February 24, 2025

Understanding Digital Services Taxes

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• Many countries are unable to appropriately levy income tax on Big Tech companies as these companies do not have a physical presence within their borders. Instead, they use Digital Services Taxes (DSTs) to ensure that these companies pay some tax within their jurisdictions.
• The U.S. has consistently opposed the implementation of DSTs, even imposing retaliatory tariffs on certain countries.
• While there are attempts at forging multilateral consensus on how to tax large multinational corporations, there is no global consensus on this issue, largely due to U.S. opposition.
• Given the breakdown in international negotiations, Canada enacted a law in June 2024 to apply DSTs to large technology companies. The US has raised a dispute about the imposition of this tax under “nondiscrimination” provisions of the U.S.-Mexico-Canada Free Trade Agreement, alleging that these taxes are targeted at U.S. companies, despite the tax applying to all companies that meet the relevant revenue and related thresholds.
• Limiting the ability of countries to tax Big Tech companies leads to a lack of fairness in the digital economy, a transfer of wealth from smaller to richer countries, and a shortfall in resources required for many countries to meet their developmental goals.

What is a Digital Services Tax (DST)?

A digital services tax (DST) is a tax on the gross revenues, the total amount a business earns, derived from the provision of digital services to users in a specific jurisdiction. It is typically imposed when a government is not able to receive adequate income tax payments from digital companies operating in their jurisdiction, compared to the value created for the companies by users based within their territories.

Companies with a global footprint typically pay income taxes where production occurs, or value is added rather than where consumers are located. In the global digital economy, large technology companies often have no physical presence in countries where they provide services or have users they derive value from. As a result, Big Tech companies can avoid paying taxes in such jurisdictions.

This implies that many countries stand to lose out on significant revenue, particularly given the growing size of the digital economy and its monopolization by companies from major economies. The countries where these digital multinationals are based can choose to tax these companies as they please (though often, lobbying by Big Tech companies leads to insufficient taxation even in countries such as the U.S., which is said to provide several unwarranted tax breaks to them).

This can lead to an unfair transfer of wealth away from countries that could need resources to meet their developmental needs. The increase in the size of the digital economy, coupled with an inability to appropriately tax this sector, implies that the revenue base for developing countries is reduced. This compromises the ability of developing countries, in particular, to provide secure and stable welfare and social security protections to their populations.

Per a report by the Congressional Research Service, 19 countries, including major economies such as India, Indonesia, France, the UK, and Italy, have implemented taxes on non-resident digital service providers. The National Trade Estimates Report 2024 lists only five jurisdictions and nine countries as having considered or implemented a DST, as indicated in Annex A.

More recent industry comments submitted by the Coalition of Service Industries, ACT, the App Association, Consumer Technology Association, the Consumer Technology Association, and the Computer and Communications Industry Association to the Office of the U.S. Trade Representative for preparation of the 2025 NTE Report indicates that 46 jurisdictions are considering or have implemented a DST (See Annex A).

DSTs or a multilateral solution to taxing digital multinationals?

Countries are increasingly trying to find ways to tax the digital economy, given the shift in the global economy towards digitalization of goods and services. In the absence of global agreement on a fair and comprehensive taxation framework for the digital economy, a patchwork framework of domestic taxation mechanisms has emerged. While some have argued that a framework of DSTs could be more easily administrable than implementing significant income tax reforms, a patchwork taxation system can also lead to an unfair allocation of taxes. Small countries may have less ability to impose and collect such taxes in addition to the increased compliance burden on companies.

Attempts at finding a multilateral and global solution to the issue of taxation of the digital economy have been ongoing with little tangible progress.

The most significant effort was initiated in 2021 under the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS). Involving more than 140 countries, Pillar 1 of the BEPS framework aims to ensure that multinational companies will pay some income tax where their customers are located in exchange for the removal of all individual digital services taxes.

However, due to a lack of global political consensus amidst significant opposition from the U.S., there is no clear timetable for the implementation of the framework, which appears to have reached a dead-end. More recently, the United States has announced its intent to walk away from the BEPS framework, alleging that the agreement violates U.S. sovereignty and economic competitiveness.

