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Digital taxation

Tax rules for the digital economy which are based on the principles of tax good governance can help promote growth and, among other benefits, deliver on the green and digital transitions.

Why is there a need for a fair taxation of the digital economy?

The digital economy has brought many benefits to citizens and companies. At the same time, the rise of certain digital activities and novel business models has become a growing challenge for existing taxation systems. It is important that all sectors of our economies pay their fair share of taxes and contribute to the functioning of our societies.

The current rules governing international taxation matters were designed to apply to businesses with a physical presence in a country. The increasing digitalisation of economies presents tax challenges, such as the reduction of tax revenues due to abusive tax avoidance and tax evasion. Tax rules therefore need to be adequately updated.

With the rise of new technologies and business models, many digital businesses:

  • have users and customers in a country where they do not have any physical business presence
  • generate profit from interaction with users and customers, using their data and contributions

Since tax rules still presume a physical presence, profits from digital activities are often not taxed in a market jurisdiction (i.e. the country where the users and consumers are located).

The EU towards a fair digital taxation system

Global reform of international rules on corporate (business) taxation

EU legislation on corporate tax rules is closely linked to and driven by efforts to find global solutions. The G20 and the OECD have been leading negotiations on international digital taxation with a view to reaching a consensus on a long-term global solution.

The work is principally being carried out by the G20/OECD Inclusive Framework on Base Erosion and Profit Shifting (BEPS). The initiative has already brought together 140 countries and jurisdictions.

On 8 October 2021, the OECD/G20 Inclusive Framework on BEPS reached an agreement on the key aspects of a reform of the international rules on taxation of the profits of multinational enterprises. This agreement is laid down in the statement on a two-pillar solution to address the tax challenges arising from the digitalisation of the economy, also known as the ‘October 2021 statement of the OECD/G20 Inclusive Framework on BEPS’.

All EU member states expressed their support for this statement, both as members of the Inclusive Framework and in the Ecofin Council and the European Council.

The October 2021 statement of the OECD/G20 Inclusive Framework on BEPS provides for a two-pillar solution.

Pillar one consists of rules and arrangements that will enable the reallocation of taxing rights among the jurisdictions where the largest and most profitable multinational groups have their share of the market and earn profit.

Pillar two essentially comprises rules on minimum effective taxation of the largest multinational groups, aimed at reducing the opportunities for tax base erosion and profit shifting. It also aims to ensure that the agreed global minimum rate of corporate tax – 15% – is paid.

Pillar one: reallocation of taxing rights

The main expected output of pillar one is a multilateral convention which will allow the parties to exercise (or ‘reallocate’) a new taxing right (‘amount A’).

The text will cover a wide area of rules concerning

  • scope, nexus, tax base
  • revenue sourcing rules on elimination of double taxation
  • dispute prevention and settlement
  • removal and standstill of unilateral measures (such as national digital taxes)
  • entry into force of the convention

‘Amount B’ of pillar one will provide increased tax certainty by creating standardised transfer pricing benchmarks for common transaction types.

Pillar two: minimum effective taxation

Work on pillar two has advanced more quickly than on pillar one. The OECD/G20 Inclusive Framework on BEPS approved the OECD model rules ‘Tax challenges arising from the digitalisation of the economy – global anti-base erosion model rules (pillar two)’ on 14 December 2021. All member states have committed to these rules.

Minimum effective taxation, which constitutes the essence of pillar two, is based on two main rules, also known as global anti-base erosion model rules (‘GloBE rules’):

  • the income inclusion rule (IIR)
  • the undertaxed payment rule (UTPR)

These rules are intended to ensure that the profits made by multinational groups with a turnover of at least €750 million are taxed at an effective rate of at least 15%.

The pillar two rules were transposed into EU law through a Council directive of 15 December 2022 on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the EU.

Finalising the two pillars

In its meeting on 10-11 July 2023, the G20/OECD Inclusive Framework on BEPS made further progress on the remaining elements of the two-pillar project. As one of the key points, it was confirmed that the final agreement on and the signature of the multilateral convention are expected to take place by the end of 2023.

EU tax policy for the digital economy

The EU is working in several areas to make sure that current taxation rules are fit for the digital age. These issues have been among its top priorities since 2017.

In March 2018, the European Commission proposed new rules to ensure a fair taxation of digital activities in the EU which also promotes growth. The Commission proposals are now on hold, in light of the fact that negotiations in the G20/OECD Inclusive Framework are progressing. If a global solution and agreement in these negotiations are reached and effectively implemented, the proposals would become obsolete.

The 2018 digital taxation package consisted of two legislative proposals to:

  • reform corporate tax rules so profits are taxed where companies have a significant digital presence
  • develop an interim tax for revenues from digital services (digital services tax)

Administrative cooperation on the exchange of tax-related information

One of the key building blocks of EU tax policy is administrative cooperation through exchange of tax-related information between member states. This helps ensure effective revenue collection.

The digitalisation of the economy presents particular challenges as certain types of information on revenues or income from digital economic activities might not be accessible to national tax authorities.

In order to overcome this problem, and in line with globally agreed standards, the EU is widening the scope of administrative cooperation through targeted amendments to the directive on administrative cooperation in the field of taxation (DAC).

In March 2021, the Council adopted new rules (DAC7) under which, from 2023 onwards, member states’ tax authorities have automatically exchanged information on income earned by sellers on digital platforms. This helps to:

  • prevent tax evasion and tax avoidance in relation to activities on such platforms
  • enhance tax fairness
  • foster a level playing field for both platforms and sellers

On 17 October 2023, the Council adopted a directive including a new set of amendments to the DAC rules (DAC8). The changes mainly concerned:

  • the reporting and automatic exchange of information on revenues from transactions in crypto-assets
  • the exchange of information on advance tax rulings for the wealthiest (high-net-worth) individuals

The aim was to strengthen administrative cooperation between tax administrations and to enlarge the scope of registration and reporting obligations.

