Candice Horbacz
Brussels, Belgium – A recent Belgian law proposal aimed at modernizing the country’s corporate income tax system for the digital economy has drawn sharp criticism from economist Cristina Enache. In her written testimony submitted to the Belgian Finance and Budget Committee on August 31, 2026, Enache argued that the proposal, despite its framing as an income tax reform, is economically akin to a Digital Services Tax (DST) and carries significant risks of economic distortion, legal uncertainty, and trade friction while promising only modest revenue gains.
The May 2026 Belgian law proposal seeks to adapt the nation’s corporate income tax (CIT) system to the complexities of the digital realm. A corporate income tax is a levy imposed by governments on the profits of businesses. The Belgian initiative introduces several key mechanisms: the creation of a Digital Permanent Establishment (DPE), the attribution of taxable revenues to Belgium based on users and digital participation, the implementation of deemed profit allocation rules, and a digital withholding tax intended to function as a minimum tax. A withholding tax is income an employer deducts from an employee’s paycheck and remits to the government, or in this context, a tax deducted at source from payments to digital service providers.
The Global Digital Tax Dilemma: A Decades-Long Debate
The rapid and unprecedented growth of the digital economy over the past two decades has fundamentally reshaped how businesses operate and generate value. Companies like social media platforms, e-commerce marketplaces, cloud service providers, and online content platforms can now generate substantial revenue in countries without needing a traditional physical presence, challenging established international tax norms. This has sparked a global debate among policymakers, tax authorities, and international bodies such as the Organisation for Economic Co-operation and Development (OECD), the United Nations (UN), and the European Union (EU) on how and where these digital giants should be taxed.
For years, many digital firms benefited from favorable tax regimes, including research and development (R&D) incentives and patent boxes, which aimed to foster innovation but often resulted in lower effective tax rates compared to traditional industries. This perceived disparity, coupled with the difficulty of taxing profits generated remotely, fueled calls for new tax measures.
The international community has explored various solutions, including the OECD’s ambitious Pillar One and Pillar Two initiatives, which aim to reallocate taxing rights and establish a global minimum corporate tax. However, the slow pace of reaching a global consensus has led many individual nations and regional blocs, particularly in Europe, to introduce unilateral measures. These have included targeted Digital Services Taxes (DSTs), expanded concepts of "significant economic presence," and digital permanent establishment rules, all attempting to capture a share of the profits from digital activities within their borders. Belgium’s current proposal is the latest in this series of unilateral responses.
A key point of contention in this debate revolves around the value created by users of digital platforms. Supporters of digital taxes argue that user data, engagement, and network effects contribute significantly to the value of digital businesses and should influence where profits are taxed. Critics, however, highlight the challenges in accurately measuring and valuing this contribution, especially for services provided free of charge, and point out that network effects are not unique to the digital sector.
Belgium’s Bold Proposal: A Deeper Look
The Belgian proposal introduces a Digital Permanent Establishment (DPE), a significant departure from the traditional understanding of a permanent establishment (PE) which typically requires a fixed place of business or a dependent agent. Under the Belgian plan, a DPE would be deemed to exist if a foreign company exceeds certain digital activity thresholds in Belgium within a tax year. These thresholds relate to user numbers, connection counts, and global revenue allocations, indicating a focus on a company’s digital footprint rather than its physical presence.
Furthermore, the proposal moves away from taxing actual net profits towards a system of deemed profit allocation. It unilaterally attributes revenue to Belgian users and then applies formula-based apportionment coupled with presumed profitability assumptions. This means that instead of a company’s actual reported profits, a predetermined profit margin would be used for tax calculation purposes. A tax is a mandatory payment or charge collected by governments from individuals or businesses to cover the costs of public services.
The digital withholding tax mechanism, designed as a non-refundable levy, acts as both a minimum tax and an additional gross-basis charge. It mandates that where digital corporate income tax is due, 80 percent of that liability is imposed as a withholding tax in the subsequent year. This is particularly concerning for loss-making companies, as it could create a cash-flow burden even if little or no corporate income tax is ultimately owed.
