How do digital services taxes work?

Gary Clyde Hufbauer (PIIE) and Megan Hogan (PIIE)

How do digital services taxes work?


The digitalization of economies and cross-border trade have posed new challenges to policymakers trying to tax company profits. The existing international tax system was designed in the age of brick-and-mortar commerce and only allows governments to tax firms with a physical presence in their country. To expand their tax bases, many countries, including France, Britain, and Italy, have proposed digital services taxes (DSTs) that tax companies based on their digital presence as well.

As of 2021, 15 of the 38 countries in the Organization for Economic Cooperation and Development (OECD) had proposed or implemented DSTs. Most share uniform characteristics and apply to gross revenues from digital advertising sales, the provision of digital services (including the maintenance of a digital platform or marketplace), and the sale of user data. To ensure they apply only to the largest digital firms, DSTs have minimum thresholds for global and domestic revenues earned inside the jurisdiction that must be met before firms are subject to taxation.

DSTs have come under scrutiny since their conception. US policymakers argue they discriminate against large US tech firms and give local businesses that do not meet the revenue thresholds a competitive advantage. The United States Trade Representative has considered imposing retaliatory tariffs on traded goods in response to foreign DSTs.

Firms have also criticized DSTs for leading to multiple taxation. Taxes applied to gross revenues, like DSTs, do not allow for cost deductions. The same input may be taxed multiple times if the firm made operating purchases within the jurisdiction. Similarly, if the headquartered country does not deduct DSTs paid abroad from the firm's corporate tax or income tax bills, the same profits may be taxed twice.

This PIIE Chart is based on Gary Clyde Hufbauer and Megan Hogan's blog, Canada's digital services tax threatens global effort to curb tax havens, and Policy Brief, The European Union renews its offensive against US technology firms.

Produced and designed by Nia Kitchin and Oliver Ward.


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