Digital services taxes have spread across Europe as governments look for ways to tax large digital companies and raise revenue, but the article argues they are a weak tool for funding the EU budget. DSTs raise relatively little money, can fall on consumers, create trade tensions, and reintroduce the problems of turnover taxes that Europe previously moved away from.
Why digital services taxes emerged
The debate starts with a gap in the international tax system. Under current rules, multinational companies generally pay corporate income tax where production occurs, not where consumers or users are located.
Supporters of digital taxes argue that digital companies can earn income from users in foreign countries without having a physical presence there, meaning those countries may not collect corporate income tax from the activity.
The OECD has been working with more than 140 countries on reforms known as Pillar One, which would shift some taxing rights over the largest multinational businesses to the countries where consumers are located. Pillar One was expected to replace unilateral digital services taxes, but negotiations have not produced an agreement that would eliminate them.
A digital services tax is different from a corporate income tax. It is usually a tax on selected gross revenue streams of large digital companies, not on profits.
The EU’s failed DST proposal
In March 2018, the European Commission proposed rules for taxing businesses with a significant digital presence. As an interim measure, it also proposed an EU-wide digital services tax.
The proposed EU DST would have applied a 3% tax to revenue from:
- Digital advertising;
- Online marketplaces;
- Sales of user data generated in the EU.
A business would have been in scope if it had:
- Annual global revenue above €750 million;
- EU revenue above €50 million.
The tax was estimated to raise between €1.3 billion and €5 billion per year for EU Member States. The upper estimate would have equaled about 0.07% of total EU tax revenues collected in 2024.
The European Commission did not obtain the unanimous support needed to adopt the proposal.
Unilateral DSTs in Europe
After the EU-wide proposal failed, several European countries introduced or considered their own digital services taxes.
Austria, Denmark, France, Hungary, Italy, Poland, Portugal, Spain, Turkey, and the United Kingdom have implemented a DST. Belgium, the Czech Republic, Germany, Latvia, Norway, Slovakia, and Slovenia have announced or considered similar taxes.
The designs vary widely:
- Austria taxes online advertising.
- Hungary also focuses on advertising revenue, though its effective rate has been reduced to 0%.
- Denmark applies its DST to streaming services.
- France has a broader base covering digital interfaces, targeted advertising, and transmission of user data for advertising.
- Turkey taxes online services including advertisements, content sales, and paid services on social media websites.
- The United Kingdom applies its DST to social media platforms, internet search engines, and online marketplaces.
Rates also differ. Poland’s implemented levy is 1.5%, while Hungary and Turkey had rates of 7.5% in some form. Turkey’s rate was reduced to 5% starting January 1, 2026, and is scheduled to fall to 2.5% from January 1, 2027.
Who pays the DST in practice
The article argues that the economic impact of a DST is closer to an excise tax than to a corporate income tax.
Corporate income tax is generally borne largely by shareholders. Excise taxes are often passed on to consumers through higher prices. Since lower-income individuals spend a larger share of their income, excise taxes tend to be more regressive.
Evidence cited in the article shows that some companies targeted by DSTs have passed the tax on to users. Apple, Amazon, and Google passed on the United Kingdom’s 2% DST. Google also explains that a DST-related charge is added in countries where ads are accessed.
A research paper by Dominika Langenmayr and Rohit Reddy Muddasani is cited as finding that attempts to target large digital platforms largely miss the mark because the cost mostly falls on European consumers.
Trade and retaliation risks
DSTs are described as discriminatory because they target industries dominated by U.S. companies. The U.S. government has opposed these taxes for years.
The article notes that President Donald Trump used Section 301 investigations during his first term, while the U.S. Congress more recently threatened the Section 899 retaliatory tax. Section 899 was removed from the One Big Beautiful Bill Act, but the DST dispute remains unresolved.
Until there is a consensus on taxing the digital economy, the article warns that retaliatory measures could harm all parties.
Design problems with DSTs
DSTs are levied on revenue, not profit. That means a company may owe tax even if the relevant digital service is not profitable in the taxing country.
This creates high effective tax rates for lower-margin businesses. The article gives the following example:
- A company has €100 in revenue and €85 in costs.
