Digital Economy and Profit Allocation: The Application of the Profit Split Method to the Value Created by a “Significant Digital Presence”

The European Commission recently released a comprehensive legislative proposal laying down a new set of tax rules applicable to the digital economy. The proposal at issue also provides a set of rules concerning profit attribution to a “significant digital presence” (a new concept of permanent establishment intended to establish a digital taxable nexus in the European jurisdictions). The EU legislator opted for the profit split method (adapted in a consistent manner to reflect the way value is created in digital activities). The aim of this article is to understand how the new proposed EU rules concerning profit attribution to a “significant digital presence” will work and then try to evaluate their suitability and efficiency. To this end, the article studies and compares three highly digitalized business models. Based on such analysis, the author proposes both theoretical and practical solutions aimed at making the proposed EU provision on profit attribution to a “significant digital presence” applicable and efficient.