of the in-scope gross revenues, excluding the value-added tax
(VAT) (see Articles 7 and 8 of the draft, European Commission, 2018b, p. 34).
The EU DST gathered considerable political momentum as a “quick fix”, whereas the
integration of “significant digital presences” into EU member states’ double tax treaties was
acknowledged as the preferable mechanism over the long term (see Kofler, Mayr, & Schla-
ger, 2017; Bendlinger, 2018, p. 268 et seq.; Kofler, 2018, p. 57).
However, the implementation of either (or both) of these measures failed in the face of
resistance from certain member states, most notably Ireland, which is where Google’s and
Facebook’s EU headquarters are located (see Leigh, 2018). Even the proposed tax solely on
the provision of targeted advertising services (i.e., the EU digital advertising tax [EU DAT];
see Council of the European Union, 2019a) could not secure approval from all member
states (see Council of the European Union, 2019b, p. 8; Mayr, 2019a, p. I; Mayr, 2019b,
p. 264). Against this background, several EU member states decided to introduce national
solutions.

2.2 Grouping of national legislation by tax design

As of the time of the publication of this paper, several EU member states have introduced or
proposed national measures regarding the taxation of the digital economy (for a digital tax
map, see Tax Foundation, 2019b). These proposed and implemented unilateral tax
measures can be categorised as one of the following three types:

. Digital services taxes;

. Digital advertising taxes;
. Unilateral adjustments to PE definitions in the national income tax code.

Digital services taxes (DSTs) address multiple digital business models. Generally, they
are influenced by the draft of the EU DST and mostly mimic its primary characteristics (e.g.,
wording, tax scope, tax base, tax rate and revenues thresholds). Therefore, national DSTs
usually refer to the same three kinds of digital business models defined in the EU DST,
namely targeted advertising, the processing of user data and the provision of online market-
places (see above, Subsection 2.1.). Policymakers and scholars mostly classify these DSTs
as “hybrid taxes” because they combine elements of income and consumption taxes. DSTs
generally help to level the playing field and function as a substitute for corporate taxation.
By contrast, the national DSTs are linked to the provision of digital services, and since con-
sumption is calculated using gross revenues excluding the VAT, they are prone to be passed
on to customers (see Scientific Advisory Board of the German Ministry of Finance, 2018,
p. 3; Pinkernell, 2019, p. 361). Accordingly, DSTs are not covered by the scope of existing
double tax treaties, which only applies to taxes on income and capital (see Kofler et al.,
2017; Schön, 2018).
Most unilateral measures taken by EU member states resemble DSTs. Given the broad
media coverage of the French DST, it might be considered the most famous example. Apart
from that, the UK (which is an EU member state for now), Italy, Spain and most recently
(September 2019) the Czech Republic have drafted DST proposals (see HM Treasury,
2018b; Obuoforibo, 2019; Gazzetta Ufficiale, 2018; Nocete Correa, 2019; Kleinová,
2019). Except for the UK DST, which is covered in Subsection 2.3.1., all national DSTs
have been designed in a manner similar to the EU DST.
 South African Journal of Accounting Research 5

In contrast to DSTs, digital advertising taxes (DATs) exclusively target online advertis-
ing services. Thus, the scope of DATs is significantly reduced to address only a single
digital business model. Like national DSTs, the national DATs are based on gross revenues
excluding the VAT. Notably, DATs do not fall under the scope of double tax treaties because
they are regarded as consumption or transaction taxes (see Kofler et al., 2017).
As of the time of the publication of this paper, only Austria and Hungary have
implemented national DATs (see also Tax Foundation, 2019b). The Austrian DAT
mainly incorporates the principles of the proposed EU DAT (see Austrian Parliament,
2019b, p. 25). The Hungarian DAT has been in effect since 2014, making it one of the
first digital economy tax measures instituted anywhere in the world. In contrast to the
EU DAT, both the Austrian and the Hungarian DAT cover both the revenues from the pro-
vision of target advertising services (see Article 3 nr. 1 of the EU DAT draft, Council of the
European Union, 2019a, p. 17) and all forms of digital advertising services (see Subsections
2.4.1. and 2.4.2.).
Adjustments to the PE definition may refer to a small or vast array of digital business
models depending on the design of the legal amendment. If a digital business model meets
the criteria of the digital PE, the earnings in a particular country are subject to the national
income tax in the same manner as traditional businesses. In contrast to DSTs and DATs,
income taxes are based on net profits. Amendments to the national PE definition indispu-
tably underlie double tax treaty provisions (see Kokott, 2019, p. 129; Cibuľa & Kačaljak,
2018, p. 85).
Only a single European country, namely Slovakia, has unilaterally modified the PE defi-
nition in its national income tax code (see also KPMG, 2019).
For the purpose of this paper, five national measures were selected for closer examin-
ation, including the French and the UK DSTs, the Austrian and the Hungarian DATs and the
amendments to the Slovakian income tax code, which are presented in the following sec-
tions. From the range of similar national DSTs, France functions as the representative
model for EU DST-inspired national DSTs because it is the only one that has already
been implemented. Moreover, from the range of EU DST-inspired national DSTs, the
French DST is likely to affect digital businesses the most because France’s economy is
the third largest in the EU (before Brexit; see Eurostat, 2018). The UK DST is also pre-
sented since this legal draft incorporates significant distinctions from the EU DST, which
are important to conducting the analysis of national digital taxes presented in Section 3.
Moreover, the UK represents the second largest economy in the EU (before Brexit; see
Eurostat, 2018). Therefore, the implementation of the UK DST is likely to have a significant
and probably even larger impact on the digital economy compared to the French DST. The
Austrian and Hungarian DATs differ considerably in relation to certain aspects that are also
important to the analysis presented in Section 3. Thus, both are further explained in Sub-
section 2.4. Lastly, the amendments in the Slovakian income tax code are presented to illus-
trate a unique and bold move in national tax policy. These five examples are only described
to the extent necessary to support the aim of this paper.