- Profit is €15.
- A 3% DST on revenue creates a €3 tax bill.
- That equals a 20% tax on profit.
The effective tax rate changes sharply depending on profit margin:
- At a 5% profit margin, a 3% DST equals a 60% effective tax rate on profit.
- At a 25% profit margin, it equals 12%.
This means lower-profit companies bear a heavier effective burden. The article argues that DST bases relate poorly to profits, cash flow, or ability to pay.
DSTs can also cause tax pyramiding. Unlike VAT, they do not include a credit system for tax already paid earlier in the supply chain. The same activity can be taxed multiple times, magnifying effective tax rates and distorting economic decisions.
DSTs may also tax business inputs, such as advertising and cloud computing.
Size discrimination and compliance costs
Many DSTs apply only to companies above large revenue thresholds. This can reduce administrative burden, but it also gives smaller companies below the threshold a relative advantage and may encourage firms near the threshold to change behavior.
Because thresholds are not adjusted for inflation, more companies may fall into scope over time.
Digital businesses may also be put at a disadvantage compared with non-digital businesses operating in similar markets.
DSTs create compliance and administrative costs. Governments must write rules, administer the tax, and enforce it. Businesses must identify user locations and calculate taxable revenue. Since national DSTs differ, companies face added complexity across countries.
The article notes that Europe replaced turnover taxes with VATs in the 1960s to improve the cross-border market. DSTs are presented as reintroducing the negative economic effects of turnover taxes.
The European Economic and Social Committee raised concerns in 2018 that DSTs could shift resources toward larger Member States and disadvantage smaller ones, weakening cohesion in the Single Market. Finland, Sweden, and Denmark also expressed concerns about effects on innovation and competitiveness.
Revenue raised by DSTs
The article says DSTs raise small amounts of revenue relative to government budgets.
In countries that separately report DST revenue, recent annual collections ranged from:
- €137 million in Austria;
- €1.04 billion in the United Kingdom.
In every case reviewed, DST revenue was less than 1% of general government revenue.
Turkey collected the most relative to total government revenue, at 0.24%. The United Kingdom was around 0.1%. Italy, France, Austria, and Spain were lower, between 0.05% and 0.07%.
VAT as an alternative
The article argues that if the goal is to raise revenue from digital services, the EU should focus on improving VAT rather than expanding DSTs.
Digital services are often already included in the VAT base. EU VAT rules have also been updated so that non-EU businesses must register and remit VAT in the Member State of the consumer, taxing digital services at the point of consumption.
Revenue from these VAT measures increased sharply:
- €3 billion in 2015;
- €4.5 billion in 2018;
- €20 billion in 2022;
- More than €33 billion in 2024.
The 2024 VAT figure is about seven times higher than the upper-end revenue estimate for an EU-wide DST.
The article argues that expanding VAT to cover all digital services would allow Member States to eliminate DSTs.
EU budget implications
VAT is already one of the EU’s own resources, but VAT-based resources accounted for only 9.5% of EU total revenue in 2024, down from 60% in 1988.
The article attributes this decline to policy reforms that reduced both the VAT base and the VAT rate used for own resources.
Broadening the VAT base by eliminating reduced rates and exemptions could increase Member State VAT revenue by up to €773 billion, described as four times the EU 2026 Budget.
Even without changing current rules for VAT-based contributions, that additional national VAT revenue could translate into about €2.3 billion for the EU budget, slightly above the lower estimate of €1.3 billion for an EU-wide DST.
If the VAT call rate were increased from 0.3% to its historical level of 1%, additional EU budget revenue could rise to about €7.7 billion.
Policy conclusion
The article argues that DSTs are not a strong solution for the EU budget. They generate limited revenue, can shift costs to European consumers, discriminate between firms and sectors, create compliance burdens, and risk trade retaliation.
The preferred alternative presented is stronger VAT collection and a broader VAT base. VAT is described as less distortive, trade-neutral, and non-discriminatory between firms.
The article’s conclusion is that policymakers should rethink DST expansion or an EU-wide DST and instead move toward abolishing DSTs while improving VAT-based revenue collection.
Source article: taxfoundation.org
