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How taxation of digital services is again a concern for businesses

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9 minute read 12 Aug 2025
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E-commerce
Global tax reform
Tax

As BEPS 2.0 Pillar One progress stalls, businesses worry that digital services taxes are back on the agenda for some governments.

In brief

  • Governments are reassessing digital services taxes and other source taxation measures on digital services as the momentum driving multilateral reform falters.
  • The potential for more DSTs and expanded nexus rules targeting digital services increases business complexity, uncertainty and operational costs.
  • Tax leaders are revisiting governance, data systems and cross-functional alignment to prepare for further digital tax changes, whatever form they take.

A renewed focus on digital services taxes (DSTs) and other unilateral measures to tax the digital economy, effectively under a moratorium while governments negotiated key multilateral tax reform details in recent years, is emerging again as a concern for businesses.

Pillar One of the OECD’s base erosion and profit shifting (BEPS) project was intended to require participating jurisdictions to abandon DSTs and similar measures but has stalled in the last year. As a result, the DST “standstill” that was agreed among members of the Inclusive Framework on BEPS has expired and those jurisdictions with pre-existing DSTS are collecting significant revenues, while other countries are considering DSTs and other unilateral measures to tax the digital economy. Now, the forthcoming 2025 EY Tax Risk and Controversy survey finds businesses are ranking DSTs as the No. 1 source of future tax risk.

The situation became more complex in January, when US President Donald Trump issued an executive order1 on his first day in office declaring that that “OECD Global Tax Deal has no force and effect in the US.” That initial announcement might have encouraged governments to consider introducing unilateral measures that will fill the resulting void; however, it was followed by a February White House memorandum2 specifically aimed at discouraging DSTs and similar measures levied on US businesses. This leaves countries to contemplate a complex tradeoff between the revenue gains of exercising source taxation over digital businesses and the strong deterrent posed by threatened US retaliatory action.

“The first half of the year has been marked by explicit and implicit departures from multilateral commitments,” says Craig Hillier, EY Global International Tax and Transactions Leader. “It seems we’re entering a far more transactional world now, where tax and trade decisions are increasingly shaped by short-term national interests rather than long-term consensus building.”

1

Chapter 1

DST adoption was largely deferred by BEPS 2.0 Pillar One

Delays to Pillar One have weakened global consensus, prompting renewed interest in DSTs across Europe, Asia and Latin America, despite early expectations they would be phased out.

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The BEPS 2.0 Amount A framework was originally designed as an alternative to unilateral DSTs and other source taxation measures to tax the digitalized economy as part of a deal that would reallocate taxation rights over digital company profits based on user location and engagement.
 

"In 2021, more than 140 countries agreed in principle to abandon DSTs if Pillar One could be implemented,” says Liam Smith, Director, Indirect Tax at Ernst & Young LLP. “They hit the pause button and that was effectively the end of DSTs as long as an agreement could be made.”
 

Yet adoption of the broader reform agenda has proven to be challenging. Pillar One was intended to lay the groundwork for Pillar Two, but the global minimum tax moved forward first – without securing US legislative approval. That reversal left the original framework incomplete, with Pillar One still unresolved.       
     

In June, the US administration reached an agreement with other members of the G7 to exclude US parented groups from the Income Inclusion Rule and Undertaxed Profits Rule under Pillar Two, effectively permitting the US system for taxing globally low-taxed income to coexist alongside Pillar Two. This agreement will now be considered by the Inclusive Framework more broadly and attention will turn to reaching a more comprehensive deal to implement such a compromise. Manal Corwin, director of the OECD Centre for Tax Policy and Administration, told the European Parliament’s subcommittee on tax matters in May that discussions about Pillar One “will have to wait” until the US concerns about Pillar Two are resolved. “It’s important to stabilize and create certainty there,” Corwin said.
 

Ecommerce Europe, a trade group, in March warned the OECD about new risks that DSTs would again proliferate and asked for a new hiatus pending resolution of Pillar One issues.
 