2.3 First group: Digital services taxes

2.3.1 The UK digital services tax
In contrast to comparable unilateral measures within the EU territory, the UK DST sup-
plements previous measures that have predominantly addressed undesirable arrangements
of digital businesses. The UK DST’s predecessor, the UK diverted profits tax (“UK DPT”),
6 S. Geringer

was primarily enacted to re-allocate revenues from abusive tax structures to the UK affiliate,
which was the case with Google’s tax scheme, the so-called “Double Irish Dutch Sandwich”
(i.e., the “Google Tax”). However, the purpose of the UK DPT has not been narrowed just
to rebalance the tax inequality between traditional and digital business models (see Avi-
Yonah, 2019, p. 59; Sinnig, 2017, p. 410; Houlder, 2017). Indeed, the UK DPT tackles
any kind of profit shifting that exploits “tax mismatches” (e.g. shifting profits to a low-
tax jurisdiction) or avoids a PE in the UK. If such an abusive arrangement is discovered,
the UK DPT of 25% is applied to the diverted UK-related profits (see HM Revenue &
Customs, 2018, p. 3; Sinnig, 2017, p. 410 et seq.). Thus, the UK DPT can be classified
as a “classic” anti-tax avoidance provision.
By contrast, the UK DST was proposed in November 2018, and it was designed to
ensure that the local share of digital businesses’ created value is taxed in the UK (see Obuo-
foribo, 2019). The UK DST aims to address services, which are characterised by the value
created from the participation of their users in accordance with the OECD “user partici-
pation” approach that the UK has promoted (see Wünnemann, 2019, p. 137; see also
above, Subsection 2.1.). Hence, if enacted, the UK DST would be applied to revenues gen-
erated through the provision of social media platforms, search engines and online market-
places (see HM Treasury, 2018b, subsections 1.16 to 1.18). These digital services must be
understood in their broadest sense. For instance, a “provision of a social media platform”
may resemble online advertising, subscription fees or sales of data, to name a few (see
HM Treasury, 2018b, subsections 4.1 and 4.2). Consequently, the UK government chose
not to take the EU DST as a pattern, but instead, defined the tax scope autonomously.
Similar to the EU DST, the draft of the UK DST implies two thresholds for global
annual revenue and UK-related annual revenue, which must be exceeded to trigger the
DST (see HM Treasury, 2018b, subsection 1.18). The revenue thresholds are set at 500
million pounds of global in-scope revenues and 25 million pounds of UK-sourced in-
scope revenues, respectively (429.9 million euros and 21.5 million euros according to
the exchange rate of the European Central Bank [ECB] of November 22, 2019; see HM
Treasury, 2018b, subsection 6.4). Compared to the thresholds of the EU DST, which
have been set at 750 million euros of overall global revenues and 50 million euros of in-
scope revenues generated within the EU territory (see above, Subsection 2.1.), the UK
DST is more likely to target fewer corporations. In contrast to the EU DST, which would
have been 3%, the UK DST rate has been set at 2%. The UK government justifies the
lower tax rate by arguing that the UK DST is calculated from gross revenues (instead of
net profits) (see HM Treasury, 2018b, subsections 6.1. and 6.3; Obuoforibo, 2019).

2.3.2 The French digital services tax

The French DST (“Taxe sur les services numériques”, which is usually referred to as “Taxe
GAFA”) could undoubtedly be attributed to the national digital tax that has received the
broadest media coverage of all proposals by a European country. The controversial argu-
ments surrounding its implementation by the French National Assembly in July 2019 cul-
minated in Donald Trump threatening Emmanuel Macron with the imposition of tariffs on a
variety of French goods, most notably French wine (see Tankersley, Nicas, & Swanson,
2019). Notwithstanding, Emmanuel Macron signed the bill on July 24, 2019, which put
the French DST retroactively into effect as of January 1, 2019.
Concerning its main characteristics, the French DST virtually mirrors the draft of the
EU DST. The French DST centres around two digital business models in accordance
with the EU DST proposal. Hence, the French DST is applicable to revenues generated
 South African Journal of Accounting Research 7

