Authors: Robert van der Jagt, Chairman, KPMG’s EU Tax Centre, and Chris Morgan Head of Global Tax Policy, KPMG International


KPMG firms in the EU1 (hereafter “we") are pleased to provide our comments on the consultation on a proposed Digital Levy (“the Consultation).

We applaud the EU's initiatives to finance the post COVID recovery referred to in the Consultation (the EU Council Conclusions of 21 July 2020). However, we believe that it is important to clarify the relationship between the taxation of highly digitalized businesses and the stated need to raise own resources as set out in the Consultation.

There are three objectives referred to in the Consultation:

  1. Ensuring that digitalized businesses pay "their fair share to society";
  2. Raising own resources for the EU; and
  3. Ensuring that 1) and 2) are achieved without “interfering with the ongoing work at the G20 and OECD level on a reform of the international tax framework” (i.e. within the so-called Pillar One).

We deal with each of these and their interaction below.

Taxation of the digital economy

The need for policy to be based on clear evidence

As set out in our response to the European Commission’s (EC) original consultation in 2017 entitled “Fair taxation of the digital economy” the issues surrounding the taxation of digitalized businesses are complex with different stakeholders raising varying concerns. We believe that it is important that statements made are fully justified and supported with evidence. It does appear to us that the Consultation simply assumes that all “digital companies" function in the same way and are not paying “a fair amount of tax”. To this extent it does not seem to take into account all the work carried out by the OECD Inclusive Framework - which has examined the differences between various business models and the complexities of the digital economy in detail. Indeed, the Consultation appears to divide companies into traditional versus digital whereas the reality is that the whole economy is digitalizing.

An example of the need to clarify facts is that the Consultation refers to "lower taxes, or even no, taxes paid by companies in the digital economy" as if this were a universal truth. However, various studies have shown that on average the rate of tax paid by digitalized businesses is broadly in line with those paid by "traditional businesses"2. IMF Working Paper 20/76, Tec(h)tonic Shifts: Taxing the Digital Economy, compares the tax rates of highly digitalized companies with the average in the Fortune Global 500 Firms. While noting that the level of taxes paid is hard to establish using financial accounts, on page 71 the paper nevertheless states “What we see is that the tech sectors report implied average tax rates more or less in line with the average of other Fortune Global 500 firms.

What is most striking is that the implied tax rates are certainly non-zero, and therefore we can reject the widely-held hypothesis that on average these companies pay zero or low corporate income taxes at the globally consolidated level emphasis added.” The fact that some digitalized companies have a low tax rate – for a variety of reasons – is not a justification for imposing a special regime on all digitalized companies.

Another example is the references to digitalized businesses making significant revenues out of the monetization of customer or user data; again, this is only true of businesses in certain sectors and not all digitalized businesses.

A further statement which needs to be clarified is “These factors create a strong tendency towards market concentration and accumulation of market power and lead to digital companies exploiting and possibly worsening market efficiencies." While there have indeed been concerns expressed about monopolistic power being exercised by a few companies, it is a very big step to say this is true of all digitalized businesses. Furthermore, to the extent that monopolies and competition issues are of genuine concern, it is important that they should be dealt with through the appropriate competition laws and should not be addressed through some kind of digital services tax.

Is there a need to address the taxation of digitalized businesses at the EU level?

What can be said with certainty is that digitalization enhances the phenomenon described by the OECD as "scale without mass" - i.e. the ability of a company to generate revenues in another country without having a traditional (significant) taxable present. It is for this reason that the Inclusive Framework has been discussing Pillar One which, if agreed upon, would result – broadly - in a shift of taxing rights to countries where consumers are located. It is our view that , if “scale without mass” is the real concern about digitalized businesses, this is the appropriate way to address it and it is necessary to see if the Inclusive Framework reaches agreement before the EU decides to take any further steps.

If the Inclusive Framework is unable to reach agreement, it is our view that any EU level tax on digitalized businesses should still be a tax on profits, not on revenues, and should replace any DSTs.