“Allowing the expiration of the DST moratorium without follow-up and coordinated measures risks leading to the reintroduction of unilateral tax regimes such as DSTs at national level, creating double taxation, economic distortions, as well as risks of retaliatory tax and trade measures, resulting in uncertainty for businesses operating cross-border,” wrote Luca Cassetti, the group’s secretary general.
 

Many DSTs were originally framed as temporary measures, intended to sunset once a global deal was reached. “They were meant to fill a gap until Pillar One arrived,” says Michel Zeegers, a partner focusing on indirect tax issues at EY Belastingadviseurs B.V. in the Netherlands. “But with Pillar One stalling, countries moved ahead anyway and that’s why we’ve already seen DSTs implemented.”

2

Chapter 2

A new wave of DSTs brings broader scope and deeper compliance burdens

DSTs are expanding in scope and reach, capturing firms beyond big tech. Divergent rules and thresholds raise compliance risk across sectors and jurisdictions.

Today, some countries are assessing whether to expand the scope of their DSTs; Italy, for example, removed its DST domestic revenue threshold. There has also been much discussion regarding the potential adoption on a unified EU DST, but for now these ideas have been paused. Beyond DSTs, other countries are assessing whether to introduce alternative means to target digital activity, with Nigeria and Vietnam, for example, enacting expanded tax nexus rules based on significant economic presence that target digital services primarily performed outside those countries. Meanwhile, Indonesia and others have expanded their value added tax (VAT) regimes to apply to digital services. Canada, on the other hand, had initially introduced a retroactive DST in 2024, backdated to 2022, but has since withdrawn that levy in response to US trade pressure. India similarly withdrew its equalization levy this year on digital advertising revenues. It is likely that other jurisdictions have also been deterred in the short term by potential US trade pressure and retaliation.

We're heading into a world where companies could face very different DST rules, thresholds and reporting obligations across multiple jurisdictions.

Liam Smith

Director, Indirect Tax at Ernst & Young LLP

In some jurisdictions, companies previously well outside of scope may now be affected. “I was speaking with representatives from a private start-up recently, who had just realized they are going to exceed the DST revenue threshold in every European country with a DST,” says Anne Freden, the US VAT practice leader at Ernst & Young LLP in the US. “They were surprised at how low the threshold is. In practice, some DSTs capture far more companies than they were expecting.”3

The unilateral nature of DSTs means they often diverge in scope, threshold, and administration:  France uses group-level returns, Spain uses entity-level, and the UK has a more streamlined, centralized approach to DST compliance. In Spain, compliance can be particularly complex. Even individual provinces now require separate DST filings, adding another layer of administrative burden.

"We're heading into a world where companies could face very different DST rules, thresholds and reporting obligations across multiple jurisdictions," Smith says. And increased risk is not just an issue for tech giants. Ancillary services such as rewards and loyalty platforms that function like e-commerce or advertising services, generating revenue from user engagement or third-party partnerships, or travel and booking platforms that generate revenue through service fees or commission-based models may also find themselves in scope, as these digital transactions can have the same revenue structure as online marketplaces. 

3

Chapter 3

DSTs spark retaliation risk and test corporate tax readiness

DSTs risk renewed US trade action and expose gaps in corporate tax operations as teams struggle with data silos, new rules and rising global compliance complexity.

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As DSTs come under renewed focus, so too will the risk of retaliation, especially from the US government. President Trump’s February memorandum directed the US Trade Representative to investigate DSTs imposed by other countries and to consider tariffs on jurisdictions targeting US tech companies.4 Section 891 of the Internal Revenue Code, which grants the president the authority to double tax rates on foreign citizens and corporations, has also been mentioned publicly by the administration. The legislation, enacted in 1934, has never been used, however, and as such, there is uncertainty about how it would be enforced.
 