by targeted advertising and the provision of online marketplaces, but, unlike the EU DST
proposal, not the processing of user data (see Article 299 II. of the French Tax Code, Legi-
france, 2019; see also Hidien, 2019, p. 270 et seq.). The nexus to France is given as soon as
a digital interface is accessible by users residing in France. In contrast to the EU DST that
refers to the global and EU-wide revenues (see above, Subsection 2.1.), French lawmakers
restricted the scope of the French DST by setting the second threshold at 25 million euros of
annual revenues generation from the provision of digital services solely within French ter-
ritory (see Article 299 III. of the French Tax Code, Legifrance, 2019). Although the French
DST cannot be offset against the corporate tax, it can be deducted as a business expense (see
Hidien, 2019, p. 270).

2.4 Second group: Digital advertising taxes

2.4.1 The Austrian digital advertising tax
Before implementing its DAT, a tax on traditional advertising services had been in force in
Austria for over 18 years (“Werbeabgabe”). However, this advertising tax did not include
online advertising services for historical reasons. Against this background, Austrian policy-
makers decided to extend the existing advertising tax to establish a fair taxation scheme for
the digital economy (see Austrian Parliament, 2019b, p. 26 et seq.).
The Austrian DAT (“Digitalsteuer”) was broadly designed in accordance with the draft
of the EU DAT. However, the Austrian DAT goes beyond the scope of the latter, as it does
not solely refer to targeted advertising, but to any kind of online advertising services (see
also Mayr, 2019b, p. 266). Moreover, Austrian lawmakers have narrowed the scope of the
DAT, which is similar to French policymakers (see above, Subsection 2.3.2.). Hence, such
companies are only considered taxable persons for the purposes of the Austrian DAT when

. The total amount of worldwide revenues for the relevant financial year exceeds 750
million euros; and
. The total amount of taxable revenues in Austria during the relevant financial year
exceeds 25 million euros (see Article 2 of the Austrian DAT, Austrian Parliament,
2019b, p. 2).

By contrast, the existing Austrian advertising tax does not apply a similar exemption for
small and medium-sized enterprises (SMEs) (only a de minimis rule for revenues which do
not exceed 10,000 euros; see also Geringer, 2019, p. 395).
The Austrian DAT was set at 5% of the in-scope revenues to determine a uniform tax
rate for the existing Austrian advertising tax and the Austrian DAT (see Mayr, 2019b,
p. 266; Geringer, 2019, p. 399).
In Austria, tax revenues are usually not earmarked. Hence, it is remarkable that 15
million euros of the annual tax revenues from the Austrian DAT will be explicitly dedicated
to financing of the digital transformation process of Austrian media companies (see Article
8 paragraph 4 of the Austrian DAT, Austrian Parliament, 2019, p. 3; see also Mayr, 2019b,
p. 266; see on the issues arising from this earmarking below, Subsection 3.3.).

2.4.2 The Hungarian digital advertising tax

Hungary introduced an advertisement tax in 2014 to address revenues from traditional as
well as online advertising services. The current tax rate is set at 7.5%, and smaller
8 S. Geringer

advertising companies that do not raise revenues of more than 100 million Hungarian
forints (299,141 euros according to the ECB exchange rate of November 22, 2019) are
exempt from the Hungarian DAT (see Sinnig, 2017, p. 412 et seq.).
In contrast to the Austrian DAT, the Hungarian tax is uniformly applicable to offline and
online advertising services. Most notably, smaller advertising companies are indiscrimi-
nately exempt from the tax, even if they provide traditional or online advertising services.

2.5 Third group: Extensions of the PE definition in the national income tax code
2.5.1 Amendments to the Slovakian income tax code
Slovakia is the only European country that has broadened the scope of the PE definition in
the national income tax act (“Zákon o dani z príjmov”; see also KPMG, 2019). In 2018, the
requisitions for limited tax liability in Article 16 of the Slovakian income tax code were
amended so that a PE was established in Slovakia by providing recurring mediation services
related to transportation and accommodations, even if they are solely performed through
digital platforms (see Zákony pre ľudí, 2019). The term “digital platforms” is defined in
Article 2 ag) of the Slovakian income tax code as hardware or software platforms, which
are necessary to create and manage applications (see Zákony pre ľudí, 2019; see also
Cibuľa & Kačaljak, 2018, p. 80 et seq.; European Parliament, 2019a, p. 40).

