Europe says it wants investment and scale. Then it should match the rhetoric with a tax system that is simpler, clearer, and harder to game. That means rethinking corporate income taxation at its roots, abandoning unnecessary side measures like Digital Services Taxes (DSTs), building a broader and more harmonised VAT base, and enforcing what already exists before inventing anything new.
Europe does not merely have a tax gap; it has a clarity gap. Layer upon layer of directives, national provisions, exemptions and guidance have produced a system so intricate that complexity itself now undermines compliance.
Over the past decade, European finance ministries, tax authorities, and international bodies have responded to economic digitisation not by simplifying tax systems, but by steadily adding new layers to them. Digital services taxes, revised nexus rules, platform levies, and wild ideas about taxing data have been presented as modern answers to a changing economy – they raise little revenue, but each adds complexity and extends administrative reach.
The impulse behind these measures has been largely political. When public debate turns to the taxation of large cross-border firms, officials and lawmakers feel compelled to produce visible responses. Visibility, however, is not the same as sound governance – still less as effective taxation. Across Europe, new instruments have been layered onto systems that were already enormously complex, making them harder to administer, more burdensome to comply with, and increasingly difficult even for legislators to properly oversee.
At a time when competitiveness, investment, and productivity sit at the centre of major European governments’ agendas, this trajectory warrants far closer scrutiny.
Taxes on Digitally Delivered Services: Loud Politics, Small Revenues
DSTs illustrate the point. Several European governments introduced them to claim that digital commerce was no longer escaping taxation. The message was straightforward: if online platforms generate revenue from users, then tax that activity where the users are.
The fiscal reality is far more modest. Available country data show that DST revenues remain marginal almost everywhere. In Austria they account for roughly 0.09 per cent of total tax revenue, in France about 0.08 per cent, in Italy and Spain around 0.07 per cent, and in the United Kingdom roughly 0.05 per cent. Even in the most prominent cases, they rarely exceed a fraction of one per cent of national tax intake and typically account for about 1 per cent – or less – of corporate tax revenues.
That is not a fiscal backbone. It is political theatre.
The Illusion of Targeting Big Tech – SMEs Hit Hardest
Much of the policy debate, triggered by the European Commission’s 2018 proposals, has focused on who formally pays the tax. Yet legal liability and economic burden are not the same. The economy, not the statute book, determines where the cost ultimately settles. Taxes on digital activities are not finely targeted instruments. The ability of multinational firms, particularly those reliant on IP to locate patents, and other intangible assets in low-tax jurisdictions, and to allocate profits accordingly under established transfer pricing rules, has long been a structural feature of the international tax system. These arrangements predate the digital economy and are not unique to digital firms. DSTs do not alter these underlying profit allocation rules. Instead, they impose an additional layer of taxation on gross revenues earned in user jurisdictions, increasing complexity while leaving the fundamental architecture of corporate taxation unchanged. Their limitations become clearer when set alongside established tax bases such as corporate income taxation (CIT) and VAT.
DSTs are levied on revenues, not profits. Firms pay regardless of their margin. A company operating on a 5 per cent margin faces a markedly different effective burden from one operating on 25 per cent, even when both are subject to the same statutory rate. The distinction between legal incidence and economic incidence is frequently overlooked. In competitive markets, taxes are always passed on to individuals. They surface in prices, fees, wages, and capital income. In many well-documented cases, large technology companies have increased commissions, advertising rates, or service charges in response to national DSTs. The cost moves along the value chain. Most of it is absorbed by small and medium-sized firms (SMEs) that rely on digital tools to reach customers.
What is often missing from the public conversation is a basic comparison. These instruments differ significantly in structure, neutrality, and stability. When placed side by side, the contrast between CIT, DSTs and VAT is striking (see Table 1).
