The decision coincides with a landmark OECD deal to reform the global tax system and the visit of US Treasury Secretary Janet Yellen.
Brussels has "put on hold" plans for an EU-wide digital tax that would target tech giants like Amazon, Facebook and Google.
It comes after pressure from the United States who believe the EU's levy has been made redundant by a separate, landmark agreement to reform the international tax system.
It was given a further push over the weekend when G20 finance ministers and central bank governors gave their green light.
"Successfully concluding this process will require a final effort, a final push by all parties, and the Commission is committed to focusing on that effort," a spokesperson for the European Commission said on Monday. "For this reason, we have decided to put on hold our work on a proposal for a digital levy."
The executive plans to "reassess" its proposal in October, which is when the G20 want the technical details finalised.
The introduction of an EU-wide tax on the goods and services sold online inside the EU's single market is part of a bid to boost Brussels financial resources and pay for the costly post-coronavirus recovery.
The proposal for the EU digital tax, details of which have not yet been made official, was meant to replace the different levies that some member states, like France, Spain and Austria, have put in place in recent years.
These countries argue that big tech corporations, like Amazon, Facebook and Google, are not paying their fair deal of taxes because taxing rights are still determined by the place where the company's headquarters is based – usually in countries that offer low tax rates, like Ireland – instead of by the place where the goods and services are being purchased by customers, which, in their view, marks the moment the real revenue actually originates.
Worried about growing fragmentation inside the single market, the European Commission began working on an EU-wide digital tax with the aim of making it operational by 2023. The executive had previously said the levy would be modest and non-discriminatory and would work in parallel to the eventual OECD agreement.
However, the United States disagrees and argues such a digital levy would be in fact discriminatory because the main target would be American companies from Silicon Valley, which comfortably dominate the market of online services in Europe and elsewhere.
Ever since the G7 reached the landmark tax deal, Washington has increased pressure on Brussels to delay the introduction of the proposal, asking their Atlantic allies to wait at least the technical details of the OECD agreement are finalised.
"The agreement that we've reached in the OECD framework discussion calls on countries to agree to dismantle existing digital taxes that the United States has regarded as discriminatory and to refrain from erecting similar measures in the future," said US Secretary of the Treasury Janet Yellen, who visits Brussels this week.
"So it's really up to the European Commission and the members of the European Union to decide how to proceed. But those countries have agreed to avoid putting in place in the future and to dismantle taxes that are discriminatory against US firms."
The European Commission spokesperson refused to say whether US lobbying played a part in its decision to pause its digital tax plans.
Reacting to the announcement, MEP Andreas Schwab, who acts as negotiator on digital taxation for the European People's Party (EPP), said the delay was welcomed.
"The EU must delay this proposal in order not to jeopardise the current international negotiations. This is the priority, our priority," Schwab told Euronews in a statement.
"Once we finally have the proposal at international level, we could go ahead and think about a EU Digital Tax reform especially on own resources beyond or complementary to what we will achieve at international level, but not before."
What is the landmark tax deal?
The draft text endorsed by 90% of global GDP is based on the OECD's two-pillar approach. Its main goal is to increase fairness, certainty and stability in the global tax system.
- The first pillar is centred on the partial reallocation of taxing rights to ensure that taxing profits is no longer exclusively determined by a company's physical presence. Using a complex formula, countries would be able to obtain a share of the profits that multinational companies make inside their markets. More than $100 billion of profits are expected to be re-distributed.
- The second pillar is focused on establishing a minimum effective tax rate of 15% for the profits obtained by large multinationals, wherever they are based. The OECD estimates the minimum rate would generate around $150 billion in additional global tax revenues every year.
The United States argues that the first pillar will be enough to address the challenges that arise from the digitisation of the economy and will render the EU's digital tax redundant and unnecessary.
Earlier this month, Ireland, Hungary and Estonia joined a small group of six countries, including two Caribbean tax havens, to oppose the OECD deal. The three countries operate tax rates that fall below the 15% threshold. Their decision cast a shadow over the EU's unified position because, according to the EU treaties, any reforms on taxation require the unanimity of the 27 member states.