3. Critical analysis of national digital taxes in Europe

3.1 Introduction
At first glance, the arguments justifying the introduction of national measures to tax the
digital economy (see above, Subsection 2.1.) appear convincing. As of the time of the pub-
lication of this paper, both the OECD and the EU have not yet delivered recommendations
to tackle the peril of increasing tax inequality between traditional and digital business
models and diminishing tax revenues due to ongoing digitalisation. On the other hand, poli-
ticians are exposed to a noticeable amount of pressure to counteract these developments.
Notwithstanding, national policymakers should be careful not to rush into implementing
short-sighted and ill-thought-out measures which can predominantly entail disadvanta-
geous effects.
Therefore, the three groups of national efforts designed to get a fair share of the tax rev-
enues pie and rebalance existing tax inequality are thoroughly examined in the following
sections. Each section is dedicated to one of the following five aspects:

. Relationship with double tax treaty law/peril of double and multiple taxation;
. Coherence with European law;
. Impact on (global and regional) competition and competitiveness;
. Contribution to tax revenues;
. Establishment of fair taxation statuses.

3.2 Relationship with double tax treaty law/peril of double and multiple taxation
Both DSTs and DATs do not fall under the scope of current double tax treaties because
double tax treaties currently only cover taxes on income and capital (see also above, Sub-
section 2.2.). Consequently, residence states are not obliged to grant tax credits for DSTs
and DATs paid in EU countries. In case residence states decide not to accept the deduction
 South African Journal of Accounting Research 9

of DSTs and DATs, revenues are prone to underlie double or multiple taxation (depending
on the company group’s structure) (see Hidien, 2019, p. 270; Kofler et al., 2017). Since the
largest digital businesses are US-based, the 80% foreign tax credit of the GILTI scheme is
notably only applicable to income and corporate taxes (thus not the DSTs and DATs; see
Schildgen, 2019, p. 370 et seq.). The deductibility of the French DST as business expenses
(see above, Subsection 2.3.2.) may not serve as a meaningful device to avoid double taxa-
tion because the targeted businesses mostly do not pay any corporate tax in the source
states, which is why the discussion regarding fair taxation of the digital economy
emerged in the first place (see also Pinkernell, 2019, p. 363).
On the other hand, amendments to national PE definitions are undoubtedly covered by
existing double tax treaties (see also above, Subsection 2.2.). Apparently, Slovakia’s unilat-
eral extension of the PE definition is not consistent with existing provisions of the Slova-
kian double tax treaties (see Kokott, 2018, p. 129; Cibuľa & Kačaljak, 2018, p. 85).
Generally, double tax treaties must be primarily applied in case of incompatibility, as
long as they are not superseded by national law. Currently, the Slovakian legal principles
and local laws do not allow treaty overrides (see Cibuľa & Kačaljak, 2018, p. 85 et
seq.). Therefore, the broader PE definition in the Slovakian income tax code cannot
come into effect in cross-border situations. Accordingly, the new digital PE may not
have any practical significance. Thus, Slovakia’s unilateral amendments must be considered
as a toothless measure as long as no corresponding amendments are made to the referring
double tax treaties (see also Cibuľa & Kačaljak, 2018, p. 86 et seq.; Schön, 2018).

3.3 Coherence with European law

All national DSTs and DATs in EU countries have implemented revenues thresholds that
must be exceeded for a company to be subject to the national DSTs and DATs. By law,
these thresholds do not differentiate between domestic and foreign businesses. However,
the DSTs and DATs will mostly burden foreign digital companies (see Schön, 2018;
Becker & Englisch, 2018). Consequently, they are prone to indirectly discriminate
against foreign companies, which is a violation of the fundamental freedoms of the EU, par-
ticularly the freedom of establishment and the free movement of persons (see also Ehrke-
Rabel, 2019, nr. 1146f; Kokott, 2018, nrs. 102 et seq.; Schaumburg, 2019, nrs. 4.64 et seq.).
National tax laws of EU member states must also comply with EU state aid law. Accord-
ingly, EU member states are generally prohibited from granting positive state aid (e.g., sub-
sidies) or negative state aid (e.g., favourable tax treatments) to a selected group of
companies (see Micheau, 2011, p. 196; Kokott, 2019, nr. 141; Englisch, 2019, nrs. 9.8
and 9.10.). However, state aid can be justified if they differentiate between undertakings
in a similar legal and factual situation, and this differentiation can be explained by the
nature and logic of the reference system (i.e., the reference system that usually includes
all regulations related to a particular tax such as the corporate tax). Thus, unequal treatment
must be rooted in the particular tax regime (see also Micheau, 2011, p. 203 et seq.; Kokott,
2019, nr. 215; Geringer, 2019, p. 396; Englisch, 2019, nr. 9.23). Enactment of the Hungar-
ian DAT was previously tried before the General Court of the European Union, with its de
minimis rule (see Subsection 2.4.2.) being considered unlawful state aid for smaller adver-
tising companies. However, the General Court did not share the EC’s concerns: Since the
Hungarian DAT was enacted for redistribution purposes, the differentiation between adver-
tising companies with revenues below and above the set threshold was justified (see
General Court of the European Union, 2019). On the other hand, the Austrian DAT was pri-
marily introduced to establish a fair taxation of the digital economy. Yet, only large
10 S. Geringer

