A. Challenges of taxing the digital economy

Despite general consensus that ‘data is the new oil’Footnote ⁵ and that data is an increasingly important value driver, one can observe highly divergent views across the tax world on whether ‘data’ can qualify as an asset and, if so, under what circumstances.Footnote ⁶ This does not, however, prevent its taxability;Footnote ⁷ yet it adds to the complexity of the question if and if so, how data should be taxed as well as how data should be valued. Thus, a specific tax targeted on data only, a so-called ‘data-tax’, despite its many merits,Footnote ⁸ would have to be established based on several contingencies.

In the absence of a sophisticated and granular supranational system of taxation of the digital economy, a more ‘general’ and open system that would target different digitalised business models and the ‘tech giants’ especially, would appear more viable – at least in the beginning. The need for such a system resulted in the introduction of Digital Services Taxes (DSTs) by several countries within and outside the Union. Resort to DSTs arose from a combination of two factors: the urgency to deal with the digitilisation of the economy in a meaningful (and profitable) way that would put a halt in tax base erosion – the revenue states were losing due to their inability to tax digital business models, and the lack of a multilateral agreement on how to do so. DSTs would allow different states to raise revenue from several digital services that were ‘effectuated’ in their territory. These digital services could be data-based, arise from e-commerce activities or otherwise. Given their potential to generate revenue, it comes as no surprise that many national DSTs were introduced as a source of revenue post-Covid.

The activities that would trigger DSTs would require a high level of user participation.Footnote ⁹ Thus, such taxes are not necessarily data-centred, but they can certainly apply to data-driven business models. Accordingly, DSTs have not been targeting the taxation of data per se, neither do they aim at monetising and taxing the value of data. Instead, the idea behind DSTs has been to establish, for the first time, a way to tax businesses that operate in a digital world, even in places where they have no physical presence. Thus, DSTs could be understood more as an exercise of testing well-established tax principles with an adjoining element of (social) justice that builds on the claim that these ‘tech giants’ do not pay enough taxes because of the obsolete tax rules that target only brick and mortar businesses.Footnote ¹⁰ Therefore, at first sight national DSTs do not come with any ‘superior’ normative and axiological choices, but rather with revenue considerations and fairness proclamations; as some states’ solution to the need for a fair taxation of the digital economy.

These fairness concerns were manifested by the fact that, despite their large market share in the European economy (and beyond), tech companies were subject to a very low effective tax rate.Footnote ¹¹ The systematic payment of the lowest effective corporate tax rates by the most valuable and highly digitalised multinational enterprises (MNEs) such as Google, Amazon and Facebook, facilitated the concentration of wealth in a small number of companies and the individuals who control them.Footnote ¹² This was due to both the nature of digital business models, which do not require physical presence, the inadequacy of international tax principles to deal with this, and the increasingly sophisticated tax planning techniques. The opportunities for many such MNEs to minimise their tax burden had also rendered citizens aware of tax fairness issues. Especially citizens of the source states (where the income arose but could not be taxed) were, effectively, asked to make up the revenue shortfalls for the loss of that potential revenue.Footnote ¹³

These considerations justify the fact that the groundwork of the OECD on the taxation of the digital economy was directed, after all, to ensuring that multinational enterprises paid their fair share of tax wherever they operated.Footnote ¹⁴ This was perceived as a double (fairness) problem that required a two-step approach. At a first level, an international debate was initiated to develop a consensus about a fair tax system with fair effective tax rates, that resulted in the so-called Pillar Two rules that established a minimum effective tax rate of 15 per cent.Footnote ¹⁵ At a second level, and once the minimum tax rate had been agreed in step one, internationally agreed rules on the allocation of taxing rights – the so-called Pillar One, would be developed to give effect to this fair tax system. The main idea at OECD level was to solve both these multidimensional challenges through international consensus.

DSTs were dealing with the second main question in the international tax debate; where to tax MNEs’ profits and what to tax (what value is being created), on their own terms. This meant that different national DSTs targeted different digital business models (eg the Hungarian tax on advertising services and the broad Italian DST on digital transactions)Footnote ¹⁶ or relied on specific criteria and thresholds to identify which business models would fall within their scope (eg scale and level of user participation).Footnote ¹⁷ The underlying idea was based on the premise that if there was a nexus with these states’ territory, ie the territory acting as ‘the market’, this could give them a taxing right. The basic ‘fairness’ question of the nexus that gave this right was decided by national legislation on different criteria (eg user participation).