Developing countries have also taken the issue of taxation of multinational corporations to the United Nations (UN) with proposals for a UN tax convention. If such an agreement is possible, an agreement at the UN will take time, given the U.S.’s position on opposing any agreement. Further, the terms of reference for the ad-hoc committee tasked with drafting the convention were only finalized in August 2024, which implies a long, arduous road ahead.

The slow pace of progress on a multilateral solution has, however, led many countries to reconsider the implementation of DSTs while still supporting a multilateral solution to the issue.

How are DSTs linked to digital trade?

As taxation of the digital economy has become an increasingly important issue around the world, trade agreements are being used to thwart the ability of countries to implement and enforce a variety of taxes concerning the digital economy.

For example, provisions mandating a moratorium on the application of customs duties to cross-border electronic transmissions have been included in new trade agreements despite uncertainty over the future of a similar moratorium at the World Trade Organization. The moratorium could limit the ability of smaller countries to collect much-needed revenues while also creating an unequal playing field between digital and non-digital trade in similar goods. Free flow of data provisions, which are also increasingly seen in trade agreements, can limit the ability of signatories to mandate local processing and storage of data, including financial and tax-related data. Such data can be necessary for regulators and governments to assess and impose corporate taxes and otherwise carry out critical administrative functions. A number of trade agreements also limit the ability of signatories to require MNCs to establish a local presence. This limits the ability of governments to require a “physical presence” within their jurisdictions, which is traditionally a requirement for taxation. Trade agreements also regulate payments between foreign investors and domestic parties and allow MNCs to interfere in local tax-setting processes through the implementation of process-related obligations such as transparency requirements.

Directly relevant to the issue of DSTs, however, are provisions concerning nondiscrimination in the regulation of services and investment.

Nondiscrimination is a critical concept in international trade law that requires (a) countries to treat all trading partners equally and (b) treat similar foreign and domestic products/services similarly. This concept is, however, being used by Big Tech and its lobbyists to challenge a host of digital economy-related regulations that, while neutral in terms of their stated scope, are alleged to disproportionately target service providers from the U.S.

For instance, Big Tech and its allies have frequently complained about pro-digital competition-related interventions such as the EU’s Digital Markets Act and similar legislative proposals across the world. As these targeted regulations apply to companies based on their size, they tend to disproportionately apply to U.S.-based tech companies because they are by far the biggest in the world.

As with pro-competition regulation, nondiscrimination provisions in investment and services chapters of trade agreements can be used to target the application of DSTs. For example, in its consultation request relating to the introduction of DSTs by Canada, the U.S. alleges that Canada has violated Articles 15.3.1, 14.4.1, and 14.4.2 of the U.S.-Mexico-Canada Trade Agreement (USMCA), as discussed below.

The U.S. retains the ability to take unilateral retaliatory action against foreign trade practices that are deemed to be “unreasonable, Understanding Digital Services Taxesdiscriminatory or unjustifiable” under Section 301 of the Trade Act.

The U.S. has previously made similar allegations with respect to DSTs imposed by several countries, including France, India, Turkiye, Italy, Austria, Spain, and the UK. Based on dubious factual and legal arguments, the U.S. imposed retaliatory tariffs against some of these countries.

As an interim measure during the negotiation of the BEPS framework, a number of countries agreed to adopt a transitional approach to DSTs, under which DST liabilities due from MNCs under local laws would be set off against future income taxes due from the same entities under Pillar 1. These commitments led to the U.S. terminating its unilateral retaliatory actions against Austria, France, Italy, Spain, the UK, Turkiye, and India in 2021.

While originally set to expire in 2023, the understanding reached by these countries was extended till 30 June 2024. Having now expired, countries such as Canada are now seeking to or are currently reexamining the issue of implementing DSTs.

What is the U.S.-Canada DST dispute about?

Canada has been considering the implementation of a DST for several years, with the U.S. government opposing such proposals since 2019. Canada held off from implementing a DST in view of the progress of the BEPS framework. However, given the political stalemate at multilateral negotiations, on June 20, 2024, the government enacted Bill C-59, which imposes a 3 percent tax on revenues relating to online marketplaces (e.g., online auctions, e-commerce, ride-sharing, etc.), online targeted advertising, social media platforms (excluding platforms solely for communication) and sale/licensing of user data.

