Towards a European digital services tax: renewing the momentum for a fair contribution

The rapid growth of the digital economy has disrupted traditional tax frameworks, which rely on physical presence. Many digital firms generate substantial revenues across borders while paying relatively low taxes, raising concerns over fairness and lost public revenues. Addressing this challenge has been a policy priority for the EU, leading to the European Commission’s 2018 proposal for a digital services tax (DST) – a 3% levy on certain digital revenues. However, negotiations at the OECD level under Pillar One stalled progress, leaving the EU without a unified approach to digital taxation. 

Since then, the EU’s financial needs have escalated due to global crises, including the COVID-19 pandemic, Russia’s invasion of Ukraine, and shifting US policy. The bloc must secure funding for defence, economic resilience, and the green and digital transitions, making the reconsideration of a DST more relevant. Our estimates suggest that a 5% DST could generate EUR 37.5 billion in 2026, representing nearly 19% of the EU’s 2025 budget and about 8% of corporate income tax revenue in 2023. These figures highlight the potential of a DST to provide a substantial source of revenue for the EU at a time of heightened fiscal pressure. 

While a DST offers a significant revenue source, alternative digital taxation methods exist, including the digital permanent establishment tax, a destination-based cash-flow tax, and expanding VAT on digital transactions. Each presents challenges in implementation and enforcement, but the DST remains the most viable short-term option, given the Commission’s prior work and Member States’ experience with similar measures. 

Moving forward, the EU must reassess its digital taxation strategy. A renewed push for an EU-wide DST could provide an immediate solution, but long-term reforms are necessary. With OECD negotiations stalled, the EU must strike a balance between fiscal autonomy and global tax cooperation to ensure digital firms pay their fair share without distorting markets. 

Apostolos Thomadakis is Head of Research at ECMI and Research Fellow at CEPS.

This In-depth Analysis was originally published by CEPS and requested by the Greens/EFA in the European Parliament.