A Digital Services Tax in Disguise
Cristina Enache’s central argument is that the Belgian proposal, despite being formally drafted as a modification to the corporate income tax, is economically indistinguishable from a Digital Services Tax (DST). DSTs are typically characterized by:
- Attributing revenue to users in a specific jurisdiction.
- Applying special rules to defined digital business models.
- Most crucially, taxing gross revenue rather than actual net profits.
The Belgian proposal aligns with these characteristics. It unilaterally attributes revenue to Belgian users, allocates taxable income—the amount of income subject to tax after deductions—through formula-based apportionment (determining the percentage of a business’s profits subject to a given jurisdiction’s tax) coupled with deemed profitability assumptions, and establishes nexus through digital activity thresholds.
Instead of directly levying a percentage tax on revenue, Belgium’s approach involves first assigning presumed profit margins to different business models and then taxing those deemed profits at the standard 25 percent corporate income tax rate. For example, specific profit margins of 25 percent, 15 percent, and 10 percent for various digital business models would translate into effective DST rates of 6.25 percent, 3.75 percent, and 2.5 percent of revenues, respectively.
This mechanism, while legally distinct, produces the same economic outcome as a direct revenue tax. For instance, marketplace platforms, which often operate with actual profit margins below 15 percent, could face effective tax rates well above 40 percent under the proposal. A firm with an actual profit margin of just 5 percent could see its effective tax rate soar to 125 percent if subjected to a deemed profit margin of 25 percent. This creates significant distortions, penalizing low-margin firms, discouraging investment, and skewing business decisions. While companies may challenge these presumptions, doing so would impose substantial additional compliance and administrative costs.
Economic Consequences: Pyramiding and Distortion
One of the most significant criticisms of taxing digital services, and a core concern with the Belgian proposal, is the risk of tax pyramiding. Tax pyramiding occurs when the same final good or service is taxed multiple times along the production process, leading to vastly different effective tax rates depending on the length of the supply chain. This disproportionately harms low-margin firms.
Modern digital value chains are highly specialized, involving multiple providers such as search platforms, advertising networks, marketplaces, and analytics services. As highlighted by a 2026 Tax Foundation study, DSTs effectively penalize this specialization because each layer in the value chain may trigger another taxable transaction. Unlike value-added tax (VAT) systems, which use credit mechanisms to prevent cascading taxation, the Belgian proposal lacks such a feature, resulting in an effect similar to turnover taxes. This discourages outsourcing and innovation, encourages less efficient vertical integration, and ultimately reduces overall economic efficiency. Given that the proposal’s tax base concentrates heavily on specialized digital intermediaries, Belgium can expect these adverse effects to manifest within its economy.
The Flawed Concept of a Digital Permanent Establishment
The introduction of a Digital Permanent Establishment (DPE) is a central pillar of the Belgian proposal. However, this reinterpretation of international tax rules deviates significantly from the OECD Model Tax Convention, which traditionally requires a physical presence for a permanent establishment.
An International Monetary Fund (IMF) paper from July 2026, cited in Enache’s testimony, points out that even if a jurisdiction were to establish nexus through a DPE rule, the attribution of profits would remain highly challenging. Under the arm’s-length principle and traditional PE profit attribution rules, little or no profit may be allocable to a jurisdiction where significant functions, assets, and risks are absent. The Belgian proposal, by replacing actual profit attribution with formulaic deemed margins, implicitly acknowledges this inherent difficulty but fails to resolve it, instead confirming the IMF’s criticism by sidestepping the core problem.
Heightened Risks of Double Taxation and Treaty Conflict
The unilateral expansion of a country’s tax base through redefinitions like the DPE significantly increases the likelihood of double taxation and a contentious redistribution of taxing rights. Belgium may recognize a DPE, while its treaty partners may not, or they may reject Belgium’s profit allocation calculations, leading to the same income being taxed twice. A 2020 Tax Foundation report illustrated how expanding the definition of PE could lead to more than 100 percent of a company’s income being taxed. This risk is exacerbated when the tax is based on deemed profits derived from revenue rather than actual profits.