B. The development and nature of DSTs and Pillar One

In principle, a DST is a destination-based tax applied to the gross revenues of large digital MNEs operating in market jurisdictions, for example, providing social media, e-commerce, or advertising services with users or consumers in the jurisdiction.Footnote ¹⁸ While national DSTs were already introduced in several countries across the world in 2013 and 2014,Footnote ¹⁹ an attempt to define the characteristics of DSTs was only very recently included in the OECD’s Public Consultation document.Footnote ²⁰

The discussions on a multilateral solution to the allocation of taxing rights in the digital economy, the ‘Pillar One project’, put into question the survival of national DSTs. The idea behind the OECD’s Pillar One proposal, which was part of the BEPS Action 1, was that part of the ‘digital’ MNE profits would be re-allocated to the countries where they would sell their products and provide their services, in other words, where their consumers are. Taxing rights would thus be (re-)allocated – in a coordinated manner – to ‘market jurisdictions’ even when the MNEs would have no physical presence there. To effectuate this multilateral approach, a multilateral convention (MLC) for allocating taxing rights in the digital economy would have to be concluded.

The suggested tax solutions under Pillar One have been fiercely criticised on several grounds, including their potential problematic relationship and co-existence with domestic tax rules,Footnote ²² their complexityFootnote ²³ and their reflection of the value created or contributed by the market and/or users.Footnote ²⁴ In brief, the rules contemplated under Pillar One would introduce a steeply progressive tax system targeting very high revenue MNEs only, which, usually, are not residents of the targeted ‘market jurisdiction’ at issue.Footnote ²⁵ While Pillar One intends to leave aside certain businesses with tangible activities, such as the extraction of natural resources, or banking activities, the imposable ‘digital tax’ remains a direct tax levied on a specific part of taxpayers’ income, defined by a formulaic key of the allocation of gross profits within a market jurisdiction. Tax sovereignty is therefore exercised by the mere access to the domestic (large) market but not on a net income basis that best reflects the ability-to-pay principle.Footnote ²⁶

Should agreement be reached on Pillar One, unilateral measures like national DSTs should be removed in favour of the global solution that Pillar One would introduce.Footnote ²⁷ Otherwise, as the OECD has pointed out, the imposition of unilateral DSTs ‘can be inefficient and lead to disputes with other countries – both because they may create double taxation and because they can lead to trade retaliation.’Footnote ²⁸

The political sensitivity of the taxation of the digital economy is great, considering that the USA, the driver behind the politics of international taxation,Footnote ²⁹ is stalling the Pillar One project. This halt may have detrimental effects for the future of the ‘new multilateral approach’ and Pillar One, specifically. While the US has been central in building multilateral cooperation in international tax, it has done so with a view to bolstering the US’ competitiveness.Footnote ³⁰ This shift towards US-centric multilateralism, that has been characterised as a ‘hegemonic multilateralism’,Footnote ³¹ makes the role of the US pivotal in all upcoming international reforms. If the United States rejects Pillar One why would another country want to adopt the two-pillar solution when unilateral, tailor-made solutions may be available?

However, as there are still hopes that Pillar One may pass, DSTs are still ‘on hold’. Unilateral DSTs have not been welcomed, as expected, especially by businesses that would bear the tax and states that are homes to such businesses, most notably, the US.Footnote ³² By way of example, the US has attacked unilateral DSTs introduced by Austria, India, Italy, Spain, Turkey, and the UK, on the basis that they excessively burdened US digital companies and, thus, they violated international tax principles and constituted discriminatory trade measures.Footnote ³³ The US’ opposition especially to the famous French ‘GAFA tax’ in July 2019Footnote ³⁴ culminated with the finding by the US Trade Representative that the DST, discriminated against US digital companies and because of its application to revenues unconnected to a presence in France contravened prevailing international tax principles and was particularly burdensome for the in-scope US companies.Footnote ³⁵ In 2020, the Trump administration announced 25 per cent tariffs on $1.3 billion worth of trade with the EU in response to the French DST.Footnote ³⁶ These tariffs had a delayed implementation date and have been on hold. Despite hopes for a multilateral solution, countries, like Canada, have decided not to wait any longer and have moved on with introducing a unilateral DST as of 1 January 2024. With Pillar One being stalled, the USA still has an easier task in opposing unilateral solutions rather than going against a solution that has been endorsed by all states, but her.

C. Pillar One: The impact on the EU

A major consideration in the Union’s and Member States’ next moves relates to political contingency. After the adoption of the GloBE directive and the Union’s expressed and proven commitment to abide by Action 1 of BEPS, Pillar One remains in a limbo state at a global level. The scope of the new rules (targeting primarily US companies) and the re-allocation of taxing rights between ‘home’ jurisdictions and ‘market’ states have been contentious issues that prevent the participating states (members of the Inclusive Framework) from reaching consensus.Footnote ³⁷ The technical details of the profit allocation and nexus rules have also been disputed.

This failure to secure global consensus has a significant impact on the international tax landscape, as it allows individual states to act independently. The initial deadline the OECD had imposed on the MLC coming into effect was 31 December 2023.Footnote ³⁸ According to that statement, if the MLC was not in effect by that date, members of the OECD Inclusive Framework would be free to impose new DSTs. The initial ambition did not materialise and, after several controversies on the technical details of Pillar One (Amount A), the text of the MLC,Footnote ³⁹ the Explanatory StatementFootnote ⁴⁰ and the Understanding on the Application of Certainty for Amount A of Pillar One,Footnote ⁴¹ which reflected the consensus achieved so far among members, was only published in October 2023. As per the texts’ cover note, these publications intended to ‘ensure transparency; facilitate the ability of some members of the Inclusive Framework to engage in internal processes necessary to enable swift adoption […]; facilitate resolution of remaining differences by the Inclusive Framework; and prepare the MLC for signature’. Despite the lengthy unsuccessful deliberations towards a commonly accepted outcome, members of the Inclusive Framework reaffirmed their commitment to achieve a consensus-based solution and to finalise the text of the MLC by the end of March 2024, with a view to holding a signing ceremony by the end of June 2024.Footnote ⁴² None of these events have come to pass.

