The EU's Digital Markets Act may reshape how US-based multinational companies configure their tax obligations and even their business models
In November 2022, the European Union enacted the Digital Markets Act (DMA) with enforcement beginning this past March. The purpose of the DMA was to regulate large online platforms — such as Alphabet, Amazon, Apple, ByteDance, Meta, Microsoft, and others (often referred to as gatekeepers) — to ensure fair competition and to prevent anti-competitive practices in the digital market.
The DMA is part of a broader EU regulatory framework that includes the Digital Services Act (DSA), which regulates online intermediaries and platforms such as marketplaces, social networks, content-sharing platforms, app stores, and online travel and accommodation platforms. Its main goal is to prevent illegal and harmful activities online as well as the spread of disinformation. It is also designed to ensure user safety, protects fundamental rights, and creates a fair and open online platform environment.
Since the central purpose of the DMA was to create fair business practice in the digital market, the identified gatekeepers are obliged to ensure there is transparency in their advertising metrics and pricing; provide access to data generated by businesses and allow interoperability with their services. These gatekeeping companies are forbidden from restricting users from uninstalling pre-installed software or apps, preventing other businesses from using other platforms or services, and forcing users to favor a gatekeeper’s services or products over a competitor.
On its surface, the intent of the DMA is to promote fair competition, including leveling the playing field in digital market, which is great; however, there may be some unintended consequences resulting from DMA or its larger framework DSA. Indeed, the so-called butterfly effect holds that when one thing changes, that change can impact other things to changes as well — and that may be at player here. As the gatekeepers will need to adapt to new standards and practices to be compliant for DMA, companies using these platforms then may also have to make changes to their systems to be able to continue working with the gatekeepers.
The cost of regulatory rules
In addition, the larger platforms may pass down any costs coming from new regulatory rules on to their customers and the smaller business lower in their service chain. From a tax perspective, there are three potential considerations for multinational firms based in the United States that are not one of the gatekeepers to keep in mind, including:
Impact of the Value Added Tax and the Goods & Services Tax — Non-gatekeeping multinational companies that nevertheless provide digital services or goods may find themselves required to comply with the Value Added Tax (VAT) and the Goods & Services Tax (GST) in multiple jurisdictions. The place of supply of goods rule is a destination-based tax that applies to businesses that sell in jurisdictions beyond their location and are required to make sure they have the correct locations of the consumers of their products or services so that they pay the appropriate taxes as required for each jurisdiction. In addition, filing accurately and in a timely manner is required.
Transfer pricing and intercompany transactions — Companies that begin to add the sales of goods and services resulting from opportunities afforded by DMA may be faced with a shift in the how the company is structured and how it prices intercompany transactions. This transfer pricing is one of the most controversial tax components for multinational organizations; and in the US, arm’s length pricing is required for intercompany transactions. It is a method that is based upon whether the transaction involves tangible or intangible goods or the provision of services, and how one part of the business may report on it to offset a tax liability. In addition, the transparency needed by the gatekeepers could require non-gatekeepers to adopt greater documentation since the tax authorities may require additional documentation on the transfer pricing transactions.
Effect on business models and pricing strategies — Because the central purpose of the DMA is to foster competition and prevent anti-competitive practices, this may present opportunities for business growth among non-gatekeeper companies. As a result, changes and adjustment to business models will bring their own tax implications. For example, companies may look at various service offerings, each having a different or specific tax obligation. And new business models might include offering bundled services, subscription models, and discounted or free trials — all of which can present very different VAT/GST calculations and additional tax implications.
Overall, for businesses offering digital goods and services, the enactment of the DMA created a window of possibilities and business opportunities that could make certain business goals a reality for many companies. With these opportunities, of course, there are additional tax implications that must be considered either simultaneously with or before moving into the digital goods and services sales market.
Further, the corporate tax departments of these multinational companies will need to stay abreast about how these potential changes will impact their organizations’ overall tax obligations. In the recent 2024 Indirect Tax Department Report, tax professionals indicated that international tax complexities were one of the top challenges to doing their work effectively. And more than 45% of survey respondents said they are looking to technology to help them with “accommodating e-commerce and digital products.”
You can download a copy of the Thomson Reuters Institute’s 2024 Indirect Tax Department Report, here.