Furthermore, Article 24(3) of the OECD Model Tax Convention mandates that contracting states treat permanent establishments in the same way they tax resident companies. By taxing DPEs on deemed profit margins, the Belgian proposal introduces a tax regime that differs significantly from the ordinary corporate income tax paid by resident companies, creating a potential breach of treaty obligations and leading to disputes over mutual agreement procedures, increased litigation, and taxpayer uncertainty. An IMF paper confirms that both expanded nexus regimes and DSTs operate outside traditional treaty frameworks, leading to overlapping tax claims and undermining international tax cooperation and investment.
Intriguingly, the proposal itself acknowledges the risk of double taxation and the taxation of deemed profits. It suggests that if combined taxes limit a company’s profit margin too much, the company would "have to increase prices," viewing this as an intended effect to counteract "artificially low prices" due to tax optimization. However, this admission highlights that the burden is expected to be passed on, and such effects would be amplified if multiple jurisdictions adopted similar measures.
Trade Tensions and Retaliation Concerns
The implementation of DST-like measures, often perceived as targeting large US-based technology companies, has historically led to significant international trade tensions. The US government has consistently opposed DSTs, with former President Trump initiating Section 301 investigations and, more recently, the US Congress threatening retaliatory measures such as the Section 899 tax. While Section 899 was ultimately removed from the "One Big Beautiful Bill Act," the underlying issue remains highly contentious.
Because the Belgian proposal would disproportionately burden large multinational digital companies, many of which are headquartered in the United States, it risks reigniting transatlantic tensions. The United States is Belgium’s fourth-largest export market, with significant trade in goods and services. While Belgium has a balanced trade in digitally deliverable services, unilateral measures targeting predominantly US-based digital firms could undermine this crucial economic relationship. Such actions create legal uncertainty, strain international trade relations, and increase the likelihood of retaliatory action, ultimately harming all parties involved in the absence of a globally agreed framework.
Burden on Belgian Consumers and SMEs
The economic incidence of a digital tax is typically closer to an excise tax—a tax imposed on a specific good or activity—than a corporate income tax. While corporate income taxes are largely borne by shareholders (who are disproportionately higher-income households), excise taxes are usually passed on to consumers through higher prices, making them often regressive.
Evidence from other countries that have implemented DSTs supports this. Apple, Amazon, and Google (now Alphabet) all passed on the UK’s 2 percent DST to users. Google explicitly states that a surcharge for DSTs is added in countries where ads are accessed. A recent research paper by economists Dominika Langenmayr and Rohit Reddy Muddasani concluded that attempts to target large digital platforms often miss the mark, with the cost primarily falling on European consumers. Another IMF paper links DST adoption to lower imports of digital services.
This suggests that the Belgian proposal would likely impose a disproportionate burden on Belgian consumers and small and medium-sized enterprises (SMEs) that rely heavily on digital platforms. Instead of primarily targeting foreign tech giants, the actual burden would fall on local advertisers, marketplace sellers, and ultimately, Belgian households through higher prices and reduced access to digital services.
Administrative Nightmare
The Belgian proposal would introduce extensive compliance and reporting obligations. Affected companies would need to meticulously track global revenues, user numbers, and connection counts, allocate users at a country level, perform GDP-weighting calculations, and adhere to detailed reporting requirements. Companies wishing to challenge the default allocation methodology would face the additional burden of providing evidence for alternative profit determinations. This necessitates the collection, verification, and continuous monitoring of vast amounts of operational and financial data across multiple jurisdictions.
This level of complexity is a principal criticism of digital services taxes and digital nexus rules. Both businesses and tax administrations struggle with determining user location, attributing revenues accurately, and understanding compliance obligations, particularly in the absence of clear guidance. The proposal’s reliance on user counts, connection thresholds, global revenue allocation formulas, and GDP adjustments would significantly exacerbate these concerns, creating substantial compliance costs and increasing the risk of disputes over data accuracy and tax liability. The IMF has consistently warned that overlapping unilateral digital tax measures can substantially increase administrative burdens and compliance costs, and the Belgian proposal, with its multi-layered approach, is poised to be among the most complex.
Modest Revenues vs. Significant Economic Costs
Despite the significant complexities and potential international fallout, the revenue generation from DSTs in other European countries has been relatively modest. In countries like Austria, France, Italy, Spain, Turkey, and the UK, DST revenues typically range from €137 million (Austria) to €1.04 billion (UK) annually. As a share of total government revenue, these figures are usually below 0.1 percent, with Turkey being an outlier at around 0.24 percent. For most, including the UK, France, Italy, and Spain, it hovers between 0.05 and 0.07 percent.