This throws some doubts on what the next steps at the European level will be. The Union has so far used the OECD’s works on Pillars One and Two as a ‘stepping stone’ to build on international developments in order to take a more ambitious anti-base erosion step.Footnote ⁴³ The initial expectations of the European Parliament’s Legislative Train Schedule that the MLC text will be open for signature by the end of June 2024 have been recently removed from the webpage. Instead, in a more tampered down tone, it is proclaimed that ‘[t]he Commission will propose a directive for the implementation of Pillar One in the EU as soon as the work at the OECD is sufficiently mature.’Footnote ⁴⁴

The unresolved issues, together with the United States’ reluctance to sign the MLC in the near future, make the future of Pillar One bleak.Footnote ⁴⁵ Reportedly, Pillar One has also been blocked by India and Saudi Arabia.Footnote ⁴⁶ Because of the prevailing uncertainty as to the Pillar One outcome, the Union is in a limbo state. This is not only because new unilateral DSTs may be introduced while the old ones are also running, but also because the Union has been withholding different proposals both with regard to revenue (‘EU digital levy’) and tax-specific (proposal for a Council Directive on Business in Europe: Framework for Income Taxation (BEFIT proposal),Footnote ⁴⁷ in anticipation of developments on the Pillar One front. Specifically, the potential introduction of an EU digital levy would be at odds with Article 38 of the OECD’s MLC that provides that existing unilateral DSTs should be removed.Footnote ⁴⁸ At the same time, the Union wants to continue to influence and be part of global dynamics and – if the MLC is adopted – of the ‘global consensus’ solution in digital taxation. While the ‘globality’ of the consensus is contested on several grounds,Footnote ⁴⁹ at EU level, all Member States appear to be currently in favour of adopting Pillar One. By implementing Pillar One, the EU and the Member States will be bound by the agreed tax design that will define the total revenue to be generated. How this revenue will be distributed would remain an internal matter for the EU through which it could pursue its constitutional values, priorities and possibly, a digital strategy. The following section will explore the possible introduction of an EU digital levy under these different lenses.

A. A brief history of the discussion

The first reaction of the EU towards the taxation of a digitalised economy came in December 2018, immediately after the release of the 2018 OECD Interim Report on the tax challenges arising from digitalisation.Footnote ⁵⁰ As an immediate reaction, the Commission published proposals for two Council Directives on the taxation of the digital economy and one (non-binding) Commission Recommendation relating to the corporate taxation of a significant digital presence (SDP).Footnote ⁵¹ One proposal concerned rules relating to the corporate taxation of SDP,Footnote ⁵² while the other established a common system of DSTs on revenues from certain digital services, intended as a temporary solution until Member States reached a long-term agreement (EU DST proposal).

The idea behind the DST proposal was to tax revenues generated by the supply of certain digital services. Article 3 provided an exhaustive list of services falling within the scope of the proposed Directive, including ‘the transmission of data collected about users and generated from users’ activities on digital interfaces’.Footnote ⁵³ Different rules for determining user location were offered for different types of services. The user’s location for each service would be associated with taxable revenue, determining which countries could claim taxing rights and DST revenue.Footnote ⁵⁴

One aim of the EU DST proposal was to establish an EU-wide DST to prevent fragmentation of the single market due to uncoordinated, unilateral measures and to ensure that competition would not be distorted thereby.Footnote ⁵⁵ It also sought to promote sustainable public finances, ensure social fairness, and combat aggressive tax planning. The preamble acknowledged in 2018 that the issue of taxing the digital economy was global, suggesting that a multilateral, international solution would be ideal.Footnote ⁵⁶ However, the preamble also noted that progress at the international level can be challenging, and Member States were under pressure to act, given the risk that their corporate tax bases were being significantly eroded over time.Footnote ⁵⁷

The EU DST faced numerous criticisms, many of which mirrored common concerns about DSTs in general, including issues related to tax design, policy, and administrability. It was specifically criticised for adding complexity to an already intricate Corporate Income Tax (CIT) system,Footnote ⁵⁸ the perceived ‘mismatch’ between value creation and taxation,Footnote ⁵⁹ potential double or multiple taxation, fairness issues resulting from taxes on revenue that ignore profit,Footnote ⁶⁰ and being discriminatory by targeting only a narrow group of digital companies.Footnote ⁶¹ Critics also argued it could negatively impact investment, innovation, welfare, and growth, while distorting business decisions.Footnote ⁶²

Despite the many drawbacks of the EU DST proposal, several argued in favour of DSTs as a potential solution for taxing location-specific rents.Footnote ⁶³ They argued, specifically that DSTs would allow location-specific rents earned by digital platforms to be captured by the countries in which such rents arose.Footnote ⁶⁴ The need to address the unfairness of states’ inability to tax based on digital presence called for an imperfect solution, given the complexities of taxing the digital economy. DSTs, whether temporary or permanent, were seen as a way to remedy this injustice, albeit imperfectly.

