The digital economy is playing an increasingly important role in global and European markets, with leading technology companies often generating substantial revenues in certain EU Member States without having a physical presence there. The traditional corporate taxation rules set out in the Treaty on the Functioning of the European Union and in national legislation do not always adequately reflect the realities of digital business models. As a result, at the level of the European Union and the Organisation for Economic Co-operation and Development, new mechanisms for “digital taxation” are being discussed and proposed.
The purpose of this article is to outline the main EU legal acts and initiatives in the area of digital services taxation, to highlight their importance for Bulgaria, and to provide a legal context for possible changes in national legislation.
I. EU-level Legal Framework
Legislative competence in the field of taxation within the EU is limited by the general principle that direct taxation remains under the authority of the Member States. However, Article 113 of the TFEU allows the EU to adopt directives concerning the harmonization of indirect taxes, insofar as this is necessary for the functioning of the internal market and the avoidance of distortions of competition, and where there are significant divergences affecting the single market.
Two Key Legislative Proposals by the Commission in 2018
In 2018, the European Commission introduced two legislative acts that marked the start of intensified debate on digital taxation in Europe:
– COM(2018) 147 final – Proposal for a Council Directive on a common system of a digital services tax (DST), focusing on taxing revenues from certain digital activities. The proposal provided for a 3% tax rate on revenue from online advertising, the sale of user data, and online intermediary platforms, generated in the Member States.
– COM(2018) 148 final – Proposal for a Council Directive laying down rules relating to the corporate taxation of a significant digital presence. This proposal aims at a more long-term solution, tied to recognizing “digital presence” as a criterion for tax jurisdiction.
Although the first initiative was conceived as a temporary measure and the second sought a lasting structural solution, neither gained unanimous approval. Discussions subsequently shifted to the OECD’s global framework.
In its conclusions of 27 May 2022 and other official documents, the Council underscored the need for common measures to prevent tax competition and aggressive tax practices within the EU. However, it acknowledged the complexity of reaching a compromise, given the requirement for unanimity among all Member States (Article 115 TFEU).
Administrative Cooperation Among Member States
Directive 2011/16/EU on administrative cooperation in the field of taxation (DAC), along with its series of amendments (Directive (EU) 2018/822, Directive (EU) 2020/876, Directive (EU) 2021/514, etc.), expands the scope of information exchange among Member States.
In the context of digital taxation, this administrative cooperation is crucial. Many digital services are provided across borders without a clear physical link to customers in individual countries. Thus, the European Commission emphasizes that only through enhanced data sharing (e.g., on online transactions, user registrations, financial flows) can Member States identify and fairly tax the relevant revenues.
Global Context: Coordination with the OECD
In parallel with European legislative activity, the G20 countries and the OECD Member States are working on a “Two-Pillar Approach” (Pillar One and Pillar Two):
– Pillar One aims to redistribute part of the profits of major multinational companies to the countries where they have users or derive revenue but do not have a physical presence.
– Pillar Two involves introducing a global minimum corporate tax rate (commonly discussed at around 15%) to prevent artificial profit shifting to low-tax jurisdictions.
The EU is closely following these processes in order to adapt a possible European digital tax in line with global standards and to avoid overlap or conflicts.
Significance for the Internal Market and Protection Against Tax Abuse
The objective of EU-wide initiatives is to prevent a situation where some Member States introduce their own “digital taxes” while others do not, which could create a risk of fragmentation within the internal market and unfair competition.
II. Significance and Impact on Bulgaria
Establishing a unified regulatory framework for taxing digital services creates the need of analyzing the existing Bulgarian legislation and its potential adaptation. Currently, national legislation governing corporate taxation is mainly contained in the Corporate Income Tax Act and the Tax and Social Insurance Procedure Code.
1. Current Legal Situation
1.1 Definition of a Permanent Establishment
Bulgarian law relies on the traditional concept of “permanent establishment” to determine whether a foreign company is subject to corporate taxation in the country. This concept is laid down in the Corporate Income Tax Act as well as in numerous Double Taxation Conventions. However, it does not fully cover digital business models in which a company may have no physical presence yet still generates revenue from customers in Bulgaria.
1.2 Absence of Explicit Regulation on “Digital Presence”
Neither the Corporate Income Tax Act nor the Tax and Social Insurance Procedure Code contain a precise definition or rules regarding a Significant Digital Presence. Consequently, tax authorities often find it difficult to justify taxing companies providing online services without a physical infrastructure in place.
1.3 Tax Conventions and the Application of DTTs
In cross-border operations, existing bilateral double taxation conventions apply. Most of these conventions include traditional clauses based on the OECD Model, which also focuses on physical presence. Thus, there is no explicit provision on how to allocate taxing rights for revenues derived from digital sources.
2. Potential Implementation of New Legislation
2.1 Legislative Amendments in the Corporate Income Tax Act
Introducing European or global rules for digital services taxation may require a new section or chapters in the Corporate Income Tax Act dealing with:
– Criteria for “Significant Digital Presence,” such as thresholds for annual turnover, number of users, or other indicators of online economic presence;
– Mechanisms for calculating the tax base for these companies, particularly if the services provided span multiple Member States;
– The tax rate or calculation method (if the EU or OECD proposes specific parameters, akin to the 3% DST or a common approach for profit allocation).
2.2 Procedural Amendments in the Tax and Social Insurance Procedure Code
Effective implementation of the new regime would require procedural provisions regarding:
– Administrative cooperation and information exchange among the tax authorities of the Member States (in addition to the existing rules under Directive 2011/16/EU);
– Control over taxable operations, e.g., an obligation for local entities (clients, advertisers, users) to declare or report services received/provided from companies subject to digital taxation;
– Dispute resolution, as tax audits and disputes over establishing foreign companies’ liabilities often involve international arbitration or EU dispute settlement mechanisms (pursuant to Directive (EU) 2017/1852).
Conclusion
At this stage, the European Union has not adopted a unanimous decision on a common mechanism for taxing digital services, and on a global level, negotiations within the OECD framework have yet to conclude with binding agreements. Therefore, there is no formally established schedule for introducing either EU-wide or global rules. If the Council of the EU reaches consensus, Member States could adopt the relevant legislation within a few years following a political agreement. Should global standards be endorsed by the OECD, they could be implemented once ratified by individual jurisdictions.
If the concept of “Significant Digital Presence” is accepted, introducing a common or harmonized taxation framework would require additional provisions in Bulgarian legislation – primarily the Corporate Income Tax Act and the Tax and Social Insurance Procedure Code – and an adaptation of administrative capacity to monitor online business models. If the EU proceeds with such a decision, any corresponding legislative amendments in Bulgaria would need to be consistent with the provisions set out in bilateral and multilateral double taxation conventions.
Sources:
Council of the European Union – Digital Taxation
Directive 2011/16/EU on administrative cooperation in the field of taxation (DAC) and subsequent amendments
– Latest amendment: Directive (EU) 2021/514 (DAC7)
Tax and Social Insurance Procedure Code
OECD – Negotiations on the Two-Pillar Approach (Pillar One and Pillar Two)