Under threat from US retaliatory tariffs, are DST’s effective taxes?
Digital Services Taxes are the newest, and possible to newest extinct, class of taxation. President Trump signed in February an order to investigate reciprocal tariffs against countries with Digital Services Taxes which the US see as indefensible tariffs in disguise, unfairly singling out Meta, Apple, Google.
Closing a tax loophole or fiscal politics?
DST’s attempt to close an income tax loophole for offshore digital services. They are an imperfect reaction to the legacy global tax rules, designed in the 1920’s for goods. DST promoters argue these antiquated rules fail to tax new digital advertising, data or online platform services. But critics remonstrate that DST’s single out just a few US digital giants and are politically motivated. They are illegal service import tariffs in disguise – if so, then they can hardly be justified when threatened by possible US tariffs.
Those countries which introduced them – France; the UK; Italy; Canada, Spain, and Turkey and more – saw them temporary until OECD Pillar 1 reform negotiations reset the rules on taxing digital. Pillar 1 aims (ed?) to tackle some of the criticism of DST’s, and countries had agreed to freeze them whilst the OECD completed agreement. But President has pulled out of this process in January.
Fair, simple and economical tax tests
Taxes are evaluated against a range of principles: fair; simple; and do they raise enough to be bothered? Here is may evaluation.
| Principle | How DSTs Perform | |
| 1. Correct market failure |
✅ |
Big hit here, as they close the income tax loophole offshore digital services enjoy |
| 2. Revenue Sufficiency |
✅ |
The amounts aren’t huge like income tax or VAT. But the UK, for example, is already close to £1 billion per annum, way ahead of its original forecast |
| 3. Ease for tax authorities |
✅ |
Much to everyone’s surprise, they are very easy and low-cost to collect for tax administrations. Possibly because they only target a few giant companies who are rooms of clever accountants and tax people who are motivated to comply. |
| 4. Flexibility |
✅ |
Adapted quickly to digital economy changes; seen as a transitional measure before global reform. |
| 5. Transparency |
⚠️ |
Mixed – DSTs are publicly debated but separate from income tax, leading to unclear total burdens. |
| 6. Discriminatory |
❌ |
The main compliant from the US: the high thresholds mean just a few score of US-based digital giants will ever pay much DST. Singling out specific taxpayers like this isn’t just, and likely breaks with many tax treaties. They are tariffs hidden as income taxes. |
| 7. Neutral |
❌ |
Can distort business decisions (e.g., pricing, location of services) and create double taxation risks for services where location of value add isn’t clear. So fail neutrality tax test. |
| 8. Simple for taxpayers |
❌ |
Urgh, no! Tax payers say the rules are complex and difficult to determine the correct country to declare in. Accounting or ERP’s just aren’t built with these taxes in mind. |
