Digital Services Tax Debate Intensifies

Denise Hatem
July 1, 2020

On 18 June 2020 European officials announced that an EU-wide digital services tax (DST) will be introduced if the US’s recent withdrawal from global tax negotiations stops international agreement.

The US’s withdrawal follows the United States Trade Representative’s (USTR) initiation of Section 301 investigations into DSTs adopted or proposed in the EU and nine countries. Section 301 of the Trade Act of 1974 is the main statutory authority under which the US imposes trade sanctions. Conduct actionable includes practices that are unreasonable or discriminatory and which adversely affect US commerce.

For more detail, here is an extract from the USTR’s notice:

“The US Trade Representative is initiating investigations with respect to Digital Services Taxes (DSTs) adopted or under consideration by Austria, Brazil, the Czech Republic, the European Union, India, Indonesia, Italy, Spain, Turkey, and the United Kingdom…The investigation initially will focus on the following concerns with DSTs: discrimination against US companies; retroactivity; and possibly unreasonable tax policy. With respect to tax policy, the DSTs may diverge from norms reflected in the US tax system and the international tax system in several respects. These departures may include: extraterritoriality; taxing revenue not income; and a purpose of penalizing particular technology companies for their commercial success.”

The investigation may be intended to compel delay or even retraction of DSTs. The USTR concluded in 2019 that the French DST discriminated against US digital companies, such as Google, Apple, Facebook, and Amazon. France has since postponed the introduction of DST until 2021 after the US threatened tariffs in retaliation.

Taxing the digital world

DSTs aim to capture revenue generated in the digital world by large foreign companies. Although technology enables active participation in foreign economies without physical presence, jurisdiction to tax requires physical presence under the current framework. Common features of DSTs include high revenue thresholds and narrow scope to ensure that only very big businesses operating in select sectors face the tax.

DST is hotly debated, though commentators on both sides agree that DST is one of the most fascinating and surprising global tax developments in recent years. Critics argue that the tax discriminates against certain countries and sectors, operates as a distortionary import tariff, violates state aid rules, results in double taxation, and will in turn be shifted to consumers. Those in favour argue that the tax is justified because digital platforms are undertaxed, current rules fail to recognize users’ role in generating income for digital companies, and that DST operates as a tax on location-specific rent.

Governments were previously expected to agree by July 2020 on a global solution to be implemented by the end of this year. Due to the COVID-19 pandemic, the agreement deadline has been extended to October 2020, but the year-end implementation deadline currently remains in place. It’s highly likely that the US’s withdrawal from global tax negotiations has now jeopardized this timeline.

Take Action

To learn more about what we believe the future holds, download Trends: Continuous Global VAT Compliance and follow us on LinkedIn and Twitter to keep up to date with regulatory news and other updates.

Sign up for Email Updates

Stay up to date with the latest tax and compliance updates that may impact your business.


Denise Hatem

Denise Hatem is a Regulatory Counsel at Sovos specializing in international taxation, with a focus on value added tax systems in the European Union. Denise received her B.A. from the University of Connecticut and her J.D. from Notre Dame Law School. She is a member of the Massachusetts Bar.
Share This Post

LATAM VAT & Fiscal Reporting
May 20, 2020
Sovos Acquires Taxweb, Extends Tax Determination Capabilities in World’s Most Challenging Compliance Landscape

Earlier this month Sovos announced its second acquisition of 2020, completing our solution for Brazil with an unparalleled offering that solves tax compliance in the place where it is most challenging to do so.  Too many companies doing business in Brazil have been burdened by managing multiple point solutions for continuous transaction controls (CTCs), tax […]

Tax Compliance
August 7, 2020
GAO Urges IRS to Overhaul 1099 Reporting for the Gig

A couple of weeks ago, the Government Accountability Office (GAO) released a report to the Senate Finance Committee describing the issues the IRS faces in enforcing income tax compliance for gig economy workers. The report highlighted long-standing issues the government has been grappling with in receiving tax information necessary to enforce compliance along with specific […]

EMEA VAT & Fiscal Reporting
August 4, 2020
New VAT Rules for Online Marketplaces and Imports of Goods into the UK

The United Kingdom’s HMRC has issued new guidance on the VAT treatment of cross-border sales of goods and online marketplaces beginning 1 January 2021, following the end of the transition period. Cross-Border Sales under £135 New rules will apply when a business sells goods for £135 or less to a UK customer and the goods […]

EMEA VAT & Fiscal Reporting
August 3, 2020
New EU Tax Package: VAT Priorities

On 15 July 2020, the European Commission (EC) adopted a new Tax Package, intended to increase tax compliance while reducing administrative burden on businesses. The Tax Package contains a number of proposals related to VAT, of which three in particular stand out: A single EU VAT registration for taxpayers; Modernized VAT reporting obligations; and Facilitated […]

August 3, 2020
Should Insurers Receive an IPT Holiday From Their Governments?

It’s been a tough year for businesses. Whilst many have accepted that 2020 is likely to be a year to forget, unfortunately tax still needs filing and paying. Tax authorities have been understanding – nobody could have foreseen this – and there has been a concerted effort to provide SMEs with tax relief and postponements […]

Asia Pacific E-Invoicing Compliance EMEA India
July 31, 2020
India: Last-Minute Changes to the Proposed E-Invoicing System

The October deadline is fast approaching for the Indian CTC invoicing mandate, but it remains a moving target. In a swift move that was published just two months prior to go-live, authorities have now changed the scope of who is affected by the reform, as well as updated the JSON format. Why the change? The […]