(foreign) companies exceeding the revenues thresholds (see Subsection 2.4.1.) are subject
to the Austrian DAT, which leads to de facto “fair taxation” of just parts of the digital
economy. Thus, the exemption cannot be explained by the nature and logic of the
system, and the ECJ will likely characterise the use of revenues thresholds as unlawful
negative state aid (see Geringer, 2019, p. 395 et seq.). Scrutinising national DSTs in
other EU member states leads to the same result, when the comparable regulations on reven-
ues thresholds and the purposes of the DSTs are taken into account. Apart from that, the Aus-
trian DAT also entails direct state aid, with its revenues being primarily used to fund the digital
transformation of domestic media companies, which cannot be explained by the nature and
logic of the reference system (see Geringer, 2019, p. 401 et seq.; Ehrke-Rabel, 2019, nr.
1146j). Another state aid issue concerning the Austrian DAT can be found in the unequal
treatment of SMEs that provide traditional advertising services and those that provide
digital advertising services because digital advertising companies are widely exempt from
the DAT (see above, Subsection 2.4.1.; see also Geringer, 2019, p. 399 et seq.).
In contrast to the national DSTs and DATs, national amendments to the PE definition, as
in the case of Slovakia, do rather not raise any issues regarding their compatibility with
European law, most notably because it is not necessary to apply the modified PE definition
in cross-border situations (see above, Subsection 3.2.).

3.4 Impact on (global and regional) competition and competitiveness

The estimated tax burden resembles one of the key factors in business decision-making con-
cerning the choice of location and cross-border activities. Among other things, (digital)
taxes should be designed such that companies can easily determine which tax burden
will apply if they provide services in a particular country (see Zöchling, Plott, Rosar, &
Dziurdź, 2018, p. 8 et seq.). DATs benefit from their well-defined scope, as companies
would rather not face difficulties in the evaluation of whether their services constitute
digital advertising. The Slovakian definition of a digital PE is also prone to putting compa-
nies in a position where the assertion of the overall tax burden linked to business activities
in Slovakia should not cause any obstacles. On the other hand, the proposed and
implemented national DSTs seemingly create a certain degree of legal uncertainty. Scholars
and practitioners agree that the definitions of the taxable digital services in the existing DST
models entail grey areas, at national as well as at EU level, because the boundaries between
analogue and digital business activities have become increasingly blurred. This circum-
stance might hamper the economic prosperity of countries implementing DSTs (see Pinker-
nell, 2019, p. 363; Becker & Englisch, 2018; Wünnemann, 2019, p. 139; EY, 2018, p. 3;
Scientific Advisory Board of the German Ministry of Finance, 2018, p. 5). The intensity
of their capability to hamper economic prosperity, which is generally associated with
DSTs, is possibly amplified in the case of the UK DST. It includes its own catalogue of defi-
nitions that differ significantly from EU DST wording (see above, Subsection 2.3.1.).
Hence, the travaux preparatoires of the EU DST may not be utilised to better understand
the UK DST regulations (see also Obuoforibo, 2019).
As stated above, both national DSTs and DATs trigger double (and multiple) taxation
(see Subsection 3.2.). Therefore, these taxes add up to the existing (corporate) tax
burden in the residence states. Hence, it seems appropriate to assume that this circumstance
hampers the competitiveness of digital companies located in countries with national DSTs
and DATs. Most notably, this can stifle emerging digital businesses and start-ups in the mar-
ketplace (see also Scientific Advisory Board of the German Ministry of Finance, 2018, p. 3
et seq.).
 South African Journal of Accounting Research 11

Accordingly, the introduction of additional national taxes on the revenues generated

from the use of digital business models could discourage traditional businesses from
launching digital transformation processes in their businesses (see Schön, 2018).
Because the grade of digitalisation is likely to determine the future existence of businesses
in the globalised economy (see Zöchling et al., p. 3 et seq.), European companies may
forfeit competitiveness by losing ground to competitors from other countries and continents
(see Becker & Englisch, 2018; Schön, 2018; European Parliament, 2019a, p. 49; IFO, 2018,
p. 16). Moreover, a race concerning the attractiveness as a location for digitalised
businesses might be spurred by the introduction of unilateral measures by only a number
of EU member states, thereby toxifying the EU’s political and economic climates.
Another important point that warrants discussion is the likelihood of unilateral
measures triggering retaliation by residence states. The headquarters of the largest IT
companies are located predominantly within the territory of the United States (see Pinker-
nell, 2019, p. 364; Scientific Advisory Board of the German Ministry of Finance, 2018,
p. 2). Hence, the introduction of national digital taxes by other countries heavily affects
the US sphere of interest. The United States has clearly indicated that they will not accept
any “unilateral and unfair […] tax that targets our technology and internet companies”
(US Department of the Treasury, 2018; see also EY, 2018, p. 4). In reality, Donald
Trump threatened Emmanuel Macron with the placement of tariffs on French goods,
and referring investigations were initiated (see above, Subsection 2.3.2.). If the results
were positive, the United States may decide to introduce penalties against France and
other European countries that implement national digital taxes (see also European Parlia-
ment, 2019a, p. 49). If so, they would be equal to the penalties introduced in October 2019
as a result of European countries granting subsidies to Airbus (see POLITICO, 2019).
Alternatively (or additionally), the United States could introduce national taxes that
would primarily address foreign business branches (e.g., the German automobile indus-
try; see Scientific Advisory Board of the German Ministry of Finance, 2018, p. 5; Pinker-
nell, 2019, p. 363 et seq.). Therefore, any unilateral measures that tax the digital economy
risk triggering retaliation by digital businesses’ residence states. Such a legal arm’s race
re-establishes borders and introduces penalties at the expense of the targeted businesses,
which could potentially discourage business owners from providing cross-border services
(see Becker & Englisch, 2018; Kokott, 2019, p. 125).

