Over the last few years, concerns have been raised that the existing international tax system does not properly capture the digitalization of the economy. Under current international tax rules, multinationals generally pay corporate income tax where production occurs rather than where consumers or, specifically for the digital sector, users are located. However, some argue that through the digital economy, businesses (implicitly) derive income from users abroad but, without a physical presence, are not subject to corporate income tax in that foreign country.

To address these concerns, the Organisation for Economic Co-operation and Development (OECD) has been hosting negotiations with more than 130 countries to adapt the international tax system. The current proposal would require some of the world’s largest multinational businesses to pay some of their income taxes where their consumers are located. This proposal is referred to as Pillar One.

Pillar One would replace some existing norms for taxing multinationals and run counter to some policies that countries have put in place to tax digital companies in recent years. The most common form is a digital services tax (DST), which is a tax on selected gross revenue streams of large digital companies.

Because Pillar One is focused on changing where profits are taxed, including for many large digital companies, digital services taxes are expected to be repealed in a transition process which is expected to be completed by the end of 2023.

On October 21, 2021, a joint statement from Austria, France, Italy, Spain, the United Kingdom, and the United States laid out a plan to roll back digital services taxes and retaliatory tariff threats once the Pillar One rules are implemented. On November 22, the U.S. Treasury announced that Turkey had agreed to the same terms.

The joint statement outlined a crediting approach to bridge between digital services tax liability and new Pillar One tax liability for the companies in scope of both between. This would be necessary for the transition expected to occur with minimal double taxation for the companies that would be liable under both Pillar One and current digital services taxes.

Though work has continued on Pillar One as reflected in the most recent policy document, it is still unclear how many different policies might be removed if Pillar One ever gets adopted.

However, those are not the only countries that may be impacted by the OECD agreement. About half of all European OECD countries have either announced, proposed, or implemented a digital services tax. Because these taxes mainly impact U.S. companies and are thus perceived as discriminatory, the United States had responded to the policies with retaliatory tariff threats.

Austria, France, Hungary, Italy, Poland, Portugal, Spain, Turkey, and the United Kingdom have implemented a digital services tax. Belgium, the Czech Republic, Denmark, and Slovakia have published proposals to enact a digital services tax, and Latvia, Norway, and Slovenia have either officially announced or shown intentions to implement a digital tax.

The proposed and implemented digital services taxes differ significantly in their structure. For example, while Austria and Hungary only tax revenues from online advertising, France’s tax base is much broader, including revenues from the provision of a digital interface, targeted advertising, and the transmission of data collected about users for advertising purposes. The tax rates range from 1.5 percent in Poland to 7.5 percent in both Hungary and Turkey (although Hungary’s tax rate is temporarily reduced to 0 percent). Denmark’s DST would apply to video streaming services.

These digital services taxes have been generally considered to be interim measures until an agreement was reached at the OECD level, and now that such an agreement has been reached it will be important to monitor how countries change or repeal their digital services taxes. At the same time, the United Nations (UN) has added special provisions for income from automated digital services to the UN Model Tax Convention (see Article 12B), which would apply to treaty parties that agree to its inclusion.