Note: This analysis is part of our series on geopolitical tensions in digital policy. The series starts by dissecting a recent US memorandum that scrutinises different types of foreign digital policy. Topical pieces, including this, then distill the global state of affairs and explain the cause of geopolitical tensions in one type of digital policy.

The taxation of the digital economy is central to geopolitical tensions in digital policy. The recent US memorandum instructs authorities to scrutinise digital services taxes and other foreign regimes that may subject US companies to discriminatory or extraterritorial taxes. Below, we outline how governments are taxing the digital economy and why this contributes to geopolitical tensions, building on the Digital Policy Alert database.

Digital service providers can enter markets and generate revenue without establishing a physical presence. Some governments argue that, as local residents generate value for foreign digital service providers, these providers should generate tax revenue for the government. Novel tax regimes thus require foreign digital service providers to pay taxes even without a local physical presence. 

Taxes on the digital economy can be direct or indirect. Direct taxes, such as income tax, are imposed directly on company revenues or profits. They include “digital services taxes” (DSTs) and, imposed on revenues generated by providing digital services to local users. Indirect taxes can be passed on to others, for example consumers. They include value-added taxes, goods and services taxes, and sales taxes, which can extend to digital services. 

The Digital Policy Alert has documented 194 binding policy developments regarding the taxation of the digital economy at the national and EU level, as of 7 April 2025. 74 developments concerned direct taxes, 74 indirect taxes, and 48 other elements of taxation, such as procedures.

 Our findings on direct taxes include: 

• DSTs, the core of geopolitical tensions, were adopted across continents. Recently, Colombia, Kenya, Nigeria, and Malaysia, among others, joined Austria, Canada, France, Italy, Spain, Turkey, and the UK in imposing a DST. Other governments announced DSTs, for instance Rwanda, or proposed but did not adopt DSTs, for example the EU and Brazil. India recently announced the revocation of its “equalisation levy” on digital advertising.

• 43 developments were adopted or already in force, while 25 were under deliberation and six were rejected or revoked. 

• A large majority of direct taxes targeted the entire digital economy. Single proposals focused only on e-commerce.

 Our dataset on indirect taxes demonstrates that: 

• The most active jurisdictions were Indonesia, Kenya, Mexico, and the EU. 

• Almost all the developments were adopted or in force (63) and only few proposals were currently under deliberation.

• Close to half (34) of the developments applied to the entire digital economy. Sector-specific indirect taxes most commonly targeted e-commerce (24) and digital payment providers (12).

Canada implemented a 3% DST in June 2024. 

• The DST applies to domestic and non-resident businesses whose global yearly revenues exceed EUR 750 million and whose revenues derived from providing digital services to Canadian users exceed CAD 20 million (approx. USD 14 million). In-scope digital services include online marketplace services, online advertising services, social media services, and user data sales.

• The DST retroactively covers revenues earned since 1 January 2022, with first payments due on 30 June 2025. The deadline for DST registration, subject to a lower threshold of CAD 10 million (approx. USD 7 million), was 31 January 2025. The DST was previously postponed (see below).

• Certain firms, for example Amazon, have imposed a “DST fee” as a reaction to the DST.

As of 1 July 2021, digital economy businesses have indirect tax obligations regarding the goods and services tax (GST) and the harmonized sales tax (HST). 

• Non-resident vendors supplying digital products or services, such as online music streaming, to consumers in Canada must register for, collect and remit GST/HST. The same applies to non-resident vendors who supply qualifying tangible goods, for instance goods delivered or made available in Canada.

• Non-resident distribution platform operators, that facilitate the supply of digital products or services or qualifying tangible goods to Canadian consumers, must also register for, collect and remit GST/HST. 

• Short-term accommodation supplied through accommodation platforms is also subject to GST/HST. Either property owners or accommodation platform operators must register for, collect and remit GST/HST.

The memorandum claims that foreign taxes on the digital economy cost US companies billions of dollars and that DSTs are “designed to plunder American companies.” The core of the tensions is the alleged appropriation of revenues by foreign governments: Tax regimes often apply based on revenue thresholds (analysed in depth in another piece of this series) and many of the world's largest digital service providers are US companies. 

DSTs have contributed to geopolitical tensions before:

• In 2019 and 2020, the first Trump administration launched investigations into eleven DSTs under Section 301 of the Trade Act. It subsequently issued seven determinations, against Austria, France, Italy, Spain, Turkey, the UK, and India, proposing additional 25% tariffs on selected products.

• In 2021, the Biden Administration reached a transitional arrangement with several countries, to delay their DSTs or credit them against future tax obligations and in exchange avoid retaliatory tariffs. These arrangements were made in view of the OECD/G20 Inclusive Framework on Base Erosion and Profit, to which 137 countries agreed in October 2021. 

• As the implementation of the Inclusive Framework stalled, some countries extended their transitional arrangements, while others started implementing their DSTs. Canada, for instance, stated its preference for an international solution, but announced that it would impose its DST if the Inclusive Framework was not implemented by 2024. The Inclusive Framework, however, is yet to be implemented – the US recently withdrew. 

• In 2024, when Canada implemented its DST, the Biden administration announced dispute settlement consultations under the US-Mexico-Canada Agreement (USMCA). The US contended that the DST discriminates against US companies, violating commitments under the USMCA's Cross-Border Trade in Services and Investment chapters. 

• In 2025, the Trump administration instructed agencies to scrutinise foreign digital services taxes through both the Section 301 and the USMCA mechanism (for Canada). 

Geopolitical tensions concerning indirect taxes on the digital economy are more novel. The "destination principle" of international taxation, as per the OECD guidelines, allows for value-added-tax (VAT) to be retained by the country where the taxed product is sold. Since VAT collected on imports should be rebated on exports, indirect taxes are generally less controversial than direct taxes on the digital economy. The Trump administration is, however, specifically scrutinising VAT regimes. A recent memorandum that demands an examination of non-reciprocal trade relationships explicitly mentions VAT regimes. Novel indirect tax regimes, including the recently adopted EU VAT in the digital age package, are thus on the radar.

The next steps are different for direct and indirect taxes, both in terms of responsibilities and timeline. Direct taxes will be scrutinised by the US Trade Representative (USTR), in a report expected in April 2025. In particular, the USTR will determine:

• whether to renew investigations of the DSTs of France, Austria, Italy, Spain, Turkey, and the UK initiated by the first Trump administration;

• whether to investigate the digital services taxes in other countries; and 

• whether to pursue a panel under the USMCA on Canada's DST, and whether to investigate Canada’s DST under section 302(b) of the Trade Act. 

Other tax regimes will be scrutinised by the Secretary of the Treasury, in consultation with other authorities. Their report will determine whether any foreign country:

• subjects US citizens or companies to discriminatory or extraterritorial taxes (in the digital economy or beyond); or

• has any tax measure that otherwise undermines the global competitiveness of US companies, is inconsistent with any tax treaty of the US, or is otherwise actionable under tax-related legal authority. 

To prepare for these next steps, foreign governments should analyse whether they impose direct or indirect taxes on the digital economy and consider the tariffs threatened by the first Trump administration as a response to seven DSTs. Our analysis crunches the numbers: Targeting up to 67 products per country, the total coverage of these tariffs would be approximately USD 5 billion worth of imports, if implemented today.