Trump Tariff Threats Put Countries With Digital Taxes in a Bind

Countries that have imposed digital taxes on tech giants such as Amazon.com Inc. and Meta Platforms Inc. are again under threat of retaliatory tariffs from President Donald Trump, forcing them to decide whether to resist or give in to his demands.

Dropping the tax could stir political ire from their citizens and risk losing much-needed tax revenue, but keeping the tax in place would have damaging economic effects by exposing them to steep tariffs and restrictions on US-made chips.

Alistair Pepper, managing director of KPMG’s Washington National Tax Group, said each country’s economic and political situation will inform how they react to Trump’s threats.

More than a dozen countries have a digital services tax, including the UK, France, Italy, Spain, Austria, and Turkey. The taxes are small levies placed on income made from online activities such as digital ad sales and e-commerce websites.

Both Spain and France “have revenue constraints—the French most significantly,” Pepper said. And while the French DST doesn’t raise much money, the political fallout from dropping the tax and the loss of revenue are real issues, he said.

But the issue of DSTs doesn’t exist in a vacuum. They are part of a broader list of concerns that the US has with its trading partners, including getting greater access to other countries’ markets for US products like cars and agriculture.

“None of these bilateral trade discussions revolve around a single issue,” said Pat Brown, partner and co-leader of PwC’s Washington National Tax Practice.

Thus countries—including the US—will have to decide how important a digital tax is within the context of a larger trade agreement.

“It may be with some countries that we have bilateral trade discussions with, that eliminating their DST is the single most important issue to the US,” Brown said.

Pepper, too, said the geopolitical calculus is different depending on the country. For the UK, for example, factors outside the realm of tax and trade, such as US support for the war in Ukraine, loom above these discussions.

The UK also has a “special relationship” with the US dating back to World War II and might be more willing to make concessions on its DST that other countries wouldn’t, Pepper said.

‘Top of Mind’

DSTs were first introduced by other countries during the first Trump administration. At the time, countries argued that tech companies like Facebook and Google should pay their fair share since they used citizens’ data to sell digital ads in their jurisdictions.

The levies were quickly panned by the first Trump administration. And since then, the US has maintained DSTs are discriminatory because they largely affect American companies.

Until the president’s recent social media post, the issue had lain somewhat dormant.

At the beginning of the second Trump administration, DSTs were named in a memorandum as discriminatory and subject to retaliation via tariffs. The issue reared its head once more in June when congressional Republicans named these kinds of levies in their proposed Section 899 legislation—the so-called “revenge tax” meant to increase levies on foreign-owned companies in the US if their parent countries were imposing what the US deemed “unfair” taxes.

That measure was eventually stripped from the GOP’s $3.4 trillion tax-and-spending bill.

Aruna Kalyanam, global and Americas tax policy leader at EY, said the issue of DSTs wasn’t getting much attention because a large part of administration’s focus has been to address concerns about the 15% global minimum tax.

But Trump’s social media post on Monday “was very much a reminder” that DSTs “are top-of-mind,” Kalyanam said.

Brown echoed Kalyanam, stating that “both parties in Congress and the Trump administration have made it abundantly clear that it’s an important issue that DSTs should be eliminated.”

Pillar One

Trump’s social media posts also raise questions about whether the US would be willing to reengage on a multilateral solution, known as Pillar One of the OECD-led tax pact, to halt existing and future DSTs.

Pillar One seeks to reapportion the residual profits of large multinational companies to the countries where their revenue is made. The reapportionment would be carried out by a multilateral treaty, known as Amount A.

However, Amount A talks stalled during the Biden administration over US demands that a separate portion of Pillar One, known as Amount B, be made mandatory for countries to adopt.

In an emailed statement to Bloomberg Tax, a Treasury Department spokesperson said that the US is solely focused on renegotiating large parts of the 15% global minimum tax, known as Pillar Two, at the OECD.

“These discriminatory unilateral measures undermine the stability of the international tax system and harm American companies and workers,” the spokesperson wrote.

“While we understand the interest in a path forward on taxation of the digital economy, we are singularly focused on working with countries to advance the Pillar 2 ‘side by side’ system announced by the G7 in June, which is currently being considered by the Inclusive Framework.”