Digital Services Taxes in Europe, 2025

Over the last few years, concerns have been raised that the existing 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. system does not properly capture the digitalization of the economy. Under current international tax rules, multinationals generally pay corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. where production occurs rather than where consumers or, specifically for the digital sector, users are located. However, some argue that through the digital economy, businesses (implicitly) derive income from users abroad but, without a physical presence, are not subject to corporate income tax in that foreign country.

To address these concerns, the Organisation for Economic Co-operation and Development (OECD) has been hosting negotiations with more than 140 countries to adapt the international tax system. The proposal, referred to as Pillar One, would require some of the world’s largest multinational businesses to pay some of their income taxes where their consumers are located.

Pillar One would replace some existing norms for taxing multinationals and run counter to some policies that countries have put in place to tax digital companies in recent years. The most common form is a digital services tax (DST), which is a tax on selected gross revenue streams of large digital companies.

Because Pillar One is focused on changing where profits are taxed, including for many large digital companies, DSTs are expected to be repealed. While the OECD hasn’t completely dropped Pillar One, the negotiations have failed to result in an agreement that would eliminate DSTs. Additionally, in March 2024, the US Treasury held a public hearing where a Joint Committee on Taxation staff report was discussed showing that Pillar One would result in a loss in US federal receipts of $1.2 billion. More recently, President Trump has revived trade threats against foreign DSTs and included them in his “Fair and Reciprocal Plan” for US trade relations.

On October 21, 2021, a joint statement from Austria, France, Italy, Spain, the United Kingdom, and the United States laid out a plan to roll back DSTs and retaliatory 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. threats once the Pillar One rules were implemented. Turkey subsequently agreed to the same terms. However, this agreement has also lapsed.

Currently, about half of all European OECD countries have either announced, proposed, or implemented a DST. Because these taxes mainly impact US companies and are thus perceived as discriminatory, the United States responded with retaliatory tariff threats, urging countries to abandon their DSTs.