For nearly a decade, policymakers across Europe have pursued a new frontier in taxation: digital services taxes (DSTs). The political narrative has been clear, large digital firms must pay their “fair share”. The economic results, however, have been far less impressive.
Across Europe and beyond, governments have created an expanding menu of digital taxation instruments – unilateral DSTs, turnover-based digital levies, equalisation taxes, and specialised withholding regimes targeting cross-border digital activities. These policies have generated considerable legal complexity and diplomatic tension, yet they have delivered only marginal fiscal revenues.
At the same time, while unilateral DSTs are expanding and new levies such as the proposed CORE tax are discussed, tax officials and lawmakers largely ignore the significant revenue gains that could be achieved by further reducing the Value Added Tax (VAT) gap within existing VAT systems.
The contrast between the two approaches is striking. While policymakers debate highly complex digital taxation frameworks for relatively small revenues, hundreds of billions of euros remain uncollected due to exemptions, reduced rates, and policy gaps in VAT systems across Europe.
Small Revenues, Big Debate: The Fiscal Reality of Digital Services Taxes
DSTs were initially introduced as temporary measures while international negotiations on corporate taxation were ongoing. France introduced its DST in 2019, followed by countries such as Italy and Spain, and others. Most recently, Poland has proposed expanding its existing 1.5 per cent levy on streaming services (audiovisual media services and audiovisual commercial communications) into a broader 3 per cent DST. Other jurisdictions outside Europe, including Turkey, and several Latin American economies implemented similar measures.
Most of these taxes share a common structure: they target revenues rather than profits, typically applying rates of between 2 and 7.5 percent on specific digital services such as online advertising, digital marketplaces, or user-data-driven platforms (see Table 1). Above all, they remain discriminatory, inconsistent with international tax principles, and lead to double or multiple taxation.
In theory, these taxes promise to capture value generated in domestic markets. Across the countries that have implemented them, DST revenues represent only a tiny fraction of overall tax income, and an even smaller share of GDP.
Despite this proliferation, the fiscal returns remain modest. In most jurisdictions, DST revenues represent less than one percent of total tax receipts. Moreover, the taxes tend to fall on intermediate digital services used by businesses, meaning that their economic burden is often passed through to consumers, small firms, and advertisers. The result is a policy that is administratively complex, economically distortive, and fiscally insignificant.
Table 1: The limited fiscal impact of digital services taxes
Selected EU Member States
Selected Non-EU countries
Source: Author’s calculations based on Tax Foundation, OECD Revenue Statistics (2025)
A Proliferation of Confusing Digital Tax Experiments
Instead of simplifying tax systems, governments around the world are layering new digital taxes on top of already complex corporate tax frameworks. The result is a rapidly expanding patchwork of overlapping measures that increase legal complexity, expand tax bureaucracies, and raise compliance costs for businesses operating across borders. This trend runs directly counter to repeated political promises, both in the EU and in many member states to simplify taxation and reduce administrative burdens.
Rather than streamlining existing rules, policymakers are multiplying them. The global landscape of digital taxation now resembles a fragmented collection of policy experiments (see Table 2), including DSTs on platform revenues, equalisation levies on online advertising, withholding taxes on digital transactions, and a range of sector-specific digital charges. In many jurisdictions these measures coexist with broader corporate tax reforms and international initiatives under the OECD framework, further increasing complexity and uncertainty for firms and tax administrations alike. It also imposes a significant and disproportionate compliance burden on the targeted companies.
Table 2: The ever-expanding toolkit of digital taxes: instruments and jurisdictions
Source: KPMG
The Overlooked Giant: Europe’s VAT Policy Gap
While political debates focus on taxing digital companies, a far larger fiscal opportunity sits in plain sight: the substantial VAT policy gap.
Europe relies heavily on consumption taxation. VAT alone accounts for roughly one-fifth of total government revenues in many EU countries. Yet the system contains extensive exemptions, reduced rates, and sector-specific privileges that significantly erode the tax base.
According to European Commission estimates, the VAT policy gap – the difference between the revenue generated under the current system and what could be raised under a uniform VAT base, amounts to around EUR 1 trillion annually across major EU economies.
The contrast in fiscal importance between different tax instruments is striking. For example, in France VAT generated around EUR 206 billion in revenue in 2023, more than three times the EUR 66 billion raised from corporate income taxes (CIT); while DSTs produced a mere 668 million (see Figure 1 Italy and Spain display a similar pattern: VAT revenues of EUR 141 billion and EUR 94 billion respectively far exceed corporate tax receipts, while digital taxes remain negligible.