3.5 Contribution to overall tax revenues

Sustainable tax design considers the contribution of a measure to the tax revenues (see Hey,
2019, p. 13 et seq.). Accordingly, it needs to be elaborated whether the unilateral measures
taken by certain EU member states are likely to meet this criterion. To provide a uniform
comparative method, the total tax revenues in 2016, as stated in the OECD Revenue Statis-
tics 2018 (see OECD, 2018b), underlaid this comparison.
According to the UK government, the UK DST will raise between 275 million pounds
(2020/2021) and 440 million pounds (2023/2024) (see HM Treasury, 2018a, p. 2). In 2016,
the UK reported total tax revenues of 644,700 million pounds (see OECD, 2018b, p. 151).
Putting these numbers into perspective, the UK DST would represent between 0.04%
(2020/2021) and 0.07% (2023/2024) of the 2016 overall tax revenues.
The French DST would add an estimated 400 to 650 million euros to the 2019 overall
tax revenues (see Hidien, 2019, p. 272). By comparison, the 2016 total tax revenues in
France amounted to 1,013,100 million euros (see OECD, 2018b, p. 102). The French
DST thereby reflects 0.04% to 0.06% of France’s 2016 overall tax revenues.
12 S. Geringer

The Austrian Ministry of Finance assumed the annual tax revenues derived from the
DAT to increase annually from 25 million euros in 2020 to 34 million euros in 2023 (see
Austrian Parliament, 2019a, p. 1). Austria’s 2016 total tax revenues amounted to
149,200 million euros (see OECD, 2018b, p. 86). Accordingly, the Austrian DAT represents
0.02% of Austria’s 2016 tax revenues.
The actual tax revenues from the Hungarian DAT were apparently not available in
English. The German Institute for Economic Research (IFO) estimated Hungary’s share
of revenues from the EU DST to be approximately 31.6 million euros (see IFO, 2018,
p. 27). In 2016, Hungary reported total tax revenues of 13,887,800 million Hungarian
forints (approximately 41,544 million euros according to the ECB exchange rate of Novem-
ber 22, 2019; see OECD, 2018b, p. 108). Therefore, the implementation of the EU DST
would have reflected 0.07% of Hungary’s 2016 total tax revenues. Considering that the
scope of the EU DST would have been significantly broader than the scope of the existing
Hungarian DAT, it may be assumed through an argumentum a maiore ad minus that the
effective revenues from the Hungarian DAT are estimated to be significantly less the 0.07%.
The Slovakian measure is not prone to contribute in any way to the country’s total tax
revenues because the modified PE definition lacks an effective scope due to the existing
double tax treaty provisions (see above, Subsection 3.2.).
In conclusion, the contribution from implemented and proposed national digital taxes to
the overall tax revenues appears to be comparatively miniscule. Hence, it is unlikely that
these measures will translate into substantial fiscal effects (see also Pinkernell, 2019,
p. 363; Scientific Advisory Board of the German Ministry of Finance, 2018, p. 4).

3.6 Establishment of fair taxation statuses

The unilateral measures in EU member states have been introduced with the aim to con-
tribute to “levelling the playing field” by ensuring the fair taxation of revenues/profits realised
from the use of digital business models (see Obuoforibo, 2019; Hidien, 2019, p. 268; Austrian
Parliament, 2019b, p. 25; Sinnig, ISR 2017, p. 412; Cibuľa & Kačaljak, 2018, p. 80 et seq.;
see also European Commission, 2017, p. 6; European Commission, 2018b, p. 3).
However, neither of the national DSTs or DATs includes a provision that would only
trigger the tax if the corresponding revenues underlay insufficient (corporate) taxation.
Thus, DSTs or DATs are levied regardless of whether these revenues are “undertaxed”
(see also German Ministry of Finance, 2018, p. 5, on the EU DST). The significance of
this circumstance has been amplified since the 2017 Tax Cuts and Jobs Act was signed
into law, while the US-based companies that have dominated the digital economy ever
since have been burdened with a 12.3% combined tax rate in Ireland and the United
States since 2018 (see Pinkernell, 2019, p. 338). Compared to the standard corporate tax
rate for (domestic) businesses in Hungary (9%) and Ireland (12.5%) (see Tax Foundation,
2019a), making a case for the “undertaxation” of US-based companies appears difficult as
of 2018. Yet, US-based companies are predominantly burdened with national DSTs and
DATs (see Kokott, 2019, p. 125; Becker & Englisch, 2018).
On the other hand, the indifferent tax design of the national DSTs and DATs may back-
fire on businesses that were previously not considered to be potentially subject to these
taxes (particularly traditional business models with additional digital content). For
example, the “Axel Springer” publishing house resides in Germany, where the company
is subject to one of the highest corporate tax rates among European countries (see Tax Foun-
dation, 2019a). This notwithstanding, it is subject to the French DST (see Hidien, 2019,
p. 272). Thus, traditional businesses could be subject to a higher tax rate as after they
 South African Journal of Accounting Research 13

