Abstract: The digital economy drives growth, innovation, and competitiveness. Rapid technological advancement contributes to economic and social transformations. Digitalization has produced entirely new business models and poses substantial problems for the current taxation system. An evaluation of the business models of Amazon and Google indicates that such a differentiated approach is required for both the proposed alternatives, i.e., a virtual PE or an equalisation tax. This paper presents the concept of the digital economy, features of the digital economy, business modes of the digital economy, and identifies deficiencies in the existing structure of international taxation as it relates to taxation of the digital economy. The paper further assesses nexus, data, and characterization as major components of the tax challenges of the digital economy, as well as providing mechanisms to address the emerging challenges in the present international tax system. From this study, it can be inferred that there needs to be global consensus that digital enterprises are detrimental to the tax system and that something needs to be done about it.