Raising own resources for the EU

We understand the need to finance the borrowing required for the post COVID recovery plan. Prima facie, any tax imposed should follow traditional theory – for example it should be neutral, efficient and fair. This suggests it should generally be broad based and not imposed on only a limited class of taxpayers. Nevertheless, if there is an independent reason for imposing a new tax (for example for an environmental reason) it could also be efficient to use the revenue so raised for EU own resources. If, therefore, there are reasons – as outlined above - to change the international tax rules as they apply to digitalized businesses, we consider it appropriate to use the additional revenues for EU own resources provided that a) any new tax does not interfere with the OECD Inclusive Framework Pillar One; and b) member states so agree.

Are any of the proposals set out in the Consultation compatible with the Inclusive Framework, Pillar One?

Digital services tax

The Inclusive Framework has not yet reached the final agreement on Pillar One. However, many countries have indicated that this will depend upon other countries agreeing to withdraw unilateral measures such as digital services taxes (DSTs). It is not possible to see how the "tax on revenues created by certain digital activities in the EU" referred to in the Consultation could be compatible with the OECD proposals as it would be another unilateral tax.

The OECD’s target is to reach an agreement by mid-2021 and it may take a number of years thereafter to implement any new rules. It could therefore be argued that if the EU introduced a DST in the interim period it would not actually be in breach of any Inclusive Framework agreement. However, the EC proposals are stated to come into effect as of 2023 – which does not seem to allow for much of an interim period. In any case, introducing a DST would appear to go against the spirit of any agreement. It would also impose significant compliance and administrative costs both on business and on tax administrations as it would be necessary to discontinue the tax within a short framework and introduce the new Pillar One tax. Furthermore, for well-rehearsed reasons (for example the risk of over taxation and double taxation, the negative impact on start-up businesses and loss-making companies, etc.), we do not believe that a DST is an appropriate measure even as an interim one.

A tax on digital transactions conducted business-to-business in the EU

While there is no detail on this proposal set out in the Consultation, it appears it would be a unilateral measure and therefore raises the same concerns as interfering with the OECD agreement as referred to above.

A corporate income tax top up

To be compliant with any OECD agreement a corporate income tax regime would need to implement Pillar One. If it was a separate type of tax, even if it was on profits and revenues, it would still be a unilateral measure if it differed significantly from the Pillar One regime.


It is our view that - assuming that the Inclusive Framework does reach agreement on Pillar One - an appropriate way to achieve the objectives of the Consultation would be for member states to agree that part or all of the tax to be collected on the so-called Amount A (i.e. allocation of part of the residual profits in accordance with Pillar One) should be transferred to the EC as part of the own resources.

This would, however, raise a number of issues at the member state level. First even though the possibility to tax Amount A would be a new taxing right, would member states be willing to give up the revenue to the EC? (While it the EC needs to raise revenue to pay for the post COVID recovery, the same is equally true – if not more so – for many member states.) Secondly those member states which are likely to have to give relief for amounts taxed under Amount A would likely be concerned that their current corporation tax receipts would reduce under as they would be obliged to give relief in accordance with Pillar One without being able to collect any new tax on any Amount A allocated to their country.

We note the Consultation refers to a corporation tax “top up”. A possible solution would be for the EU to introduce a top up tax on Amount A. This could be achieved by requiring member states to transfer an amount of tax equal to a set percentage on any Amount A to the EC and allowing them to either pay this amount out of tax collected at the standard rate on Amount A or to increase the tax rate on Amount A by the set percentage. To give an example, this could result in a member state with a standard rate of say 25% on corporate profits adding a surcharge of X% to any tax on Amount A so it would be taxed at 25+X%. The extra X% would be paid to the EC for the own resources. Assuming that double tax relief under Pillar One is implemented globally by the exemption method and not by giving credit, such an EU solution would not impact the tax take in non-member states. It would, however, result in an increased effective tax rate on effected companies above and beyond the impact of Pillar One in reallocating profits. Therefore, tax raising capacity would need to be balanced with issues such as the competitiveness of the EU market.

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