Over the past decade, the dramatic growth of digitally-enabled services, particularly those supplied by U.S. firms, provided a convenient target for countries looking to raise revenue without the political cost of burdening local firms. Justified by assertions that large foreign firms weren’t paying their “fair share” for the privilege of accessing a market (despite the fact that firms were taxed in their home jurisdictions) these discriminatory taxes on U.S. firms have surged, starting in 2019. Emerging in parallel to longstanding multilateral efforts to reform global tax practices, digital services taxes (DSTs) were a unilateral response borne of impatience with that process, and dramatically upended principles that have governed international corporate taxation for over 100 years: just as the United States does not assert a right to tax the profits a foreign company makes on a physical product exported to the United States, so too do we expect that country to refrain from taxing the profits generated by digitally-delivered services originating from firms located in the United States. But countries around the world are increasingly doing just that: adopting discriminatory taxation regimes that target U.S. firms offering cross-border services and exempting local competitors. The proliferation of such measures risks undermining U.S. exports, tax base, and trade relations with close allies. Although the situation has remained in precarious stasis for the past few years, 2025 appears likely to bring renewed activity on this front, with the incoming U.S. administration signaling interest in the issue.
Background: What are DSTs?
Technically, DSTs are a form of “turnover tax” that targets firms’ revenue generated from the delivery of digital services. DSTs typically use high thresholds and narrow service definitions to single out multinational firms that provide digital services to consumers, often disproportionately impacting U.S. companies by design. The United States has, on a bipartisan basis, opposed such taxes since they emerged, concerned with the damage they cause to significant U.S. interests. This concern was renewed by incoming United States President Donald Trump on his first day in office when he directed federal agencies to investigate and develop remedies for discriminatory taxation against U.S. companies as part of his trade policy priorities.
These discriminatory taxes undermine international tax cooperation between the U.S. and key trade partners, resulting in double taxation on U.S. firms, raising prices for consumers, and shrinking the U.S. tax base. While global tax principles allow governments to tax income generated by companies through assets they own in the country, governments adopting DSTs have targeted companies for simply providing cross-border digital services, undermining stable international commerce. DSTs operate as regressive taxes by nature, lowering cross-border investment and the supply of digital services while raising prices for everyday consumers. They also disproportionately affect start-ups with little or no profit, or any firm with low margins, since they tax revenues rather than profits. Finally, by subjecting U.S. firms to an extractive, foreign tax, DSTs erode the U.S. tax base, resulting in up to $23 billion annually of lost potential taxable revenue, threatening up to 31,000 U.S. FTE jobs, and reducing federal tax revenues by up to $5 billion.
Despite these harms, approximately 30 countries have adopted or proposed DSTs in recent years. These include key trading partners for the U.S., such as France, Italy, Spain, and the UK. In 2024, Canada followed suit, adopting a 3% DST on revenues from select online marketplaces, online advertising, social media, and user data services, that included most large U.S. digital service providers while conveniently excluding their leading Canadian competitors. This DST could cost U.S. firms up to US$2.3 billion annually, representing losses to both export revenues and the U.S. tax base, while impacting up to 3,140 U.S. jobs and raising costs for Canadian consumers. Canada’s ongoing experimentation with DSTs represents a valuable case study in understanding the harms of such policies. Even before Canada begins collecting its DST (first payments due this June), U.S. firms report that they have already paid approximately $10 billion for foreign treasuries.
Given these risks, DSTs have become a topic of focus in international forums. In 2016, the Organisation for Economic Co-operation and Development (OECD) and the G20 launched an Inclusive Framework to develop a new international tax agreement between 116 countries. As part of the Framework, some countries agreed to remove their DSTs as of October 2021, to allow for an agreement to be reached by June 30, 2024, on changing the rules for where companies pay taxes. However, negotiations have repeatedly stalled, raising the risk of DST contagion. Moreover, some countries participating in the OECD process have turned to the UN to establish a separate Tax Convention, paving the way for a potentially duplicative and competing tax framework.
In light of these challenges, the U.S. government has sought to challenge existing and proposed DSTs while seeking a broader solution at the international level. In 2020, the Trump administration launched Section 301 investigations into DSTs in ten overseas jurisdictions and concluded that several were discriminatory against U.S. companies, inconsistent with international tax principles, and burdened or restricted U.S. commerce. In 2021, the U.S. reached an agreement with Austria, France, Italy, Spain, and the UK, allowing DST liabilities accrued by U.S. companies to be credited under a future agreement at the OECD.
What to expect for 2025
However, with negotiations at the OECD stalling and the risk of DST contagion growing, the government has increasingly sought to engage on a bilateral basis. In August 2024, the Office of the U.S. Trade Representative launched consultations with Canada over its DST for potentially breaching commitments under the U.S.-Mexico-Canada Free Trade Agreement. In January 2025, President Trump announced an executive order directing the Department of the Treasury and the U.S. Trade Representative to investigate discriminatory taxes enacted or proposed by foreign governments to determine potential retaliatory measures.
2025 will serve as a critical year for realigning the track on international tax cooperation. Most immediately, the U.S. will undertake a review of existing and proposed DSTs to determine potentially retaliatory measures, providing incentives for foreign governments to strike bilateral agreements with the U.S. to pause DSTs and forge new compromises at the OECD. Moreover, governments will have to cooperate closely to avoid friction between the existing OECD process and the UN Tax Convention negotiations set to kick off in February. Absent meaningful progress on international tax cooperation in 2025, however, 2026 will likely see a rapid proliferation in DSTs, resulting in billions of dollars in costs to the U.S. tax base and export revenues, while lowering investment and digital services exports to foreign countries, undermining consumer welfare.
