The large highly digitalized companies (Google, Amazon, Facebook, Apple) hardly pay taxes. The reason for this is that the digital economy significantly facilitates the implementation of various tax design models. The OECD has also recognised this. This is why the BEPS project was developed. The aim of this project is to better capture the digital economy through international taxation rules. For this purpose, the states involved presented a two-pillar plan. However, without an implementing act through uni-, bi-, multilateral arrangements or agreements, the measures do not yet have any legal effect. Nevertheless, they lead to a significant derogation from the current rules on the distribution of taxation rights. Therefore, the topic is not only relevant for the GAFA companies. Rather, it has become a fundamental discussion on the distribution of taxation rights. These measures will create considerable administrative burdens and costs for companies. Therefore, the measures are worthy to be discussed below.

BEPS stands for Base Erosion and Profit Shifting, in German for profit reduction and profit shifting. All OECD and G20 Member States have joined forces on this project. Fifteen action points were agreed. In 2015, the final report on all action points was published. It pointed out that further work needs to be done on tax issues related to digital services. It was agreed that another framework would be created to ensure the implementation of BEPS results and carry out further technical work, the so-called Inclusive Framework on BEPS. In addition to the industrialised countries, this framework also includes emerging economies and developing countries. Following this, the so-called Blueprint was published in 2020. Pillar one of this report deals with the distribution of taxation rights and profit allocation, i.e. the allocation of profits with a view to the digital economy.

In order to understand the proposals at OECD level, it is first necessary to explain why the income tax treatment of the digital economy is so difficult.

On the one hand, digital services are characterized by the fact that goods or services can be offered quickly and easily via the Internet without an actual presence in the sales market. On the other hand, the reach of the company can be expanded without much effort. Moreover, the use of intangible rights, in particular the collection of customer data, is fundamental to digital services. Therefore, intangible assets play an important role. Furthermore, it can be observed that the more data is available with respect to a user, the more profitable the data analysis is.

These features of the digital economy lead to many problems related to international taxation. First of all, with digital services, it is already questionable where the place of added value can be seen at all. It is widely believed that users and their data make up a significant part of the value chain. Then the question arises, if the users are seen as part of the value chain, whether then a new tax starting point must be developed. Furthermore, it must be clarified how taxation rights are to be distributed.

The characteristics of the digital economy pose considerable problems for existing tax law. Both national law and double taxation agreements recognize the existence of a permanent establishment as the lowest threshold for establishing a taxation right (§ 49 I No. 2 lit. a) EStG, if applicable §§ 2 No. 1, 8 I S. 1 KStG and Art 7, 5 OECD-MA). Therefore, it is decisive whether digital companies that are not actually present in the market state can establish a permanent establishment there.

According to the legal definition of § 12 I 1 AO, a permanent establishment is any permanent business establishment or installation which serves the activity of a company. Consequently, it is necessary for the business establishment to be related to a specific point of the earth’s surface. However, this is not the case for digital companies that are not physically present in the market state. The website could be considered as a starting point. However, the company’s website is only virtual and can be accessed from anywhere if the Internet access is appropriate. Therefore, the website cannot be localized sufficiently specifically. Furthermore, users could be seen as a starting point. However, the current tax law is precisely aimed at the fact that in principle only a place may be taxed if the company is actually present there. With the same argument, there can be no permanent establishment under double taxation agreements. Consequently, digital services are regularly not subject to taxation in the market state.

Action point one of the interim report of the BEPS project outlined three concepts that can serve as the basis for establishing the new taxation law in the digital economy. It should no longer be relevant that the company is physically present in the state by making profits (market state).

A proposal is to impute to the state the taxation right in which the company has a significant presence. It should be noted that this proposal does not only regulate digital services. Rather, increased services and deliveries to a certain state could justify the significant presence. For this reason, this concept, in contrast to the user participation concept, is not limited to user participation. A significant presence should be assumed if the 750 million euro turnover threshold is exceeded in the given country.

The user participation concept only includes digital services. Thus, the users of a digital service are significantly involved in the added value and increase in the value of the company. Through this participation, the company generates data and content worldwide. This is of particular importance compared to conventional business models for digital services. Due to the great importance of user participation for digital companies, according to the concept of user participation, the taxation right should be granted to the country of residence of the individual users. This concept comes considerably close to the recognition of a virtual establishment.

The different tax connecting points were presented. At the level of the BEPS project, the Blueprint discusses the introduction of Amount A. This is intended to distribute part of the profit to a state by the fact that the company is not actually present and therefore establish the new tax law. Furthermore, the attribution of the profits by Amount A should be subject to further conditions. Therefore, the market state should not be allowed to tax until these are fulfilled.

First, it is required that the company carry out certain activities in order to fall within the scope of Amount A. The activity would have to be a highly automated digital service (automated digital services for short: ADS) or carried out by a consumer facing businesses (CFB for short). Certain industries are not covered by the scope of Amount A from the outset. This includes, for example, sectors involved in the extraction or extraction of raw materials, financial services, the construction industry, the sale or rental of residential properties and international aerospace and shipping companies. In this context, it is important to recognise that even if a company does not carry out these activities, it must regularly monitor whether a branch of business carries out an activity in the sense of Amount A.

4.1.1. Digital economy as an automated digital service

ADS is intended to identify services offered over the Internet that require minimal human influence on the part of the service provider after the provision of the service. No interaction with the supplier is necessary anymore in these activities. Rather, the user receives a suitable result due to the input of certain parameters into the automated system.

In order to determine whether a branch of a company constitutes an ADS activity, it is necessary to verify whether it falls within the positive list established by the OECD. This positive list contains nine categories of services considered as ADS: online advertising services, sales and other sales of user data, online search engines, social media platforms (such as YouTube), online intermediation platforms, digital content services, online games, standardized online training services and cloud computing services. All activities are also defined in the report. If the activity is on the negative list, there is no ADS activity. If the activity is not on any of the lists, the general definition just set out applies.

4.1.2. Digital economy as consumer facing businesses

Even if the activity cannot be considered an ADS, it can still be a CFB activity. CFB activities are those in which services and goods usually intended for private use are offered directly or indirectly to a consumer. This includes both sales, rental and licenses. It should be decisive that the end customer is a consumer.

A company is also subject to the new regulation only if certain thresholds are still exceeded. For starters, the relevant limit for a turnover of the entire company of 1 billion – 5 billion. the euro.

In addition, companies are excluded from Amount A who reach the turnover thresholds but earn only low foreign income. It is therefore necessary to determine how much foreign profits a company makes. A country receives the taxation right under Amount A only if the ADS or CFB activities in that country exceed the sales threshold not yet set.

Furthermore, there are regulations that allocate the profits to the countries. The allocation should be based on certain indicators. The indicators shall be applied in a certain order. The first indicator in the hierarchy is the most accurate and preferable to use. Only if this can not be determined with sufficient precision can rear indicators be used. For example, the location of the user's device or the IP address is suggested as an indicator. This concept means that in the future, auditors and tax department heads will also have to have further qualifications in the field of information technology in order to be able to assess which information is technically representable. Furthermore, they must also recognize where and to what extent manipulation can occur.

If a state is entitled to the taxation right under Amount A, it must also be determined which legal entity of the group has generated which profit. Therefore, the next step is to determine which entity performs the relevant activity, exceeds the profitability threshold and has a link to the market state. Only if this cannot be determined shall the amount determined by Amount A be distributed equally among the profitable entities of the group.

Also in the report it was recognized that the Amount A causes considerable administrative effort and costs. These arise both on the authorities and on the company side. It therefore remains to be seen whether this concept can actually prevail.