The DAC8 rules cover additional categories of assets and income, such as crypto-assets. Tax authorities need to automatically exchange information provided through reporting by crypto-asset service providers. So far, it has been difficult for member states’ tax administrations to ensure tax compliance in this specific area. As crypto-assets are decentralised and easily traded across borders, strong international administrative cooperation is required to ensure that taxes are effectively collected.

On 14 April 2025, the Council adopted new rules (DAC9) to enhance cooperation and information exchange on minimum effective corporate taxation.

The new rules will:

  • create a unified standard form which multinational enterprise groups and large-scale domestic groups will be required to use to fulfil their filing obligations under the Pillar 2 directive, which implements the G20/OECD global agreement
  • enhance data exchange between tax authorities
  • reduce the administrative burden for corporations

DAC9 will have to be transposed into national law by all member states by 31 December 2025.

VAT in the digital age package

The EU is also working on new measures to reform the EU’s value-added tax (VAT) system to make it fit for the digital age.

VAT is one of the most important sources of revenue for member state authorities, contributing to public services such as education, healthcare, libraries and public transport. Every year, EU member states raise around €1000 billion in VAT revenue in the EU.

A share of VAT also goes to the EU budget as an ‘own resource’. This amounted to a contribution of around €20 billion to the EU budget in 2022.

Yet, significant amounts of VAT revenue remain uncollected and lost due to fraud, maladministration, bankruptcies, insolvencies and other factors.

On 11 March 2025, the Council gave its final approval on the 'VAT in the digital age' package, which aims to help tackle VAT fraud, support businesses and promote digitalisation. 

The new rules will :

  • improve the one-stop shop for the online VAT registration system
  • require online platforms to pay VAT on passenger transport and short-term accommodation rental, where individual service providers are exempt
  • make digital reporting obligations based on e-invoicing for businesses operating across borders in the EU fully digital by 2030

One-stop shop for VAT registration

The 'one-stop shops' allow businesses to declare and remit the VAT due on their sales of goods and services to consumers in other EU countries through a single member state's administration and in a single language.

However, when a company seeks to sell goods and services to consumers in member states other than its own (from an establishment that they operate in that member state), it must register for VAT in those additional member states. The same problem affects traders which simply want to move stock to another member state for storage.

To address this, the new rules will extend the scope of the existing 'one-stop shops' to include business-to-consumer sales of certain items like electricity or gas, which are conducted within a member state other than their own ‒ not just cross-border supplies.

This change will allow more businesses to meet their VAT requirements through a single online portal, in a single language.

This measure is expected to save businesses ‒ and in particular SMEs ‒ approximately €8.8 billion in registration and administrative expenses over a ten-year period.

On 13 May 2025, the Council agreed on a new directive on VAT rules for distance sales of imported goods and for VAT on imports. Under the new rules, foreign traders or platforms will be held liable for VAT on imports and on the distance sales of imported goods in the member state of the goods’ final destination. This will encourage use of the Import One-Stop Shop (IOSS), as foreign traders or platforms that do not use it will need to be registered in each member state.

VAT for the platform economy

In recent years, the platform economy has grown significantly, with online platforms linking certain service suppliers and consumers.

Under current VAT rules, many providers of accommodation rental and passenger transport services via online platforms pay no VAT. Many of those suppliers – whether an individual person or a small business – are usually not required to register for VAT purposes, or are simply unaware that they may be obliged to pay VAT on the services they offer.

In the accommodation and passenger transport sectors, providers are in direct competition with traditional VAT-registered suppliers such as hotels and private transport companies. For example, hotels in major European cities are competing against online platforms that offer thousands of listings in the same cities. Many of those listings are not subject to taxation.

Under the new rules, those platforms will become responsible for collecting and remitting VAT to tax authorities where their service providers fail to do so.

This will contribute to a level playing field between online platforms on the one hand and traditional suppliers of short-term accommodation and transport services on the other. 

It will ease the burden of understanding and adhering to VAT regulations for SMEs, especially across different member states, while generating significant additional VAT revenue.

Digital VAT reporting

Currently, businesses selling across EU member states submit a 'recapitulative statement' to their national tax authority every few weeks providing an overview of their sales to businesses in other EU member states.

Delayed VAT information-sharing creates a gap for fraudsters to exploit, making it difficult for authorities to rapidly identify any suspicious or fraudulent transactions.

The new rules will set up a real-time digital reporting system for VAT via e-invoices based on the existing European e-invoicing standard. 

Businesses will issue e-invoices for cross-border transactions, automatically reporting data to tax administrations, which will then share it through a new IT system for detecting any suspicious activity. 

The EU system is targeted to come into force in 2030, with full interoperability among national systems by 2035.

The e-invoicing system will:

  • reduce VAT fraud by up to €11 billion a year
  • bring down administrative and compliance costs for EU traders by over €4.1 billion per year over the next ten years
  • ensure interoperability between the existing national systems across the EU

See also

How EU tax policy works

How EU tax policy works

Combatting tax avoidance in the EU

Combatting tax avoidance in the EU

A businesswoman walks along a glowing arrow made of circuit-like lines, symbolising progress and digital transformation.
Digital transition: shaping the EU's digital future

Digital transition: shaping the EU's digital future

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Last review: 28 April 2026