According to Tax Foundation modeling, a Belgian digital tax comparable to the April 2026 proposal is projected to generate approximately €148 million annually. This represents less than 0.06 percent of Belgium’s total tax revenues, a limited source of additional government revenue relative to the size of the Belgian economy.
However, the economic costs are projected to be substantially higher. The tax is estimated to reduce Belgian GDP by approximately 0.056 percent, equivalent to about €342 million annually. Investment is forecast to decline by 0.073 percent, while wage levels and employment (or hours worked) would each fall by 0.03 percent. Consequently, total labor compensation is estimated to decrease by 0.053 percent. These effects highlight that taxes on digital activity tend to be passed through the economy, reducing incentives for investment and ultimately impacting workers through lower wages and employment.
Critically, the estimated reduction in economic output (€342 million) is approximately 2.3 times larger than the projected annual revenue collection (€148 million). This stark imbalance suggests that the broader contraction of the tax base could significantly offset the revenue generated, potentially even resulting in a net negative fiscal effect once lower collections from other taxes are considered. The economic distortions associated with the proposed digital tax are poised to far outweigh its expected budgetary benefits.
A Superior Path: Reforming VAT
Economist Cristina Enache strongly advocates for strengthening the value-added tax (VAT) system as a superior alternative if the objective is to generate more revenue from digital services. A destination-based VAT, levied on the purchase of goods or services and paid by the consumer, is considered the most coherent and least distortionary instrument for taxing cross-border digital services. VAT systems already effectively tax streaming, online advertising, cloud computing, marketplace services, and software subscriptions without the need for specialized, distortionary digital taxes.
The EU has already successfully reformed its VAT rules to account for the digitalization of the economy. These reforms require non-EU businesses to register and remit VAT in the Member State of the consumer, ensuring that digital services are taxed at the point of consumption. The success is evident: EU VAT revenues from these measures increased tenfold, from €3 billion in 2015 to €4.5 billion in 2018, €20 billion in 2022, and more than €33 billion in 2024.
If Belgium were to apply its standard 21 percent VAT rate to all imports from information industries, it could generate approximately €8.15 billion ($9.5 billion) in tax revenue, equivalent to about 3.3 percent of Belgium’s total tax revenues. This dwarfs the projected revenue from the proposed digital tax.
Furthermore, Belgium’s VAT actionable policy gap—the additional VAT revenue that could realistically be collected by eliminating reduced rates and certain exemptions—was a substantial 27.6 percent in 2024. Estimates suggest that broadening the VAT base by eliminating reduced rates and exemptions could generate up to €26.9 billion in additional national revenue, representing 10.76 percent of Belgium’s 2023 total tax revenue. Even a small fraction of this untapped potential would far exceed any revenue a digital tax could deliver, and without the associated economic distortions and international conflicts.
Compared to digital taxes, VAT offers clear advantages: neutrality across sectors, a broad tax base, the avoidance of tax pyramiding, international consistency, significantly higher revenue generation potential, and the absence of trade-related risks.
Conclusion: A Call for Coordinated Solutions
The Belgian 2026 proposal to adapt the income tax code to the digital economy, while presented as a modernization, fundamentally replicates and in some aspects amplifies the shortcomings of Digital Services Taxes. It combines problematic approaches: DST-style user-based market taxation, unilateral digital nexus rules, and gross-basis withholding and minimum taxation mechanisms.
These instruments have consistently generated limited revenues while imposing substantial economic costs, including tax pyramiding, increased risks of double taxation, heightened compliance burdens, trade tensions, international tax disputes, reduced tax neutrality, and the pass-through of costs to domestic businesses and consumers. Rather than representing an improvement, the Belgian proposal integrates multiple distortionary mechanisms into a single, complex tax regime.
Economist Cristina Enache’s testimony serves as a stark warning, urging Belgium to abandon this unilateral path. A more coherent, effective, and less damaging policy approach would focus on strengthening destination-based VAT systems and actively pursuing coordinated international solutions, rather than introducing yet another fragmented and economically detrimental digital tax framework.
