A digital services tax (DST) is not an income tax and, as we argue in our article “Digital Services Taxes, Tariffs and Subsidies”, therefore analysing it solely within an intellectual and institutional framework developed for income tax may not be helpful. The concerns about revenue, prices and the competitive relationship between suppliers, which lay behind both the justifications and criticisms of DST, are not specific to the DST but are the core concerns of international trade law. Therefore, examining the case for DST through a trade policy lens is insightful, even if some conclusions may be jarring for readers familiar with the international tax regime.
The existing arguments about the purpose and effect of DST have not generated a consensus. Trade policy analysis helps appreciate that the truth is in the eye of the beholder. For example, for the United States, a third country’s DST may be a tariff but for implementing countries, it may be an anti-subsidy measure.
The use of trade measures to attack DST and DST to address a core trade policy subject may therefore be justified countermeasures. A trade policy perspective might not change the minds of those opposed to DST but may provide an intellectually satisfying framework for those that favour DST. It can also help tax policymakers and scholars to realise that in the real world of trade in services, the boundaries between tariffs, internal taxes, tax breaks, and subsidies are not always sharp.
DST as a tariff
The assertion that the DST is a tariff in the business press presumably aims to link DST with negative connotations. Tariffs may be welfare decreasing, discriminatory, and are often associated with populism, economic nationalism, and trade wars. However, tariffs, in certain circumstances, may be welfare enhancing and domestically and internationally politically advantageous.
Governments have never stopped imposing tariffs to protect and promote domestic industry, respond to domestic political pressure and lobbying, raise tax revenue, offset environmental or other externalities, and enhance national security, or use them as a form of economic coercion. In 2005, the World Trade Organization (WTO) Appellate Body in European Communities – Customs Classification of Frozen Boneless Chicken Cuts stated that: “Tariffs are legitimate instruments to accomplish certain trade policy or other objectives such as to general fiscal revenue. Indeed, under the General Agreement on Tariffs and Trade (GATT) 1994, they are the preferred trade policy instrument …”.
The General Agreement on Trade in Services (GATS) does not regulate “tariffs” on services as such. Nor does it assume that all discrimination should be prohibited but accepts that members may have policy or political reasons for maintaining discriminatory measures against foreign services and service suppliers.
Together, this means that even if a third country’s DST may appear to be a tariff and a discriminatory tax that does not make it illegitimate or automatically undesirable. Trade policy analysis suggests DST may also be welfare enhancing for a country where the cross-border supply of a service occurs in non-competitive markets, which is the case with online advertising and some other digital services.
DST as an anti-subsidy measure
A DST may also, depending on its design, be viewed as a subsidy granted to local digital firms or an anti-subsidy measure. An anti-subsidy measure in this context may be defined as a response to a foreign subsidy provided to the supplier of cross-border digital services, and therefore similar to countervailing duties permitted under the WTO Agreement on Subsidies and Countervailing Measures. In non-competitive markets, a subsidy to domestic suppliers can eliminate or reduce the harm to national welfare caused by a distortion arising from the lack of competition. If the lack of competition is linked to subsidies provided to foreign suppliers, the subsidy to domestic supplies is in effect a type of anti-subsidy measure.
Consider the Court of Justice’s decision in European Commission v Ireland [Case C-465/20 P, European Commission v Ireland, EU:C:2024:724]. The profits in question were received by two companies incorporated, but non-resident for tax purposes, in Ireland from intellectual property licenses. Ireland and Apple claimed the profits were generated by employees of other companies in the Apple group, in particular, the parent company of the group Apple Inc based in the United States, that did not pay tax in Ireland. Importantly, the profits were not taxed in the United States. The tax break could in principle come from supplying the services indirectly through a low or no-tax jurisdiction. The use of low tax jurisdictions as a part of tax planning strategy by platform firms supplying services overseas is commonplace. When combined with a lower effective rate of corporate tax paid by these firms relative to the rate paid by firms supplying in the domestic market or the overseas market without intermediaries in low-tax jurisdictions, these tax planning strategies may evidence financial support by the home state.
Market jurisdictions arguably have a moral right and often a political imperative to respond to such support through tax laws and arrangements that harm domestic firms with anti-subsidy measures, including by introducing a countervailing duty on the cross-border supply of services to level the playing field. That tax will de-facto operate as a subsidy to domestic businesses facing unfair competition from foreign businesses that use third countries (low tax jurisdictions) to minimise their overall tax burden and therefore gain a competitive advantage over their rivals. While not functionally identical to a countervailing duty, a DST may play a similar anti-subsidy role.
