This results in two outcomes. The European Commission estimated that a 3% tax rate would raise €5 billion annually for member states. In support of its digital tax proposals, the European Commission argues that existing tax rules do not account for how value is "created by users" in the digital economy:
Today's international corporate tax rules are not fit for the realities of the modern global economy and do not capture business models that can make profit from digital services in a country without being physically present. According to a preliminary text of the proposal, beginning in 2019, the tax will be imposed on certain digital services, including online advertising, online marketplaces, and data transfer service (i.e., revenue from the sales of online user activities) determined from internet protocol (IP) addresses within Spain. The tax would apply only to companies with global revenues for the previous calendar year exceeding €750 million and €3 million in revenues earned in that current year from activities with users in Spain. The tax would apply only to businesses whose revenues from covered business activities exceed £25 million per year and groups that generate global revenues from search engines, social media platforms, and online marketplaces in excess of £500 million annually. The specifics of the DST are to be detailed in legislation to be considered by Parliament that is expected to be introduced in April 2020. Based policy analysis, though, DSTs resemble a selective tax on revenue (akin to an excise tax) and not as a tax on corporate profits. Fundamentals of a Corporate Profits Tax

A tax on corporate profits taxes the return to investment in the corporate sector. First, as explained above, international tax rules do not provide countries a right to tax an MNC's cross-border income solely because their residents purchase goods or services provided by that firm. Rather, ownership of assets justifies a country to tax that MNC's profits. Corporate accounting profit is equal to total revenue minus total cost. In contrast, DSTs are structured as "turnover taxes" that apply to the revenue generated from taxable activities regardless of costs incurred to a firm. As explained in the "Economic Efficiency" section of this report, the economic incidence of a DST is likely to be borne by purchasers of taxable services (e.g., companies paying digital economy firms for advertising, marketplace listings, or user data) and possibly consumers downstream from those transactions, depending on supply-and-demand conditions in each stage of the supply chain. As a Measure to Counteract Tax Avoidance and Profit Shifting

Proponents of DSTs argue that profits earned by MNCs in the digital economy are not adequately taxed on a worldwide basis, as many of these firms have reduced their effective tax rates through international tax planning strategies. Even if digital business models that allow individual users to monetize and sell their individual data grow, any income earned by individual users would be subject to tax under existing tax systems. For example, property owners on Airbnb are subject to income taxes and other hospitality fees levied by their national and local governments. As an Excise Tax on the Digital Economy

Excise taxes are typically justified by economic principles or as revenue-raising measures. Under an alternative scenario, sellers of digital services (e.g., Google, Facebook, Amazon) could be monopolies, or a small number of firms could have "market power" (the ability to influence the price for their services prevailing in the market), and at least part of the tax is borne by these firms in the form of reduced economic profits. Investment in affected markets would be expected to decrease. Thus, it can be expected that a DST affecting a broad range of goods and services is more likely to be regressive than not, especially when compared to a tax on corporate profits. DSTs, as they have been presented thus far, also create inequalities for firms of similar size based on certain exemptions and thresholds. Critics of DSTs would argue that the thresholds are drawn to exclude domestic MNCs or to target the taxes to a narrow set of foreign MNCs. Regardless of their rationale, these thresholds create concerns of inequitable treatment between different sectors. Two features of the UK's proposed DST create additional administrative challenges. Generally, these types of business activities are low profit margin. DSTs and Implications for U.S. Tax Policy

		U.S. Foreign Tax Credits and Bilateral Tax Treaties

U.S. corporations are allowed to claim a tax credit against U.S. corporate income tax liability for income taxes paid to foreign jurisdictions. Such taxes are considered to not distort trade. Multilateral Tax Reform Negotiations and U.S. Economic Policy

Many proponents of DSTs argue that they are "interim measures" until the international community adopts broader reforms in international tax rules.
Several countries, primarily in Europe, and the European Commission have proposed or adopted taxes on revenue earned by multinational corporations (MNCs) in certain "digital economy" sectors from activities linked to the user-based activity of their residents. These proposals have generally been labeled as "digital services taxes" (DSTs). For example, beginning in 2019, Spain is imposing a DST of 3% on online advertising, online marketplaces, and data transfer service (i.e., revenue from sales of user activities) within Spain. Only firms with €750 million in worldwide revenue and €3 million in revenues with users in Spain are to be subject to the tax. In 2020, the UK plans to implement a 3% DST that would apply only to businesses whose revenues exceed £25 million per year and groups that generate global revenues from search engines, social media platforms, and online marketplaces in excess of £500 million annually. The UK labels its DST as an "interim" solution until international tax rules are modified to allow countries to tax the profits of foreign MNCs if they have a substantial enough "digital presence" based on local users. The member states of the European Commission are also actively considering such a rule. These policies are being considered and enacted against a backdrop of ongoing, multilateral negotiations among members and nonmembers of the Organization for Economic Cooperation and Development (OECD). These negotiations, prompted by discussions of the digital economy, could result in significant changes for the international tax system.
Proponents of DSTs argue that digital firms are "undertaxed." This sentiment is driven in part by some high-profile tech companies that reduced the taxes they paid by assigning ownership of their income-producing intangible assets (e.g., patents, marketing, and trade secrets) to affiliate corporations in low-tax jurisdictions. Proponents of DSTs also argue that the countries imposing tax should be entitled to a share of profits earned by digital MNCs because of the "value" to these business models made by participation of their residents through their content, reviews, purchases, and other contributions. Critics of DSTs argue that the taxes target income or profits that would not otherwise be subject to taxation under generally accepted income tax principles. U.S. critics, in particular, see DSTs as an attempt to target U.S. tech companies, especially as minimum thresholds are high enough that only the largest digital MNCs (such as Google, Facebook, and Amazon) will be subject to these specific taxes.
DSTs are structured as a selective tax on revenue (akin to an excise tax) and not as a tax on corporate profits. A tax on corporate profits taxes the return to investment in the corporate sector. Corporate profit is equal to total revenue minus total cost. In contrast, DSTs are "turnover taxes" that apply to the revenue generated from taxable activities regardless of costs incurred by a firm. Additionally, international tax rules do not allow countries to tax an MNC's cross-border income solely because their residents purchase goods or services provided by that firm. Rather, ownership of assets justifies a country to be allocated a share of that MNC's profits to tax. Under these rules and their underlying principles, the fact that a country's residents purchase digital services from an MNC is not a justification to tax the MNC's profits.
DSTs are likely to have the economic effect of an excise tax on intermediate services. The economic incidence of a DST is likely to be borne by purchasers of taxable services (e.g., companies paying digital economy firms for advertising, marketplace listings, or user data) and possibly consumers downstream from those transactions. As a result, economic theory and the general body of empirical research on excise taxes predict that DSTs are likely to increase prices in affected markets, decrease quantity supplied, and reduce investment in these sectors. Compared to a corporate profits tax—which, on balance, tends to be borne by higher-income shareholders—DSTs are expected to be more regressive forms of raising revenue, as they affect a broad range of consumer goods and services.
Certain design features of DSTs could also create inequitable treatment between firms and increase administrative complexity. For example, minimum revenue thresholds could be set such that primarily large, foreign (and primarily U.S.) corporations are subject to tax. Requirements to identify the location of users could also introduce significant costs on businesses.
This report traces the emergence of DSTs from multilateral tax negotiations in recent years, addresses various purported policy justifications of DSTs, provides an economic analysis of their effects, and raises several issues for Congress.