Digital Services Taxes State of Play

International taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. and trade issues are once again intertwined. Policymakers who have long been concerned about digital services taxes are once again seeing opportunities to put pressure on jurisdictions that have implemented those policies.

Recent weeks have shown how aggressive Republican policymakers in Congress and the Trump administration are willing to be in order to achieve international tax and trade outcomes. The proposal for Section 899, initially included in the One Big Beautiful Bill Act, was primarily targeted at discriminatory and extraterritorial policies like the undertaxed profits rule (UTPR) of the global minimum tax and digital services taxes (DSTs). The threat of Section 899 led to an agreement at the G7 that will reduce US companies’ exposure to the global minimum tax. The agreement also led Republican lawmakers to remove Section 899 from the larger tax and spending package. However, the issue of DSTs remains.

A potential sign of how the administration will deal with DSTs came when President Trump threatened to call off all trade negotiations with Canada because its DST was going to be enforced. Canada pivoted and rescinded its DST.

DSTs often target US companies by design through high revenue thresholds for determining applicability. They also work more like an excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. rather than an income tax. DSTs apply to gross revenues rather than net profits, meaning that firms with thinner profit margins face a higher effective tax burden than more profitable businesses. While tariffs are applied to physical goods that are imported, a DST, as a sort of excise tax on (mainly) imported services, has features that resemble a tariffTariffs are taxes imposed by one country on goods imported from another country. Tariffs are trade barriers that raise prices, reduce available quantities of goods and services for US businesses and consumers, and create an economic burden on foreign exporters. . Many countries in Europe have enacted a DST of some form.

The US government has voiced bipartisan opposition to DSTs over the last decade, most recently regarding the Canadian DST. President Trump used Section 301 investigations in his first term to support potential trade actions to retaliate against earlier foreign DSTs.

In February, President Trump named DSTs a target for his “Fair and Reciprocal Plan” on Trade. That plan focused on the revenue raised by DSTs as a justification for retaliation by the US.

Below are recent figures from major DSTs from jurisdictions that regularly publish revenues raised by those policies.

Recent Revenue Raised from Selected Digital Services Taxes

Source: Tax Foundation analysis of national budget documents and announcements.
Note: These countries have been selected because they report digital services tax revenue separately as a line item.

Revenue raised from DSTs in Austria, France, Italy, Spain, Turkey, and the UK ranged from $121 million in the most recent year for Austria to $956 million in the most recent year for the UK. Austria’s DST is much narrower than the others in the sample because it applies only to digital advertising (Austria also has a separate tax for print advertising). In all cases, the amounts raise less than one percent of the country’s general revenues. France’s DST brings in the most at 0.22 percent of total revenues.

As US and foreign policymakers evaluate the impact of DSTs, they should take into account more than just revenue. Recent work by economists Dominika Langenmayr and Rohit Reddy Muddasani suggests that if policymakers intended to target large digital platforms, they have misunderstood tax incidenceTax incidence is a measure of who bears the legal or economic burden of a tax. Legal incidence identifies who is responsible for paying a tax while economic incidence identifies who bears the cost of tax—in the form of higher prices for consumers, lower wages for workers, or lower returns for shareholders. . In fact, the economic burden of the DST is commonly being passed on to consumers.

If the revenue take is relatively small, the tax burden falls on a country’s own citizens rather than foreign companies, and they invite trade threats, it seems these policies are completely misguided. As Tax Foundation experts have written before, if policymakers want to raise revenue from digital services, the value-added tax (VAT) is the correct tool for the job. It does not discriminate between firms, and it is trade-neutral. It also raises substantial revenue.

In 2024, my colleague Cristina Enache wrote,

Currently, 101 countries have implemented a VAT or GST on cross-border online sales. More than 50 countries worldwide have already implemented OECD recommendations for the effective collection of a VAT. Following OECD guidance on tax collection, the European Union VAT revenues collected from these measures increased sevenfold, from €3 billion ($3.2 billion) in 2015 and €4.5 billion ($4.8 billion) in 2018 to over €20 billion ($21.35 billion) in 2022.

A fruitful path forward would be for countries to avoid another trade dispute by pivoting away from DSTs, and, if they have not done so already, use a VAT to tax digital services. This would be a meaningful off-ramp to avoid further escalation.

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