While both CIT and DSTs target firm-level activity, their design and effects differ markedly. CIT is a complex and often volatile levy on net profits across all sectors, whereas DSTs are narrow and frequently contested taxes on gross revenues from selected digital services provided by large firms. VAT, by contrast, operates as a broad-based and comparatively stable pillar of public revenue, taxing consumption at each stage of production with a degree of neutrality and administrative simplicity that profit-based and sector-specific taxes rarely match.
The contrast points to a deeper issue that reform-minded policymakers should not ignore. As tax systems become more intricate, they grow harder to administer, harder to comply with, and, crucially, harder even for elected lawmakers to properly understand and oversee. Laws that are too complex to explain or defend in plain terms risk losing democratic legitimacy – especially when they fail to deliver on their political promises of fairness, revenue, or restraint. For those serious about tax reform and cutting bureaucracy, the lesson is uncomfortable but clear: complexity is not a sign of sophistication. It is often a sign that the system has drifted beyond effective control.
Table 1: Key features of CIT, DST, and VAT
Legal Fragmentation as Policy
The larger concern is not any single DST. It is the cumulative effect of tax code complexity. National governments have introduced patchworks of digital taxes, each with their own thresholds, definitions, and scopes. These sit alongside national CITs, national withholding regimes, and new (OECD) minimum tax frameworks. The result is a system that has grown even more obscure over time. For individuals and firms operating across borders, the landscape is increasingly difficult to understand, interpret and costlier to navigate.
Recent initiatives suggest there are few limits to how far this logic can be stretched. Italian tax authorities, for example, have argued that access to ‘free’ digital services may involve non-monetary consideration, with users providing personal data – or rights over its use – in exchange for platform services, in a manner akin to a barter transaction and therefore potentially within the scope of VAT. The attraction for policymakers is obvious: a tax base measured in users, clicks, and profiles. Yet the EU VAT Committee’s own analysis points to the practical and legal limits of this approach. In many common platform models, establishing a taxable transaction is difficult because the required ‘direct link’ between the service supplied and the consideration received may be missing – for instance, where users receive the same service regardless of the data they provide.
While the EU VAT Committee expressed clear reservations, it stopped short of closing the door. Instead, it noted that the existence of a taxable transaction would depend on the facts of each case, in particular whether a sufficiently direct link can be shown between the service supplied and the data provided. In practice, that sort of case-by-case reasoning all but invites continued enforcement attempts and a steady stream of legal disputes, with the added risk that tax authorities in other Member States may feel encouraged to test similar interpretations.
Such approaches raise obvious conceptual questions. The economic value of personal data varies widely, depends on behaviour, and is not traded in any transparent market. Valuation therefore rests on proxies and assumptions that push existing VAT concepts to their limits. More importantly, the policy focus begins to shift. Administrative attention is drawn towards ever more intricate ways of capturing perceived digital value, while less glamorous but far more consequential reforms – simplifying rules, improving compliance, and strengthening broad tax bases – receive far less energy.
This is the point at which complexity begins to outrun economic and political sanity. When tax concepts are stretched to capture hypothetical exchanges that are almost impossible to define, measure, or verify, the system drifts away from clear legal principles and towards something closer to conjecture. For those in politics who genuinely want reform, the lesson is an uncomfortable one: ever more inventive tax theories may sound bold and forward-looking, but they seldom produce reliable revenue and rarely improve how the system actually works.
Tax Complexity as a Competitiveness Issue
At the same time, policymakers in Brussels and national capitals speak ever more urgently about investment and the need to help firms scale. The Draghi report alone points to a requirement of roughly €800 billion in additional annual investment. Yet firms are still expected to navigate intricate and uneven tax systems as they try to grow. Large multinationals are, by default, better placed to absorb rising complexity, with access to specialised legal and accounting expertise and the ability to spread compliance costs across global operations. Smaller and newer firms face a very different reality. For them, complexity is not an administrative nuisance but a real barrier, making cross-border expansion costly, risky, and at times prohibitive. In a single market that remains fragmented in practice, tax complexity becomes another obstacle to scale.