The EU DST proposal was abandoned in 2019 when the ECOFIN Council failed to achieve unanimous support, paving the way for an international consensus-based solution. Meanwhile, between 2019 and 2020, several EU Member States, including France, Italy, Austria, and Spain, adopted unilateral DSTs.

B. The EU Digital Levy proposal and the own resources/EU taxes debate

Besides the international advancements in finding a ‘global’ solution to the taxation of the digital economy manifested by the Pillar One and Pillar Two proposals, the COVID-19 crisis struck the world in 2020. The pandemic not only necessitated ‘exceptional measures’ in terms of EU expenditure but also served as a catalyst for rethinking EU taxes. Consequently, the EU faced two main concerns regarding the taxation of the digital economy: to follow up on international developments that eventually led to the adoption of the GloBE directive and to find ways to raise additional revenue to address the economic repercussions of the crisis.

In this last bid, the EU adopted the Next Generation EU (NGEU) recovery plan that allows – through different sub-packages and components – to spend up to EUR 750 billion (as per 2021) for the recovery of the Member States in the forms of loans or non-repayable grants over a period of five years.Footnote ⁶⁵ The fact that this amount is equivalent to five times the ordinary annual budget of the EU compelled the EU to issue for the first time massive common debt and to openly express the need for more ‘EU revenue’ and EU revenue streams to deal with the financial repercussions of the health crisis and the Union’s recovery.Footnote ⁶⁶ The EU budget is traditionally financed by the so-called ‘own resources’,Footnote ⁶⁷ however, growing concerns about the adequacy of these resources to cover recovery repayments and borrowing costs under the NGEU ProgrammeFootnote ⁶⁸ have rekindled discussions at both academic and policy-making levels about the possibility of the EU introducing its own tax.Footnote ⁶⁹

According to Article 311 TFEU, ‘[w]ithout prejudice to other revenue, the budget shall be financed wholly from own resources’. In its formal understanding, own resources are all resources that are called own resources in the respective Own Resources Decisions (ORD),Footnote ⁷⁰ while there is no numerus clausus of admissible own resources. The distinction between an ‘own resource’ and a ‘genuine EU tax’ that has dominated tax and constitutional scholarship recentlyFootnote ⁷¹ is not purely semantic. Own resources in their original sense, are fiscal resources levied by Member States on companies and/or individuals, whose proceeds are ‘passed’ by Member States to the EU, even if the collection is done at national level.Footnote ⁷² In contrast, to qualify as an EU tax, the tax must be:

• – established by EU law without any need for legislative action at national level;

• – levied by the EU that would also be competent to decide on all constituent elements of the tax at issue, eg the rate;

• – the revenues that arise therefrom must accrue at EU level and enter the EU budget directly.Footnote ⁷³

This further and obviously presupposes, from a legality perspective, that the Union has a legislative and revenue competence to raise EU taxes.Footnote ⁷⁴ Such a tax could be administered by Member States or by EU agencies.Footnote ⁷⁵ Midway between a ‘genuine own resource’ and a national contribution, the High Level Group on Own Resources places the VAT-based own resources, as well as a Financial Transactions’ Tax (FTT)-based own resource or a carbon tax.Footnote ⁷⁶ These, as the High Level Group specifies, are often mistaken for ‘EU taxes’, but they are in fact a share of national taxes that Member States decide to transfer to the EU level, once there is a sufficiently harmonised approach concerning such taxes.Footnote ⁷⁷ Indeed, these taxes are levied at the national level; in the VAT example, Member States set the VAT rate and actually collect the tax.

Thus, the main difference, or alternatively, what the existing own resources are lacking to qualify as EU taxes, is that these taxes exist or are created at national level, and they are not levied by the EU directly. The main impediment in introducing such an EU tax lies with the competence of the EU to do so and the (in)existence of the appropriate legal basis/es in the Treaties. A brief overview of the potential legal bases for the adoption of an EU tax suggests that the provisions giving the EU taxing competences (must) serve substantive policy aims, such as environmental protection,Footnote ⁷⁸ regulating the energy industry,Footnote ⁷⁹ or protecting the functioning of the internal market.Footnote ⁸⁰ Thus, tax-related directives (or regulations) based on Articles 192, 194, 113 and 115 TFEU (as well as Article 116 TFEU) may not primarily aim at financing the EU. Therefore, the measure of the own resource must pursue primarily non-fiscal objectives as, arguably, the recently introduced ‘plastic tax’ does.Footnote ⁸¹