undergo digital transformation, and the implementation of DSTs and DATs could discou-
rage traditional businesses from digitalising their work processes and services, which
could have tremendous effects on their competitiveness in the future (see Becker &
Englisch, 2018; Schön, 2018; see also above, Subsection 3.3.).
Both the national DSTs and DATs discriminate against certain digital business models
because they do not cover all of them, with DATs discriminating to a greater extent than
DSTs due to the limitation of the scope to digital advertising services. For instance, national
DSTs and DATs do not cover streaming services (e.g., Netflix, Hulu, Spotify) or electronic
payment services (e.g., Paypal) (see Brameshuber & Franke, 2018, p. 287). Moreover,
national DSTs and DATs solely address large companies that exceed the established reven-
ues thresholds (see above, Subsections 2.3. to 2.5.). Therefore, DSTs and DATs will likely
add another layer of unfair taxation to the existing inequalities between traditional and
digital business models by introducing differing tax treatment of particular digital business
models and companies of different sizes.
Against this background, national DSTs and DATs are apparently not capable of fulfill-
ing their purpose of levelling the playing field. The EU member states’ rationale for not
linking the application of DSTs and DATs to the premise of an insufficient tax burden in
the residence state (similar to anti-avoidance rules; see also below, Section 4.) and not intro-
ducing the digital taxes for all digital businesses regardless of the actual sum of their annual
revenues remains unclear.
In contrast to DSTs and DATs, modifications of the PE definition can contribute to a fair
and equal taxation of both traditional and digital business models, as companies would
underlie the national income tax schemes under the same conditions. Moreover, the
adapted PE definition is applicable to all digital businesses underlying its scope, regardless
of the sum of their annual revenues. However, if the broadening of the PE definition is nar-
rowed down to two digital business models (online platforms for the mediation of transport
and accommodation; see above, Subsection 2.5.1.), as in the case of Slovakia, all the other
digital business models remain “unfairly taxed”. Indeed, the Slovakian model also adds
another layer of unequal tax treatment to the existing inequalities. Therefore, the explicit
national measure implemented by Slovakian lawmakers insufficiently contributes to the
establishment of the fair taxation of the digital economy.

4. Suggestions for national and supranational tax policy

The implementation of national digital taxes is likely to be accompanied by numerous unde-
sirable side-effects (see also Kofler, Mayr, & Schlager, 2018). Therefore, it is important to
determine which policy tools might better level the playing field and ensure a fair share of
the tax revenues from digital businesses.
Apparently, some digital businesses are structured so that company groups can illegiti-
mately exploit favourable tax regulations of the destination countries, which significantly
reduces their tax burden. The UK DPT was designed to target such legal, yet undesirable
arrangements (see above, Subsection 2.3.1.). However, such arrangements cannot be con-
sidered a phenomenon that exclusively appears among businesses engaged in the digital
economy. Indeed, BEPS has been practiced by companies regardless of their business
models. Thus, it is important to determine whether the tax issues related to the digital
economy could be sufficiently tackled by the implementation and rigid execution of anti-
tax avoidance regulations, inter alia transfer pricing rules (see Schön, 2018). Such measures
would entail the upside of being indiscriminately applicable to all sizes of traditional and
digital foreign and domestic businesses. Hence, they would rather not violate European
14 S. Geringer

