What Is the Digital Economy, and How Is It Taxed?

This article is an English translation of the Turkish original published by the office.

In a world where globalisation and the spread of internet tools let us reach almost anything with a click, digitalisation has changed the way goods and services are delivered and carried economic activity beyond geographical borders. As a result, traditional tax rules have proved inadequate for digital businesses, and taxing the digital economy fairly and effectively has become one of the most debated questions of tax law at both national and international level. In this article we discuss the taxation of the digital economy.

What is the digital economy?

The digital economy is the set of economic activities in which digital technologies are at the centre of production, distribution and consumption. Digital services reach far beyond geographical borders: companies can sell goods or services in a country without being physically present there. A user in Türkiye, for instance, can receive services from a US-based platform. Companies such as Google, Amazon, Meta and Netflix bring users and businesses together through digital platforms. The digital economy has become an important source of both growth and employment — but it also creates serious tax challenges for states, because it is often unclear where these companies create value and where they should be taxed.

Problems in taxing the digital economy

The rapid global growth of the digital economy has left traditional tax rules behind and seriously strained states’ capacity to collect tax. In tax law, a country’s right to tax is generally linked to the existence of a permanent establishment in that country. In the digital economy, however, multinational companies can supply goods or services without any physical presence — no server, office or warehouse — in the country, which makes it difficult to determine which country may tax their profits. Digital companies also typically create value from user data, and where that value is produced is itself a serious question: user data may be collected in Türkiye and processed in the US, leaving it unclear which country may tax the resulting income.

Another problem is transfer pricing and profit shifting. Multinational digital companies can shift profits to low-tax jurisdictions through transfer pricing between affiliates, causing tax losses, especially for developing countries. Services such as software development, marketing or advertising are declared not where the activity actually takes place but in a jurisdiction offering tax advantages, which can lead to significant revenue losses.

Identifying individuals or companies earning income online is also much harder than in the traditional economy. This contributes to tax evasion and informality and makes it harder to monitor and tax income from new digital assets such as cryptocurrencies.

National rules on taxing the digital economy in Türkiye

Türkiye’s first step was to introduce VAT liability for electronic services supplied to individuals who are not taxpayers, effective from the beginning of 2018. Presidential Decision No. 476, effective from the beginning of 2019, introduced a 15% withholding tax on payments made abroad for online advertising services.

Drawing on the work of the OECD and the EU, Türkiye has made further legislative changes, foremost among them the Digital Services Tax Law No. 7194, in force since 1 March 2020. Providers of digital services must pay digital services tax even if they are not subject to income or corporate tax in Türkiye. Article 1 of the Law defines the scope of the tax as follows:

(1) Revenue from the following services provided in Türkiye is subject to digital services tax:

a) all kinds of advertising services provided in the digital environment (including advertising control and performance measurement services, services such as the transmission and management of user data, and technical services relating to the delivery of advertising);

b) the sale in the digital environment of any audio, visual or digital content (including computer programs, applications, music, video, games, in-game applications and the like) and services provided in the digital environment for listening to, watching or playing such content, or recording it on or using it on electronic devices;

c) services providing and operating digital environments in which users can interact with each other (including services provided for the sale, or the facilitation of the sale, of goods or services between users).

(2) Revenue from intermediary services provided in the digital environment by digital service providers in relation to the services listed in paragraph (1) is also subject to digital services tax.

Türkiye’s Digital Services Tax stands out for its rate, which is high compared with its counterparts: 3% in France and Italy, 5% in Austria. The Turkish rate was set at 7.5%, and the President was empowered to double it to 15% or reduce it to 1%. (Rates and thresholds have been amended since this article was first published; the figures currently in force should be checked.)

Article 4 of Law No. 7194 sets out exemptions. The Law uses revenue thresholds: those whose revenue in Türkiye from activities within the scope of the tax does not exceed 20 million Turkish lira, or whose worldwide revenue does not exceed 750 million euros or the equivalent in Turkish lira, are exempt.

The tax base is the total revenue earned from services within the scope of the tax in the relevant period. Where revenue is in foreign currency, the Central Bank of the Republic of Türkiye buying rate on the date the revenue is received is used.

The rapid spread of digitalisation has profoundly affected taxation in Türkiye as well as in the global economy. With the growth of cross-border services, traditional rules have proved insufficient for digital players, and the Digital Services Tax was introduced to fill that gap. Advice from an experienced tax lawyer is very helpful for individuals and businesses operating in the digital economy to understand and comply with their obligations correctly.

Türker Law Office provides legal representation and advice on the taxation of economic activities conducted online, digital services tax, tax obligations arising from electronic services, withholding tax and VAT practice, and tax disputes relating to the digital economy.