J. Pownall Montoya: Digital services taxes and game theory

En el post de hoy publicamos una interesante contribución de Joshua Pownall Montoya sobre la fiscalidad de los servicios digitales. Muchas gracias, Joshua, por tu valiosa aportación al blog.


Joshua Pownall Montoya. Tax litigation attorney at the law firm Cuatrecasas and doctoral student at the University of Barcelona.

At an EU level and inspired by the OECD’s BEPS Action Plan, on March 21, 2018, the European Commission took a multilateral approach by proposing two Council Directives. These directives include the Proposal for a Council Directive on laying down rules regarding the corporate taxation of a significant digital presence, and the Proposal for a Council Directive on the common system of a digital services tax.

Nonetheless, the EU approach to taxing the digital economy, at least in the short term, has failed as the proposed directives are not in force due to a lack of consensus among member states. Countries like Austria, France, Italy, Spain, and the United Kingdom, have committed themselves to act unilaterally and have signed digital services taxes into law.

On October 8, 2021, 136 jurisdictions participating in the OECD/G20 Inclusive Framework on BEPS reached an agreement on a two-pillar solution to address the tax challenges of the digitalization of the economy. Days later, on October 21, 2021, Austria, France, Italy, Spain, the United Kingdom, and the United States of America, issued a joint statement in which the European countries in that group undertook a compromise to withdraw their respective unilateral digital services taxes once the OECD Pillar One took effect.

Prof. Dagan, from Oxford University, explained in her monography published in 2018 “International Tax Policy: Between Competition and Cooperation”, a review of which was published by Rozas Valdés (2020), that tax policy is developed in an environment of interdependency. Prof. Dagan analyzes the international tax system drawing on game theory and the well-known prisoner’s dilemma, a construct which demonstrates how two individuals may have difficulty cooperating even though it could be in their interest to do so. The international tax system is described as a market which is imperfect, but in which jurisdictions must, nevertheless, interact interdependently within a globalized environment.

So, a domestic tax policy decision cannot be taken without assessing the effects it may have on the international arena, as all tax policies currently have an international dimension. Otherwise, there is a risk that the reaction of other jurisdictions will cancel out the effects of that tax policy due to this interdependency of the international tax system, according to Rozas Valdés (2022).

In short, Prof. Dagan’s thesis can be illustrated with the recent experience regarding digital services taxes: First there was an EU proposal for a European digital services tax, but certain member states opposed it which prompted unilateral decisions for implementing domestic digital services taxes. Those unilateral actions triggered an interest in designing a multilateral solution at an OECD level based on a two-pillar approach to undertake the challenges of the digital economy.

The concept behind the prisoner’s dilemma can help to understand the existing international tax competition that policymakers have faced while making decisions about how to tax the digital economy; the decisions made in regard seem to have fluctuated between multilateral and unilateral approaches. However, jurisdictions have shown their intent to coordinate tax policies to reach a common resolution on taxing the digital economy resulting in the two-pillar solution that is being negotiated under the umbrella of the OECD. The two-pillar approach could entail an unprecedented tax reform; a turning point in international taxation.

It might still be too early to anticipate the future of unilateral digital services taxes which is contingent on the outcome of the negotiations on Pillar One. If the negotiations succeed, we will have a multilateral solution to taxation of the digital economy. However, if there is no consensus, the unilateral approach will prevail. As discussed, domestic tax policies are dependent on international tax policies as they are strongly linked to each other in a tension that oscillates between competition and coordination.


Rozas Valdés, J. A. (2022). Fiscalidad de la economía colaborativa digital. In M. A. Collado Yurrita (Dir.), Retos tecnológicos. Nueva fiscalidad, (pp. 89-106). Barcelona, Spain: Atelier.

Rozas Valdés, J. A. (2020). Review of International Tax Policy. Between competition and cooperation, by T. Dagan. Crónica Tributaria, 174 (1/2020), pp. 155-159.

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