Taxing the Digital Economy - A Legal Assessment of the Introduction of PIllar One to the Internal Market

Abstract: In the last decade, the progress of the digital economy has caused a rift in the international tax regime, which now faces several challenges. The current principles governing taxation rules are based on notions that business can only be conducted through physical presence. Consequently, these principles have been pushed to their edge as the present-day enterprises have found new ways to conduct businesses without the need of a physical presence in the market jurisdiction. According to the current rules of international taxation, an enterprise is only liable for tax in a state where it has a certain degree of physical presence otherwise it is only liable for taxation in its residence state, or a state where the enterprise has a permanent establishment. The current rules create an opportunity for aggressive tax planning schemes and tax evasion which enterprises are willing to utilize. To address these pressing issues the OECD has presented two proposals, Pillar One and Pillar Two, on how the digital economy could be taxed and the changes which would have to be made. The purpose of this thesis is to examine the legal possibilities of the introduction of OECD’s Pillar One into European Union law through a directive. Pillar One’s compatibility with some primary rules and principles of Union law are analysed, mainly the fundamental freedoms, articles 18 and 115 TFEU and the principles of subsidiarity and proportionality. The primary conclusion that can be drawn from this thesis is that such a directive would face an uphill battle, even though it would be the most plausible way for the EU member states to fulfil their commitments within the OECD. Because of the way the scope of Pillar One is determined, based on a global turnover base, it cannot constitute direct discrimination through its objective criterion. However, it is up to the CJEU to decide as they could change the conclusion by applying the majority rule which would determine that Pillar One is discriminatory. Furthermore, examined against the other fundamental freedoms and especially the freedom of establishment, it can be concluded that Pillar One would not impede the freedoms even if arguments can be made for both sides. In the way the framework is presented in the updated version of Pillar One it would not go beyond what is necessary to achieve the desired goals. Consequently, the principle of proportionality would not be breached. The fact that tax avoidance and evasion are global issues, which is unlikely solved by unilateral measures, it is more convenient for the European countries to accept a directive on the field of direct taxation. Furthermore, it would create a cohesive implementation which would strengthen the EUs position as a strong economic actor. Therefore, it can be concluded that a directive on Pillar One would be in accordance with the principle of subsidiarity. As for the unanimity requirement in article 115 TFEU, it remains to be seen if the European countries can set their differences aside and agree on the proposal.