Yet the most revealing figure is the unused revenue potential embedded in existing VAT systems. Estimated VAT policy gaps, largely reflecting reduced rates and exemptions, reach roughly EUR 255 billion in France, EUR 215 billion in Italy and EUR 155 billion in Spain. In other words, the fiscal capacity already sitting inside current VAT frameworks dwarfs both corporate tax revenues and the proceeds from politically contentious digital taxes.
At a time when European governments are layering increasingly complex rules onto corporate taxation in pursuit of relatively modest revenue streams, the numbers suggest that Europe’s real fiscal anchor, and its largest untapped source of revenue, lies in the far simpler and more stable architecture of consumption taxation. These amounts dramatically exceed the revenues generated by DSTs. The implication is straightforward: even partial rationalisation of VAT exemptions and reduced rates would generate fiscal revenues far exceeding those from digital taxes.
Figure 1: Europe’s untapped VAT potential and the limited revenues from confusing corporate and digital taxes
The Real Fiscal Opportunity
The debate about taxing the digital economy has opened an important discussion about how tax systems should evolve in a digital and globalised economy. DSTs have received significant political attention because they aim to address concerns about fairness and the taxation of multinational firms.
A more promising path lies in improving and modernising existing tax structures, particularly VAT. Broad-based consumption taxes are widely regarded as among the least distortive forms of taxation and provide a stable source of public revenue. Strengthening VAT systems through improved compliance and a broader tax base therefore offers an opportunity to enhance fiscal capacity while supporting a more neutral and growth-friendly tax environment.
To illustrate this potential, it is useful to look at two of Europe’s largest economies – Germany and France. Closing the VAT compliance gap alone could generate around EUR 29.5 billion in additional revenue in Germany and EUR 12.6 billion in France. Even after these improvements, replacing corporate tax revenues through VAT would still require higher VAT receipts. Under a hypothetical revenue-neutral scenario, this would imply standard VAT rates of roughly 22.9 per cent in Germany and 24.9 per cent in France. While these figures may appear high at first glance, they fall well within the range already observed across Europe, where several countries operate with standard VAT rates at or above these levels.
Importantly, these estimates do not yet account for the substantial VAT policy gap created by reduced rates and exemptions. In both Germany and France, this gap exceeds total corporate tax revenues. Even gradual reforms of these preferential treatments could therefore unlock significant fiscal capacity while making tax systems simpler, more transparent, and more efficient.
Table 3: General VAT rate implication from replacement of CIT by VAT (Germany and France), numbers provided in EUR billion
Source: ECIPE estimation based on OECD revenue statistics 2025 (2024 data) and VAT gap in the EU – 2024 report. Note: VTTL = Value of Total Theoretical Liability under perfect compliance; compliance gap rates sourced from the European Commission’s VAT Gap in the EU study (Germany 2023: 9.7%; France 2023: 5.6%). No further consideration of (substantial) VAT policy GAP (rate gap, exemption gap).
From Digital Tax Symbolism to Meaningful Reform
Europe’s fiscal debate currently suffers from a clear mismatch between political attention and economic impact. Digital services taxes dominate policy discussions despite generating minimal revenues and adding layers of administrative complexity to already fragmented tax systems. In practice, much of their economic burden is passed on to users of digital services – businesses and consumers alike – through higher prices. More broadly, taxes on corporate income are among the most distortive forms of taxation, directly affecting investment decisions, productivity growth, and business expansion.
Meanwhile, the largest and most stable tax base in Europe – consumption – remains constrained by exemptions, reduced rates, and structural inefficiencies that significantly narrow the VAT base. From an economic perspective, this imbalance is difficult to justify. Consumption taxes are generally considered more neutral and less harmful to economic activity. Broadening VAT bases while simplifying existing tax structures therefore offers a far more efficient path to strengthening public finances.
The fiscal numbers underscore the point. Revenues from DSTs amount to a tiny fraction of one percent of total tax receipts, while unused VAT policy gaps reach hundreds of billions of euros in Europe’s largest economies. Even modest reforms to reduced rates and exemptions would generate fiscal capacity far exceeding the revenues currently obtained from digital tax experiments.
This is not simply a technical question of tax design. It is about choosing where governments focus reform efforts. Europe can continue to layer new and highly specialised taxes onto an already complex corporate tax system. Or it can modernise and strengthen the tax base that already generates the largest and most stable share of public revenues.
The economic case points clearly in one direction: Europe’s real fiscal opportunity does not lie in inventing new digital taxes. It lies in making existing tax systems simpler, broader, and more economically rational.
This ECIPE Insight is based on a new ECIPE Occasional Paper analysing the fiscal performance of digital services taxes and the untapped revenue potential within European VAT systems. The paper examines the global proliferation of digital taxation measures, the limited revenues they generate, and the broader economic distortions associated with corporate income taxation. It also discusses the policy dynamics surrounding international tax reform efforts, including OECD-led initiatives on corporate and digital taxation. The paper is available here.