The Canadian DST came into effect on June 28, 2024.

It applies to companies with annual global revenues of Euro 750 million or more and Canadian digital services revenue of more than CAD 20 million. The tax will only apply to the revenue in excess of CAD 20 million.

Both domestic and foreign enterprises are subject to the tax (subject to meeting the revenue thresholds prescribed).

The tax is retrospective and covers the period from January 1, 2022, onwards. Companies will need to start paying the tax from June 30, 2025.

Canada expects to raise approx. USD 875 million per year from the tax.

Following the passing of Bill C-59 in Canada, the U.S. invoked provisions of the USMCA on August 30, 2024, when it formally requested dispute settlement consultations with Canada.

In its statement announcing the invocation of the dispute settlement mechanism, the USTR alleges that the DST violates Canada’s commitments under Chapters 14 and 15 of the USMCA, which concern nondiscriminatory treatment of Investment and Cross Border Trade in Services (Clauses 14.4.1 and 14.4.2 of the USMCA require the parties to ensure that investors/investments from another signatory country are treated similarly to investors/investments from the home country; Clause 15.3.1 of the USMCA requires parties to accord similar treatment to services and service suppliers as they do to their own services/service suppliers). The statement also notes that the U.S. continues to work towards a comprehensive solution to the issue of digital services taxes through the OECD/G20 global tax negotiations.

The U.S. government has consistently opposed the use of DSTs as the imposition of such taxes could lead to double taxation. Normally, double taxation is relieved by providing a tax credit for foreign taxes paid, but such credits are limited to income taxes and unlikely to be available for DSTs imposed on revenues rather than income.

It has also been argued that DSTs would result in higher prices for consumers of implementing countries because companies will pass on the increased costs.

What happens next?

The U.S. government can choose to escalate the dispute with Canada by requesting the formation of a dispute resolution panel under the USMCA any time after November 13, 2024, that is, 75 days from requesting dispute resolution. Following the appointment of a panel, hearings will be conducted to determine if the Canadian regulation in question violates the relevant provisions of the USMCA.

President Trump has also indicated that he is willing to impose tariffs on the import of Canadian goods and services into the U.S. should Canada not reverse course on the issue of DSTs. He has accordingly directed the U.S. Trade Representative to investigate whether foreign countries are subjecting U.S. “citizens or corporations to discriminatory or extraterritorial taxes.” A report is expected by April 2025.

Conclusions

Given the continued growth of the digital economy and its monopolization by Big Tech companies, it is critically important to find a just multilateral solution to taxation of the sector.  Fair taxation of the digital economy is essential for global economic justice and to ensure countries can access the resources required to serve their populations and meet their developmental goals. In the absence of a global agreement, countries must continue to have the right to tax the digital ecosystem reasonably, including through the application of DSTs.

It now appears that Canada may have to bargain away its DSTs to avoid being hit with unrelated tariffs and other sanctions from the U.S. The U.S.-Canada dispute under the USMCA assumes importance in this context, as it highlights the extent to which the U.S. government can use its political and economic heft against countries that it deems to go against its and its Big Tech companies’ interests. This also demonstrates the need to carefully design trade agreements to ensure they cannot be used to stifle the ability of governments to regulate and fairly tax the digital ecosystem.

Further Reading:

