The Fate of Digital Taxes Will Soon Be Decided

1. Introduction

   
   

The Trump administration’s decision to withdraw from the "Global Tax Deal" effectively marks the end of Pillar One (Amount A). While the OECD continues to issue communiqués via the G20 and Inclusive Framework, insisting that work on Pillar One is ongoing, it’s worth noting that the newly appointed U.S. Treasury Secretary, Scott Bessent, did not attend the February G20 meeting, and the administration’s new chief delegate to the OECD has yet to be named. Once the new administration is fully in place, the U.S. is expected to formally announce that Pillar One — at least in its current form — will be abandoned.

This raises the question of what will happen to digital service taxes. If Pillar One is scrapped, the Inclusive Framework’s moratorium on new digital service taxes, which expired on December 31, 2024, will not be extended. In principle, this would free countries to adopt or expand digital service taxes.

But of course, it’s not that simple.

2. Republican Opposition and Planned U.S. Countermeasures

Republicans have been clear about their stance against countries implementing digital service taxes or similar legislation targeting the U.S. tech sector. The first Trump administration labeled digital service taxes as "discriminatory" and threatened retaliatory tariffs on adopting countries—a threat reiterated in President Trump’s January 20 memorandum this year. Additionally, Republicans introduced two bills in 2023 and 2025 — the Unfair Tax Prevention Act (H.R. 4695) and Defending American Jobs and Investment Act (H.R. 591)— aimed at imposing punitive taxes on companies headquartered in countries that enact "discriminatory or extraterritorial taxes" (i.e., digital service taxes or Pillar 2’s UTPR tax).

As if that weren’t enough, the Trump administration issued Presidential Actions on February 21 of this year, titled "Defending American Companies and Innovators From Overseas Extortion and Unfair Fines and Penalties." These directives urge U.S. agencies to (inter alia) swiftly identify countries with digital service taxes as candidates for retaliatory tariffs. Furthermore, last June, House Republicans passed a bill to defund the OECD, accusing it of "promoting digital tax schemes that target the American tax base"—though the Senate later rejected it.[1]

3. Chilling Effect on Global Digital Service Taxes

These threats have likely dampened enthusiasm for adopting or extending digital service taxes. Several countries took steps last year to address U.S. concerns that their taxes disproportionately target American tech firms. Italy, for example, lowered revenue and physical presence thresholds to nominally broaden the tax’s reach beyond U.S. tech giants. Kenya abolished its digital service tax altogether, instead expanding the definition of a permanent establishment to include "Significant Economic Presence." However, such adjustments are unlikely to appease the U.S., as Trump’s January 20 memorandum makes clear that the administration will attack any digital service tax that "disproportionately affects American companies" — a near-inevitability given U.S. dominance in tech.

4. What Happens Now?

The future of digital service taxes will likely be decided in the ongoing U.S.-UK tariff negotiations. The Trump administration has imposed a 10% tariff on all UK goods and a 25% tariff on British steel and auto exports. A Guardian article (April 2) suggests the UK’s digital service tax is part of these talks. The tax generates €0.9 billion annually, while the cost of U.S. tariffs on UK auto exports alone could exceed €2.5 billion. The British government may thus be tempted to scale back or even sacrifice its digital service tax in exchange for tariff concessions.

5. Global Implications

How the UK handles the digital service tax issue will inevitably impact the rest of the world. The European Commission negotiates trade policy on behalf of its member states—but not tax policy. Nevertheless, it is likely that digital service taxes will also be part of the tariff negotiations between the U.S. and the Commission. If the UK chooses to sacrifice or modify its digital service tax, the Commission will find it difficult to ignore this outcome in its own negotiations. It can therefore be assumed that the Commission is informally pressuring the UK to maintain a united front on the digital service tax issue.

The U.S. is actually well-positioned to exploit divisions among EU countries on digital service taxation. EU member states do not necessarily share the same economic interests. Highly export-dependent nations like Germany, the Netherlands, and Sweden are unlikely to make sacrifices on tariffs just to preserve digital taxes in France, Italy, Spain, and Austria. This will be especially true if the UK abandons its digital tax.

In fact, the current situation regarding digital taxes is not entirely unlike the OECD’s standoff with tax havens in the fall of 2001. The tax havens initially tried to maintain a united front against the OECD. But once the OECD secured a political agreement with one key jurisdiction, it triggered an immediate domino effect, enabling the OECD to swiftly reach similar agreements with most of the remaining tax havens. Expect therefore that the UK’s negotiation outcome on digital taxes trigger the same domino effect.

6. Final Remarks

If the UK succeeds in maintaining its digital service tax unchanged, other nations will likely achieve the same outcome. However, this merely postpones the digital service tax issue rather than resolving it. The U.S. will never allow digital service taxes to profilerate on a global basis. The sums at stake are ultimately too substantial for the U.S. to remain passive. A report commissioned by EU parliamentary groups shows that a 5% EU-wide digital service tax would generate €37.5 billion in 2026.[2] As noted above, the U.S. has alternative legislative tools at its disposal in the tax domain, should it choose to focus only on tariffs in the ongoing tariff negotiations.

Should the U.S. succeed in pressuring the UK to abandon its digital service tax, this would likely set a precedent for other nations. Yet if digital taxes disappear globally, the underlying issue on how to tax the digital economy will inevitably return to both the OECD and UN agendas. It is simply politically unsustainable in the long term for tech giants to operate extensively in market jurisdictions without facing any (meaningful) taxation.

A potential compromise where the UK maintains a modified version of its digital service tax would effectively achieve the outcome I advocated in Tax Notes International back in 2020[3] - creating an "approved" model that could temporarily serve as a global template. However, such an arrangement wouldn't prevent ongoing discussions at both the OECD and UN levels regarding comprehensive solutions."

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Footnotes:

[1] SeeTax Notes International, “Senate Bill Would Fund OECD Despite OECD Taxwriters’ Objections” (August 5, 2024).

[2] SeeTax Notes International, “5 Percent EU DST Would Raise €37.5 Billion in 2026, Study Says” (April 7, 2025).

[3] See Fensby, Tax Notes International,"Why Sweden Should Lobby for A Temporary OECD-Approved Digital Services Tax" (13 July 2020).