Foreign Digital Services Taxes Are Bad, but the Alternatives Are Worse

"Earlier this summer, France briefly floated the idea of quintupling its digital services tax (DST), a tariff-like levy on services primarily provided by American tech firms. The proposal was pulled back almost immediately, but it highlighted something striking: A key piece of the international tax debate was completely absent from the Group of Seven's recent side-by-side agreement. DSTs were originally a pressure tactic."

"DSTs were originally a pressure tactic. They provided a means for European governments to force the United States into accepting the Organisation for Economic Co-operation and Development's (OECD) Pillar One proposal for a sweeping reallocation of multinational profits that would have transferred overseas the most dynamic part of the US tax base. Now that Pillar One has permanently stalled, DSTs will return absent a new agreement."

France briefly proposed quintupling its digital services tax (DST) before quickly withdrawing the idea, exposing DSTs' role in international tax debates and their absence from G7 accords. DSTs originated as a pressure tactic to coerce the United States into accepting the OECD Pillar One proposal, which would reallocate multinational profits to countries based on customer location regardless of physical presence. With Pillar One stalled, DSTs are likely to return. DSTs generally harm the domestic constituencies of the countries that impose them, target American technology firms through discriminatory revenue taxes, and represent distortionary measures rather than existential threats.

Read at Cato Institute