While DSTs do not require supply through low-tax jurisdictions, they have arisen as a response to international tax planning arrangements using low-tax jurisdictions. A platform firm can avoid the allegations of being subsidised by supplying directly from its home jurisdiction, assuming it is subject to normal tax rates. However, as long as this firm prefers to use low-tax jurisdictions, the case for DST as an anti-subsidy measure against this firm will be stronger.
If an undistorted market is the appropriate benchmark, assessment of the efficiency or equity of a subsidy affecting the cross-border supply of services requires a multi-market perspective. If DST is a potential subsidy to any competing local firms, the ‘subsidy’ provided to smaller or local firms in the market jurisdiction should, as a matter of fairness, be seen in the light of the level of support provided to DST-targeted digital platform firms in both their home and low tax jurisdictions. In some circumstances, DST might be an appropriate countermeasure. While a comparison across jurisdictions is not how anti-subsidy rules are framed in trade law, such comparisons are the grist of trade negotiations.
New Subsidy Reality
Many states have committed to Pillar Two, an international tax framework requiring large multinational enterprises with over €750 million in annual revenue to pay a minimum 15% effective tax rate on profits in every jurisdiction they operate in. This has led to a new wave of international competition where states will attempt to subsidise local business in various ways other than through a low rate of or exemptions from income tax. The United States is not implementing Pillar Two, which means it can offer its residents low rates of income tax without them becoming subject to the minimum tax rules of other states. These developments come at a time when all of the major economies have been increasing the use of subsidies as part of their industrial policies.
The concept of a subsidy under the World Trade Organisation (WTO) is broad but criticised by several governments for not capturing important forms of government support. Some states are pushing the geographic and conceptual boundaries of the regulated subsidies through a variety of unilateral measures. To address international tax competition, the concept of a tax subsidy or support should also be approached without the artificial limitations inherent in existing trade rules. We argue that a tax subsidy is not only an exception from the usual tax rules but may be created by broader features of a domestic tax system and international tax agreements that allow for lowering the effective tax rate on cross-border service suppliers relative to their foreign competitors.
The GATS does not prohibit subsidies for services. WTO Members are unlikely to agree on disciplines for subsidies for services any time soon. It is unclear why DST should be singled out for prohibition beyond the non-discrimination obligations in the GATS and other trade agreements.
In a world of aggressive and evolving tax planning strategies and tax competition that erode national tax bases, fewer broad distributional policies can be implemented. Market jurisdictions and many of their people are also concerned about the inequities resulting from giant digital platforms earning substantial profits in market jurisdictions without paying significant income tax and having much lighter overall tax burden than standalone firms and many other non-digital businesses. The root of many of these concerns is the subsidies these digital platforms receive in the form of under-taxation. The DST allows to mitigate the effects of such subsidisation.
The imposition of DST also helps create a level playing field between local and foreign digital platforms and between digital platforms and traditional media. The conventional separate entity approach to taxation of multinationals arguably has not allowed effective (and fair) taxation of digital multinationals and many cross-border service suppliers. Amount A in the Pillar One Solution was a global acknowledgement of the under-taxation of digital multinationals in market jurisdictions and the practical necessity of looking at a multinational group for the purposes of specifying a right to tax the supply activities in individual market countries. In light of the inability of the United States to implement Pillar One, DST may be the best reasonably available alternative to the reallocation of taxing rights related to income from the cross-border supply of digital services. DSTs do not trespass on the territory occupied by the current international tax regime and, if they are coordinated, whether through unilateral or collective action, will not lead to juridical double taxation.
The new willingness to target subsidies granted to firms supplying cross-border services raises questions about the tax practices to which DST is at least in part a response. Aspects of international corporate tax rules of the United States have been successfully challenged in the General Agreement on Tariffs and Trade (GATT) and WTO as export subsidies. Unilateral measures in response to foreign services subsidies are free from compliance with the WTO Agreement on Subsidies and Countervailing Measures definition of a subsidy. Multinationals that avail themselves of sophisticated tax planning opportunities that are not open to wholly domestic digital services firms may well be perceived as being subsidised in one or more jurisdiction, whether or not the total amount of a group’s tax is ‘normal’.
This blog is based on: Noonan Chris and Victoria Plekhanova (2025) “Digital Services Taxes, Tariffs and Subsidies” Canadian Tax Journal volume 73 issue 3.
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