This creates an uncomfortable question. If policymakers are serious about mobilising €800 billion in new investment, why not consider an equally ambitious corporate tax relief strategy for innovative industries? And a second, more awkward one follows: if complex tax systems are widely recognised as costly, distortionary, and difficult to navigate, why do they persist? Why are layers continuously added, but so rarely removed?
This is not merely a technical matter. It goes to the heart of competitiveness.
The One Tax That Already Works
Amid the debate, a simple point is often overlooked. A functioning mechanism for taxing value creation – including in the digital economy – already exists.
It is Value Added Taxes (VAT). Consumption taxes generate far more revenue than corporate taxes in most European economies. In many countries, VAT yields two to four times as much as corporate income tax, drawing on a broad and comparatively stable base (Figure 1).
Figure 1: Comparison of Tax Revenues from Corporate Income Tax, VAT, and Digital Services Taxes in Selected European Economies
Source: OECD tax revenue statistics 2023, Tax Foundation 2025, and country wise annual reports. Note: Total Tax, VAT, and CIT revenues are from 2023. DST revenues are from 2024, except for Austria where the data is only available for 2023.
VAT already applies to digital services. It is levied where consumption takes place. It treats domestic and foreign suppliers on similar terms. It is embedded in established administrative systems and widely understood. In other words, the main instrument capable of taxing value in a digital economy is already in place.
The overall weakness lies in compliance. Significant sums are lost each year through fraud, evasion, and administrative inefficiencies, much of it in traditional sectors where transactions are harder to track. Digital services are often easier to capture through platform reporting and destination-based rules. Even modest improvements in compliance in the wider economy would likely raise more revenue than most special taxes on e-commerce activities.
Too Many Tools, No Strategy
In Europe, a pattern has emerged. When a perceived gap appears, another tax instrument is introduced. When results disappoint, another tax layer follows. When international coordination stalls, national tax measures fill the space. Rarely are older instruments removed. European citizens and firms are left with a system that is increasingly opaque and resistant to reform.
If the objective is to strengthen competitiveness, a different approach suggests itself.
Rather than designing increasingly narrow taxes for increasingly specific goals, finance ministries and legislators must focus on strengthening broad-based instruments that already function reasonably well. That implies fewer special regimes, fewer carve-outs, and fewer attempts to engineer fairness through highly visible but narrowly targeted measures.
It implies simplicity.
Broadening the VAT base, improving enforcement, and reducing reliance on turnover-based taxes will provide more stable revenue with fewer distortions. Compliance costs will fall. Legal clarity will improve. Such reforms are not effortless. They require explanation and political leadership. But they are technically well within reach and economically coherent.
Less Symbolism, More Substance
Tax systems do not suffer from a lack of ingenuity. They suffer from a lack of discipline. Digital services taxes were born out of frustration. In design they are clumsy, and in practice they add yet another layer of bureaucracy. They also reveal a familiar political instinct: strike a tough pose against large, often foreign, companies while quietly expanding administrative reach. It is a story that is easy to tell and easy to sell. The reality is less heroic. The costs do not remain neatly confined to the intended targets. They filter through higher fees, more expensive advertising, and costlier digital services. What begins as a show of strength against distant corporate giants often ends as a quiet burden much closer to home. The more durable gains lie elsewhere.
If the aim is a more competitive, investment-friendly environment, the focus should shift to what actually works: simpler rules, broader VAT bases, stronger enforcement, and fewer layers of corporate taxation. They have the ability to make national tax systems more predictable, fairer across firms of different sizes, and easier to administer.
In the end, a competitive Europe will not be built on ever more elaborate tax ideas. It will come from radical simplification, a willingness to question the purpose and design of corporate income taxation, dispensing with unnecessary experiments like DSTs, widening and harmonising the VAT base, and making sure current rules are actually enforced.