It’s Time to Abandon Digital Services Taxes for a Superior System

Digital services taxes will occupy a prominent place on the global tax agenda for 2026 because some EU nations will insist on their use and because a growing number of nations are realizing that DSTs may not be worth having—especially when an easy alternative already exists.

The Trump administration last year declared DSTs to be extraterritorial taxes “designed to plunder American companies.” The ripple effect was swift. Canada abandoned its DST following a threat to raise tariffs. India similarly halted its digital ad tax (a welcome move following the 2024 repeal of its 2% equalization levy). Malaysia and other Southeast Asian countries agreed not to tax US social media platforms, a significant concession and another example of a tax issue included in a trade deal rather than a tax treaty.

France, meanwhile, has indicated an interest in doubling its tax on the largest technology companies from 3% to 6% (though the proposal hasn’t yet been adopted by the National Assembly). This created a danger that the US will retaliate, upending the US-EU trade truce as the EU moves forward with trade plans.

The US view against DSTs isn’t simply an effort to prevent discriminatory taxation against a number of important US companies. It’s a strong statement in favor of the global digital economy, even as US companies face increasing domestic competition from local companies—both startups and established digital platforms.

Aside from discrimination against particular companies or countries—something that should be anathema in international tax—DSTs have a number of significant weaknesses. Unlike corporate income taxes, they are based on revenue, not profit, which discourages reinvestment of profits and magnifies the economic and business impact of low rates.

DSTs distort economic activity away from digital marketplaces. (Passing DSTs on to the ultimate consumers of digital services also distorts markets and raises prices for consumers.) The taxes pose a higher compliance burden for both platforms and other digital market participants. And they implicate data privacy concerns as tax complexity grows (ironically, given Europe’s focus on data privacy).

Then there’s the biggest weakness of all: DSTs simply don’t generate the revenue supporters breathlessly anticipated.

The Tax Foundation found disappointing revenue from DSTs. Italy, for instance, received only $536 million in 2024, while Spain received $442 million and even France only $891 million and the UK $956 million. Because this revenue forms a small part of overall revenue, the damage to growth of the digital economy isn’t worth the risk.

That conclusion is particularly valid when there is a better way: Value-added taxes.

Countries can expand VAT on digital services that platforms provide to sellers, attracting revenue with a lower administrative burden. VAT, as a neutral consumption tax, treats digital and non-digital businesses equally, avoiding discrimination against specific companies or countries of origin.

It is a broad tax that applies to business-to-business and business-to-consumer transactions. VAT also avoids double taxation, while DSTs generally can be used as a credit against other taxes.

Precisely because the digital economy is the most dynamic sector in many countries, tax policies must address how to promote investment and employment. Simple, transparent, and digitalized tax administration is one way.

More broadly, a pro-growth tax policy wouldn’t discriminate against certain companies or certain types of digital commerce. Countries could work to establish clear, unambiguous legal frameworks identifying the scope and responsibilities of taxpayers.

DSTs will be high on the tax policy agenda in 2026 because trade pressures from the US are colliding with an increasing realization that DSTs won’t produce the revenues their sponsors hope and that taxing the digital economy through VAT is better policy, more efficient, and more profitable.

Using this insight and the same spirit that avoided global confrontation over the US withdrawal from its commitments under the Organization for Economic Cooperation and Development’s Inclusive Framework, the world can once again avoid having tax policy reopen fresh wounds in global trade disputes.

A focus on shifting DSTs to a VAT framework would align tax policies for growth, which the global economy will need far more in 2026.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Daniel A. Witt is president of the International Tax and Investment Center headquartered in Washington, DC, and has worked on tax policy and administration reforms in transition and developing countries since 1993.

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