In its conclusions of 21 July 2020, and in recognition of the need to bolster the EU’s borrowing and repayment capacity, the European Council tasked the Commission with proposing additional own resources.Footnote ⁸² In December 2020 the European Council introduced another own resource for the EU budget next to the ‘traditional’ own resources. The new resource was a ‘plastic tax’, that is, a levy that is based on the weight of non-recycled plastic packaging waste.Footnote ⁸³ This ‘plastic tax’ was celebrated by Frans Vanistendael as a tax that for the first time ‘truly belongs to Europe and the scope, base, and rate are all determined exclusively by the EU Council and the European Parliament’.Footnote ⁸⁴

In February 2021, the European Commission launched a public consultation on the possible introduction of a digital levy at the EU level.Footnote ⁸⁵ In its ‘Inception Impact Assessment’ on the EU digital levy,Footnote ⁸⁶ which was reminiscent of the 2018 DST Proposal, the Commission suggested that such a levy would ‘help address the issue of fair taxation related to the digitalisation of the economy and, at the same time, is intended to not interfere with the ongoing work at the G20 and OECD level on a reform of the international corporate tax framework’.Footnote ⁸⁷ While at an early stage, the Commission foresaw such a levy to take the form of either a direct or indirect tax on social media, online market places, and other digital services and platforms operating in the EU, regardless of where they are established.Footnote ⁸⁸

Many of the respondents to the public consultation pointed out to the need to align a potential EU digital levy with the OECD/G20 Pillar One developments. Some of them also noted the need to consider what would happen to the national DSTs. In light of these considerations, and in anticipation of an agreement on Pillar One, the EU digital levy was ‘put on hold’.

Instead, in December 2021, the European Commission proposed three new sources of revenue for the EU budget: (1) an Emissions Trading System own resource that, in an effort to reduce net greenhouse gas emissions in the EU, would direct 25 per cent of the revenues from emissions trading in the EU to the EU budget;Footnote ⁸⁹ (2) a carbon border adjustment mechanism (CBAM) own resource that would transfer 75 per cent of what EU countries collect under CBAM to the EU budget;Footnote ⁹⁰ and (3) the reallocation of profits of large multinational companies (MNEs) that will materialise under OECD’s Pillar 1 framework.Footnote ⁹¹ According to the Commission that third new resource would be equivalent to 15 per cent of the share of the residual profits reallocated to the respective Member States under Pillar One.Footnote ⁹² This own resource would thus be, once again, a transfer of national taxes to the EU budget allowed by a sufficiently harmonised legal framework and the contribution would be proportionate to the profits made in each State once the Pillar One rules are in place. The Commission estimates that, once this new resource is in place, revenues for the EU Budget will range from EUR 2.5 to EUR 4 billion per year.

C. An EU digital levy: Constitutional, tax, policy, and political considerations

While the specific design of an EU digital levy was not detailed, the Commission contemplated in its Inception Impact Assessment, an EU tax based either on Article 113 TFEU or on Article 115 TFEU, depending on whether it would take the form of an indirect or direct tax respectively. To use these provisions as a legal basis, it must be demonstrated that the digital levy pursues primarily an internal market objective and subsidiarily, a fiscal one. The current discussion at global level, the need for a coordinated approach and the removal of unilateral measures to facilitate trade and fair competition would certainly back the justification of the internal market legal basis.

While the legal basis has not been disputed in the literature, the most common criticism against an EU digital levy has been its potential interaction with the Pillar One framework and the risk of multiple taxation, along with burdensome administrative and compliance costs if the two were to coexist.Footnote ⁹³ These concerns are valid, especially in the absence of a concrete proposal that would allow for more specific criticisms related to the tax’s design (eg, tax base, type of tax, scope).Footnote ⁹⁴

Many commentators have predicted the end of the EU digital levy,Footnote ⁹⁵ but just as many believe that no agreement on Pillar One will be reached.Footnote ⁹⁶ If the latter alternative is the one that comes to pass, we can assume that digital taxes will be introduced at some level of government (as already happens with some Member States). In such a case, three main scenarios are possible:

• – Member States are left free to decide unilaterally how to deal with the taxation of the digital economy. While it is unquestionable that Member States enjoy fiscal sovereignty in tax matters,Footnote ⁹⁷ the multiple efforts to introduce an EU DST and the ongoing discussion around the EU digital levy do not suggest that the Union, in tandem with Member States, will opt for unilateral national solutions. This is therefore the least probable scenario.

• – The introduction of a ‘harmonised’ EU DST in the sense that the details of the tax would be spelled out in a directive and hence, the distortion of competition and administration difficulties would be minimised. Such a system would be very similar to the EU DST proposal on a common system of DSTs on revenues resulting from the provision of digital services. Such an option would harmonise the different Member States’ DSTs under a common DST system, while keeping the proceeds of the DSTs at national level (national budgets).