1. Kelsey, J., Bush, J., Montes, M., & Ndubai, J. (2020, August 13). How Digital Trade Rules Would Impede Taxation of the Digitalised Economy in the Global South. How “digital trade” rules would impede taxation of the digitalized economy in the Global South. https://www.twn.my/title2/wto.info/2020/ti200812.html
2. Chowdhary, A., Omole, K., & Maina, A. W. (2024, November 26). Taxing the Big Tech Giants: A Forthcoming Solution in the United Nations Tax Convention? Bot Populi. https://botpopuli.net/taxing-the-big-tech-giants-a-forthcoming-solution-in-the-united-nations-tax-convention/
3. Starkov, V., & Jin, A. (2024, June 10). A Toss Up? Comparing Tax Revenues from the Amount A and Digital Service Tax Regimes for Developing Countries. https://www.southcentre.int/wp-content/uploads/2024/05/RP199_A-Toss-Up_EN.pdf
4. Stotzky, R. & Fano, A. (2023, October 26). Digital services taxes, pillar one, and the path forward. https://bipartisanpolicy.org/blog/taxation-in-the-digital-economy-digital-services-taxes-pillar-one-and-the-path-forward/
5. Gravelle, J. (2024, April 4). The OECD/G20 pillar 1 and digital services taxes. The OECD/G20 pillar 1 and digital services taxes. https://crsreports.congress.gov/product/pdf/R/R47988
6. KPMG. (2025, January 30). Taxation of the digitalized economy. https://kpmg.com/kpmg-us/content/dam/kpmg/pdf/2023/digitalized-economy-taxation-developments-summary.pdf
7. Kitamura, K., & Trachtenberg, D. (2025, January 6). Canada’s Digital Services Tax Act: Issues Facing Congress . https://crsreports.congress.gov/product/pdf/IN/IN12399#:~:text=Some%20industry%20associations%20have%20stated,tax%20burdens%2C%20the%20tax%20burden
8. Smith, C. L. (2022, May 31). Reflections from the brink of Tax Warfare: Developing countries, digital services taxes, and an opportunity for more just global governance with the OECD’s two-Pillar Solution. Boston College Law Review. https://bclawreview.bc.edu/articles/34
9. Megersa, K. (2020, December 15). Digital Service Taxes and Their Application. https://www.gov.uk/research-for-development-outputs/digital-service-taxes-and-their-application

 

Annex A:

Table 1 – List of Countries Identified by the USTR’s NTE Report 2024 as imposing or having considered the imposition of DSTs.

Sr No.	Country	Under Consideration	Implemented
1	Canada	✓
2	EU	Various member states, including Austria, France, Italy, Spain, and the UK, have all agreed on a transitional approach with the U.S. (extended to June 2024).
3	India		✓
4	Kenya		✓
5	Turkiye		✓

 

Table 2 – List of Countries Considering or Having Imposed a DST Identified by Industry Comments to the USTR’s NTE Report 2025

Sr No.	Country	Under Consideration	Implemented
1	Canada		✓
2	Columbia		✓
3	EU	Various countries are considering the implementation of a DST as OECD/BEPS negotiations have reached an impasse.
4	Croatia	✓
5	France		✓ (+ tax on video content streaming services to subsidize the French film industry)
6	Kenya		✓ + Further taxes on gross transaction values on online marketplaces planned
7	Nepal		✓
8	New Zealand	✓
9	Tanzania		✓
10	Turkiye		✓
11	India		✓
12	Argentina	Unclear if proposed or enacted
13	Austria		✓
14	Belgium	Unclear if proposed or enacted
15	Brazil	✓
16	Costa Rica	Unclear if proposed or enacted
17	Czech Republic	✓
18	Denmark	Unclear if proposed or enacted
19	Greece	Unclear if proposed or enacted
20	Hungary	Unclear if proposed or enacted
21	Indonesia	Unclear if proposed or enacted
22	Israel	Unclear if proposed or enacted
23	Italy		✓
24	Kyrgyzstan	Unclear if proposed or enacted
25	Laos	Unclear if proposed or enacted
26	Latvia	Unclear if proposed or enacted
27	Malaysia	Unclear if proposed or enacted
28	Mexico	Unclear if proposed or enacted
29	Nigeria	Unclear if proposed or enacted
30	Norway	Unclear if proposed or enacted
31	Pakistan	Unclear if proposed or enacted
32	Paraguay	Unclear if proposed or enacted
33	Poland	Unclear if proposed or enacted
34	Sierra Leone	Unclear if proposed or enacted
35	Slovenia	Unclear if proposed or enacted
36	South Africa	Unclear if proposed or enacted
37	Spain		✓
38	Tanzania		✓
39	Taiwan	Unclear if proposed or enacted
40	Thailand	Unclear if proposed or enacted
41	Tunisia	Unclear if proposed or enacted
42	Uganda		✓
43	UK		✓
44	Uruguay	Unclear if proposed or enacted
45	Vietnam	Unclear if proposed or enacted
46	Zimbabwe	Unclear if proposed or enacted