Unilateral Digital Services Taxes in the European Union : Affected firms and Impact on Effective Tax Rates

This study investigates firms´ reporting of Digital Services Taxes (“DST”) the impact on the effective tax rates ("ETR") of affected firms based on financial statement information. I analyze the disclosure of DSTs in the notes, the accounting treatment, and the qualification of the unilateral DSTs implemented within the European Union (EU) using financial statements of 116 digital firms in 2019 and 2020. The findings indicate that about one-fifth of the sample firms are affected by DSTs. For accounting purposes, firms do not qualify DSTs consistently as direct or indirect taxes and, therefore, account for DST expenses either under Income Tax Expenses, Selling and General Administrative Expenses (“SGA”) or Cost of Net Revenue (“CONR”). About one-third of firms qualify DSTs as direct taxes, about 20 % as indirect taxes, and other firms do not provide any kind of remarks on the qualification. These findings are new to the literature and highly relevant for future research to determine the implications of DSTs.Further, I analyze if the introduction of unilateral DSTs helped to reduce the ETR differential between both affected and non-affected firms. To this end, I calculated various ETR ratios for DST-affected and non-affected firms to investigate the impact of DST on affected firms before and after the implementation of unilateral DST legislations for the first time using financial information for the financial years starting from 2011 to 2020 derived from Thomson Reuters Refinitiv. The results show that ETRs of DST-affected firms are not lower ETR compared to non-affected firms prior to the introduction of DSTs. Furthermore, the results indicate that the implemented DSTs do not have an observable effect on the ETR, SGA, or CONR of the DST-affected firms. In conclusion, the current unilateral DST legislations fail to achieve the intended increase in the ETR of DST-affected firms at the group level. The results advocate implementing a revised Europe-wide digital levy that is currently discussed as of 2025, as unilateral DSTs within the EU are ineffective measures to increase ETRs, and the different designs of unilateral DSTs observably leads to accounting distortions