• – The introduction of a completely different harmonisation solution at EU level for the taxation of the digital economy, such as a withholding tax,Footnote ⁹⁸ or a virtual PE (the SDP proposal).Footnote ⁹⁹

Specifically in terms of revenue, the proceeds from the different digital taxes could either go to national budgets (as in the previous examples) or the EU could opt for:

• – The introduction of an EU digital levy, in a design that would remain to be decided, as an own resource or as a genuine EU tax to finance the EU budget and/or the NGEU specifically.

• – The ‘revenue sharing’ approach, which is the one that is currently proposed as an own resource, that is the contribution by the Member States of a share of the residual profits (re-)allocated to the respective Member States under Pillar One.

In the following section, I will outline how an EU digital levy could address some of the problems currently faced by the Union in relation to digital taxes. My aim is to approach this not from the traditional policy and tax design considerations, but from the EU revenue side that could rectify remaining issues through the promotion of fairness, the single market and redistribution, all of which are (or should be) constituents of the digital constitutional strategy of the Union.

A. The relevance of spending and the justifications for an EU tax

The EU’s DST proposal was presented as a temporary measure until global consensus would be reached. In contrast to a potential EU digital levy, the EU DST aimed to harmonise domestic tax laws, while the revenue would remain with the Member States levying the DST. Instead, an EU digital levy would qualify as an own resource or – depending on the specifics of its design – even as a ‘genuine EU tax’ and, hence, the proceeds would go into the EU budget either directly (in case of an EU tax) or through Member States’ transfers (in case of an own resource). In the following, I will make the case for the introduction of a digital tax as a revenue-generating instrument for the EU, and not for individual Member States. In this context, I will argue for two plausible ways forward for the Union with regard to digital taxation; the ‘genuine EU digital levy’, in case the Pillar One MLC does not get adopted; and the ‘revenue sharing’ possibility, which is, effectively, the current proposition of the Commission, if Pillar One enters into force. This latter hybrid model would add a new own resource equivalent to 15 per cent of the share of the residual profits reallocated to the respective Member States under Pillar One.Footnote ¹⁰⁰ This would translate to an obligation on Member States (and not on the in scope taxpayer/MNEs) to pay a contribution to the EU that is calculated by applying a rate of 15 per cent on the residual profits attributed to them by the rules of Pillar One.Footnote ¹⁰¹ This own resource would thus be, once again, a transfer of national contributions to the EU budget, a somewhat revenue-sharing agreement.

As stated above, the amount (and the impact) of the contribution would depend on which of the two solutions would be promoted. Taxes – at all levels – may serve not only revenue-generating functions, but also (re)distributive and regulatory functions. So far, the EU has not used its taxing arsenal for any of these functions. Even if one assumes that the recently introduced own resource of the plastic tax is an EU tax, its pursuit of regulatory (environmental) objectives remains at a very small scale, as does its magnitude. Instead, in the past the Union has attempted to ensure, through positive but also negative integration, that Member States use their power to tax in a manner that does not compromise accomplishing the goals of the EU, such as the proper functioning of the internal market.Footnote ¹⁰² Regulation (of national tax systems) has been the main tool towards the promotion of the Union’s objectives, notably the removal of obstacles in the circulation of goods, persons and capital and the curtailment of the available tax avoidance mechanisms.

Below, I will explain why a digital tax would be a very suitable candidate to transform the EU into a tax union.Footnote ¹⁰³ First and foremost, because the introduction of some form of digital tax in the Union in a coordinated manner is essentially a fait accompli. Whether Pillar One moves on, or not, the Union will be able to either regulate national tax systems, in order to bring some degree of coordination, or to raise an EU digital levy itself. In the last scenario, while the genuine EU digital levy and the ‘revenue sharing’ option share many similarities, they also present subtle differences. As already stated, the technical part of the tax designFootnote ¹⁰⁴ could be the same but the level of the imposition of the tax (Member State or the EU) would be distinct. Obviously, the amounts entering the EU budget would differ; In the case of the EU digital levy, all the proceeds from the EU tax would enter the EU coffers making, quantitatively, a large difference.

The quantitative difference, however, does not justify the establishment of an EU tax (as opposed to an own resource, or even revenues for the national budgets). Even if the ‘revenue sharing’ option would undoubtedly scale down the contribution to the Union’s different objectives, fiscal, regulatory (like the digital transition)Footnote ¹⁰⁵ and redistributive (as in the cohesion policy), it cannot be assumed (neither entirely excluded) that the remaining revenue would be used by the Member States against the Union’s objectives. At the same time, there are no accountability or control mechanisms to ensure that the funds are going to a specific agreed cause (be it redistributive, regulatory or repayment of loans). The transfers of the Member States (in the form of own resources) have no direct allocative or distributive impacts. This is because there is no legal basis in the Treaties to support a nexus between a particular tax base (or own resource) and its spending, as if the revenue levied from x tax will/must be spent on x purpose. This is not particular to the EU, several countries, like Germany disassociate their revenue from their spending.Footnote ¹⁰⁶ Whether the revenue has been ‘properly’ allocated will only be judged at a political level in the next elections.