law or serve to promote indiscriminate tax treatment (see also above, Subsections 3.3. and
3.6.). As anti-tax avoidance provisions have been globally recognised as acceptable
national measures in the age of BEPS, the likelihood that they would trigger retaliation
by the residence states appears rather limited (see also above, Subsection 3.4.). Lastly,
the TFDE backed its refusal to recommend unilateral measures in the OECD BEPS
Action 1 report by arguing that the implementation of BEPS measures might already
lead to an adequate mitigation of tax challenges associated with the digital economy (see
OECD, 2015, nr. 383; see also above, Subsection 2.1.).
Undoubtedly, countries may also consider re-negotiating double tax treaties with resi-
dence states engaged in digital businesses to ensure the introduction of digital PEs.
However, it seems highly doubtful that source states will reach an agreement on such
amendments in bilateral situations.
At the EU level, the EC should more extensively use its powers associated with the
“Guardian of the Tax Treaties” (see also European Parliament, 2019b), and combat more
determinately arrangements between EU member states and (digital) businesses which
undermine the purposes of the single market. As a famous example, the EC urged the
Republic of Ireland to collect 13 billion euros in taxes from Apple in 2016 after the EC
had condemned this sweetheart tax deal as an unlawful state aid (see European Commis-
sion, 2016; Farrell & McDonald, 2016; Kanter & Scott, 2016). Hence, regular and strict
application of state aid laws may serve as an effective deterrent against unfair favourable
treatment and tax incentives, which can lead to a distortion of a single market.
Apart from national, bilateral and EU-wide solutions presented herein, policymakers
could take steps to finally reach a broad consensus for income tax purposes at the inter-
national level, particularly by employing the ongoing process at the OECD (see above, Sub-
section 2.1.). Settling on a compromise among a large number of countries would ensure
wide-spread acceptance and application of nexus approaches for digital businesses.
Hence, traditional and digital businesses would underlie tax regimes under comparable con-
ditions (see also above, Subsection 3.6.). Moreover, broadly-accepted measures would
minimise the risk of creating disadvantages in regional and global competition and provok-
ing retaliatory measures (see above, Subsection 3.4.; see also Becker & Englisch, 2018).
However, the existing measures to curb BEPS within the EU (anti-tax provisions and
state aid law, see above) may already provide a sufficient arsenal of meaningful devices
to tackle the most serious forms of tax inequality (see also Staringer, 2017, p. 348;
Schön, 2018). After all, the central issues concerning a fair taxation of the digital
economy, most notably the peril of double and multiple taxation (see above, Subsection
3.2.) and the probability of distortions of the regional and global market (see above, Sub-
section 3.4.), have long been well-known, and, thus have accompanied discussions among
scholars and policymakers long before the rise of the digital economy.

5. Conclusion
In response to the deadlock at the OECD and EU levels regarding the issue of a fair taxation
of the digital economy, several EU countries have moved forward with the introduction or
proposal of unilateral measures. This legislation has primarily served two aims, namely
allocating an appropriate share of the tax revenues from digital services to the particular
country and reducing tax inequality between domestic and digital business models (Subsec-
tion 2.1.).
The national digital taxes implemented and proposed in the EU territory can be allo-
cated to three groups, including the tax type (income vs. consumption/hybrid taxes), the
 South African Journal of Accounting Research 15

tax scope (single vs. multiple digital business models) and the tax base (gross revenues vs.
net profits) (Subsection 2.2.). Five of these national digital taxes have been presented in
greater detail (Subsections 2.3. to 2.5.) for the critical analysis described in subsequent
section (Section 3.). Accordingly, the following conclusions were drawn:

. The three types of unilateral approaches to the fair taxation of the digital economy
(i.e., DSTs, DATs and unilateral amendments to PE definitions) risk triggering
double and multiple taxation (DSTs and DATs) or violating existing double tax
treaty provisions (unilateral amendments to PE definitions; Subsection 3.2.);
. In addition to the issues concerning international tax law, DSTs and DATs may also
violate the EU treaty provisions, particularly the fundamental freedoms and state aid
law. Due to the ineffectiveness of unilateral amendments to PE definitions, these
measures do rather not raise any concerns at the EU level (Subsection 3.3.);
. DSTs and DATs may serve as a deterrent against the digital transformation of tra-
ditional businesses and weaken a country’s attractiveness as a business place. More-
over, DSTs and DATs are also likely to provoke retaliatory measures, such as the
introduction of tariffs and taxes tailored to harm other countries’ predominant
business branches. National amendments to national PEs will not affect competitive-
ness and international trade, as long as they are not capable of overriding tax treaties,
as in the case of Slovakia (Subsection 3.4.);
. Neither of these measures is capable of meaningfully contributing to the countries’
tax revenues (Subsection 3.5.);
. All the national digital taxes in the EU fail to deliver on their promise of establishing
tax equality between traditional and digital businesses. In fact, they add another layer
of unequal treatment to the existing inconsistences (Subsection 3.6.).

Given these issues, the national DATs and DSTs and the extension of the PE definition
in Slovakian income tax law entail significant negative side-effects. Instead of implement-
ing similar measures, source states may attempt to re-negotiate double tax treaties with resi-
dence states. However, the likelihood of residence states, particularly the United States,
backing down in bilateral situations appears to be infinitesimally small, and reaching a com-
promise in the recent OECD negotiations may be more likely. Notwithstanding, countries
should not overlook and/or underestimate the existing toolkit of anti-tax avoidance regu-
lations that can be used to tackle the most distorting tax schemes of digital businesses.
Additionally, the EC could effectively secure the functioning of the single market among
EU member states by rigidly proceeding against harmful tax arrangements between
businesses and particular countries. Lastly, the main issues associated with the fair taxation
of the digital economy (e.g., tax-avoidance schemes, double taxation and trade wars) have
yet to manifest from the emergence of digitalisation, though such issues continue to be con-
templated in discussions on cross-border economic activities.

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