This lack of a nexus challenges the justification for a specific category of an EU tax base, such as the digital levy. If we cannot earmark it towards a particular (relevant) political purpose, then how to justify the levy of such a tax at first place. This lack of a specific allocative effect of EU taxes to EU spending and the disconnection between EU revenues and expenditures contributes to the detachment of EU citizens from the contributions their Member States make and implies a deficit in democratic accountability.Footnote ¹⁰⁷ This finding applies indeed to all potential EU taxes’ bases. The answer to why an EU digital tax should be preferred is primarily a pragmatic one: because the digital levy (in whichever form) is the first tax that must and will be harmonised or levied at the EU level very soon. Secondarily, because from a benefits’ theory perspective such a tax could be justified as the ‘price’ taxpayers pay for the EU’s contribution to the ‘digital internal market’ which has been one of a protective/ rights-based nature.Footnote ¹⁰⁸ The adoption of a harmonised framework on the taxation of the digital economy, would also prevent a chaotic unilateral response that could fragment the internal market and result in multiple taxation for the taxpayers.

This justification aligns with the general acknowledgment that the levying of EU taxes can be legitimised by the ‘European Added Value’,Footnote ¹⁰⁹ in other words, the EU’s contribution in creating additional value (for the Member States) through its intervention.Footnote ¹¹⁰ It could also be justified, albeit on loose grounds, on all the benefits the taxpayers would receive from the regulatory manifestations of the NGEU’s different instruments (eg environmental considerations, promotion of the digital transition), or the re-distributional function of taxes that are embodied in the EU cohesion policy. ^{Footnote 111}

Practically, the contribution to the common EU budget could also be justified by the mobile tax base (consumers, users) that affects the allocation of taxing rights across states. In other words, direct or indirect reliance of the proposed tax system on largely mobile consumers and end users will affect the allocation of profits to the MNE jurisdictions. As this could create distortive results given the increased intra-EU mobility of consumers in the EU, it would appear sensible to address this mobility-induced distortive effects through the revenue side.Footnote ¹¹² Assuming that the individuals’ mobility remains within the EU, it seems more appropriate to transfer this generated revenue to the higher/EU level, for a lack of accurate representation of the residence of people that generate the taxable income. An EU-wide levy would also ensure that the money that goes into the EU budget does not later return to the same taxpayers through domestic loopholes, for example by way of favourable tax rulings.Footnote ¹¹³

From a broader perspective, legal scholarship has advocated for the EU to levy taxes on its own right, also as a means of democratising EU institutions. Several authors have argued that if there ought to be no taxation without representation, there cannot be any representation without taxation.Footnote ¹¹⁴ This maxim, however, cannot materialise in reality without substantial institutional reforms, most notably granting the European Parliament (EP) the power to tax.Footnote ¹¹⁵ Such an institutional, fiscal and financial overhaul could trigger and ensure an appropriate level of accountability of the Union. A ‘democratisation’ of the taxing powers would also democratise the Union’s spending. By granting the EU fiscal capacity, only then can Member States discuss seriously and selflessly the policies to be funded by such resources.Footnote ¹¹⁶ In the same vein, it has been argued that a return from the EU budget to EU taxpayers as a whole would increase taxpayers’ confidence in the tax system and would enhance the legitimisation of the tax system altogether.Footnote ¹¹⁷

Despite the limited role of the EP in what should be the most ‘democratic procedure’ of all, procedural justice, political process, and democratic legitimisation would suggest that a potential adoption of an EU digital levy or ‘shared revenue’ would at least necessitate a double approval process. This ‘double requirement’ for a uniform EU-wide tax replacing (or ‘harmonising’) existing unilateral measures and simultaneously acting as an own resource would first require the adoption of a relevant harmonising directive under Article 113 or 115 TFEU. In either case unanimity would be required at the Council and the special legislative procedure would apply. The EU tax should then pass an additional ‘barrier’ and be included in the own resources Decision that would secure that the revenue collected would go into the EU budget. While it is regrettable that the role of the EP is limited in both cases,Footnote ¹¹⁸ the double burden that would have to be satisfied provides an additional safety net in terms of scrutiny and consultation with the EP.

B. Fairness considerations

The Commission’s Inception Impact Assessment on the proposal for an EU digital levy placed emphasis on the promotion of ‘fairness’. Despite criticism regarding the use of a vague concept like fairness as one of the premises of the EU digital levy,Footnote ¹¹⁹ this reference has some merit. Fairness, and tax fairness, in particular are difficult concepts to define. The two predominant theories justifying taxes – the benefit theory and the ability-to-pay theory – provide some guidance on aspects of fairness. In the first case, people contribute to governments based on (and to the extent of) the benefits they receive. In the second case, the tax bill should be distributed in a manner (more or less) proportionate to one’s income, and from a spending aspect it should promote some degree of the ‘social welfare’ function of taxation.Footnote ¹²⁰

Fairness in this context should be understood as having three parts:

First comes the reconsideration of the ‘international tax framework’ as we know it that would mandate which states should have a right to tax in the absence of physical presence and on what basis. This inter-nation equity would materialise through a fair allocation of taxing rights among states. The benefit principle in this context is realised in that the state where the taxpayer (multinational corporation) obtains a benefit from (through the use of users’ data, for instance) acquires a right to tax. This aspect of fairness has been presented by the OECD as a drive behind the BEPS project.Footnote ¹²¹

In this case, assuming the removal of unilateral DSTs, the introduction of an EU-wide digital levy would be based on the fair assessment of existing taxes, capitalising on the untaxed base of digital economy that leaves scope for the introduction of a new tax. The imposition of a uniform EU-wide DST while replacing national DSTs would also contribute to overcome problems related to the administration of the tax and the possible distortion of competition because of the many and diverse DSTs. Fairness, in this sense, would manifest through (a) the creation of a right to tax where one should exist, and (b) improved administrability for both the state and the taxpayer resulting from EU-led uniformity. Intra-EU distortive effects of the tax base would also be minimised through the EU levy.

Second, this contribution should be fair: this is a tax design question related to the tax base, rates, and scope. Both these ‘fairness qualifications’ would be satisfied regardless of the revenue side (accruing at Member State-level or EU-level).

The third element of fairness would build on the use of the revenue. According to the impact assessment it would be used ‘for the purposes of the recovery and to support a more stable medium-term outlook’.Footnote ¹²² This revenue feature of fairness concerns the distribution of fiscal burdens between taxpayers and takes into account cognate matters such as fiscal transfers and the distributional consequences of public expenditure.Footnote ¹²³ It resonates with a general, at times, constitutional, recognition that tax should support social welfare goals and generate distributive outcomes, as mandated by the ability-to-pay principle.Footnote ¹²⁴

In an EU setting, this would be reflected in the regulatory framework the EU could offer – potentially a framework for a green and digital transition – in exchange for the revenue it receives.Footnote ¹²⁵ It would also materialise through the redistributive branch of the EU budget, rendering the EU tax into a vessel for enhancing democracy and social justice through redistribution.Footnote ¹²⁶ While such distributive outcomes can be pursued and achieved at the national level, the advantage of satisfying this element at the supranational level also lies in superior effectiveness and efficiency. According to the traditional fiscal federalism and tax assignment literature, taxes levied on highly mobile tax bases and/or redistributive taxes should be levied at the central level to avoid their erosion.Footnote ¹²⁷

Furthermore, channeling the revenue to the common budget – whether through shared revenue or a genuine EU tax – would resolve other ‘global’ or ‘intra-EU’ fairness considerations arising from the fact that larger digital businesses concentrate in richer, more powerful economies.Footnote ¹²⁸ Given that the economies of different Member States are very diverse, different revenue would inevitably arise across different states even in the case of a harmonised DST to be levied by individual states. Such a disparity would create a feeling of ‘injustice’ among citizens of smaller or less ‘digital-friendly’ states that would be ‘penalised’ due to their size or due to other policies, if the revenue were to go into national coffers.

This sense of injustice is also expressed through the ‘juste retour’ argument, which is particularly visible in the context of the own resources system. As Member States and their citizens can easily calculate how much they pay into the EU budget and how much they receive back, wealthier states (and their citizens) feel that they contribute to the prosperity of the poorer ones.Footnote ¹²⁹ This may easily result in certain redistributive outcomes being blocked by net contributing states, as has happened with cohesion policy in the past.Footnote ¹³⁰

This argument could be rebutted in the EU digital levy example. Even if the DST took the form of an own resource, as in revenue sharing, the nature of the levy itself, which primarily imposes the tax burden on ‘foreign’ taxpayers, would help mitigate the ‘juste retour’ claim. When someone else bears the burden in lack of a physical presence at a territory, it is easier for the residents of that territory to allow the revenue to go to the ‘supranational’ budget.

If a genuine EU digital levy were to be preferred, it could ease the (justifiable) perception by taxpayers and Member States that the Union’s own resources (especially the VAT-based and the GNI contributions) are national transfers from Member States and not ‘own resources’ of the Union.Footnote ¹³¹ A digital levy as a pure EU tax would also counter the perception of own resources as ‘domestic’ yet not individualised transfers, as it would enhance the connection between raising revenue and spending it, fulfilling the principle of ‘no public expenditure without taxation’.Footnote ¹³² In other words, it would reverse the current sense of disconnect between spending (subject to more democratic oversight at the EU level) and taxation (subject to democratic oversight only at the national level). Accordingly, the current obvious incongruence between taxation, spending and representation at EU level would be soothed through an EU tax or an EU own resource that would finance the EU budget. This is because such an EU digital levy (lato sensu) would satisfy multiple aspects of digital constitutionalism, notably the EU’s role as a global actor faithful to its international commitments, fairness considerations assuming appropriate tax design, the fair distribution of the value created, single market regulatory priorities (such as the EU’s digital transformation), and social welfare, as a corollary of the redistribution policies embedded in the EU budget.