More recently, the US Congress had proposed a new section 899 of the Internal Revenue Code for inclusion in the major tax legislation just recently signed into law. The provision generally would have applied a retaliatory tax increase and increased base erosion taxes on companies headquartered in countries with certain discriminatory taxes, including DSTs. US Treasury negotiations with the G7 countries and discussions with the inclusive framework resulted in the provision ultimately being dropped from the final legislation, but bipartisan Congressional opposition to DSTs remains.
 

Freden warns that in an escalating trade conflict the US digital economy may become a retaliatory target. The risk of tit-for-tat measures will not be limited to major economies. Smaller nations reliant on US trade and investment may find themselves caught in the crossfire – forced to balance the need for digital tax revenue with the potential for trade repercussions.
 

The shift from coordinated tax reform to unilateral DSTs and other similar measures is likely to significantly increase costs and operational strain for tax teams. While the cost of complying may be high, according to Smith, it may double or even triple if tax leaders attempt to achieve compliance retrospectively.
 

Zeegers says many tax teams are not prepared for this additional workload. He notes that DSTs are disruptive because corporate tax departments simply aren’t structured to manage them. For example, the data needed to calculate tax exposure often sits outside the tax function. Unlike VAT or corporate income tax, DSTs rely on input from teams beyond finance, such as sales, marketing, product and IT, where the relevant data typically resides. This often forces tax teams to work across disconnected systems and functions, with no clear ownership or established process.
 

Most corporate tax teams were built to manage traditional direct and indirect taxes. They are not set up for transaction-based levies that rely on near real-time, user-level data drawn from digital platforms, Zeegers says. As a result, many tax teams lack the systems, governance frameworks and cross-functional coordination needed to respond effectively.
 

As a result of these challenges, compliance becomes fragmented, time-consuming and prone to error, especially where manual workarounds are needed to fill data gaps or standardize inputs across jurisdictions. This shift toward digital-specific taxation highlights the limits of legacy tax operating models and points to the need for new capabilities, including agile data access and deeper collaboration across the business.

4

Chapter 4

Strategic implications for corporate tax teams

As DSTs evolve, tax is becoming an ever more strategic, cross-functional role shaping business decisions, managing trade risks and requiring near real-time data to support planning and transparency.

The potential rise of DSTs and other similar measures is an example of how the tax function is taking a more proactive role within businesses. Hillier notes that the tax function is becoming more visible and forward-looking, with transparency now extending beyond compliance to how a company presents itself to regulators, stakeholders and markets.

This expansion of scope is drawing on expertise from adjacent areas, particularly professionals with knowledge of global trade and tariffs. Many of these individuals sit outside the traditional tax function but are increasingly contributing to policy discussions and scenario planning.

The tax function’s evolving role is also changing how leaders plan and respond. Agility is becoming essential as new risks emerge, and tax decisions increasingly intersect with trade, investment and operational strategy. Some organizations are already mapping their exposure to jurisdictions that may introduce retaliatory measures and using those insights to reassess US investment decisions. Others are reviewing ways to optimize their classification codes and reporting structures to improve risk assessment.

Readiness also depends on the right data infrastructure. Smith notes that the importance of near real-time access to granular information such as IP addresses, user accounts and platform interactions demands a cultural shift. The function must evolve beyond a compliance-focused mindset toward one based on strategic communication, risk management, and long-term value.

5

Chapter 5

Navigating DST complexity: 4 priorities for tax leaders

As DST complexity grows, tax leaders are prioritizing exposure mapping, data infrastructure, cross-functional governance and scenario planning to manage digital tax risk across jurisdictions.

The growing complexity of DSTs is prompting many tax leaders to reassess how they manage digital tax risks across jurisdictions. To confront the risk, businesses should:

1. Identify exposure and track policy change

  • Audit global digital revenue streams to assess current and potential DST exposure.
  • Track DST thresholds, rate changes and retroactive applications across jurisdictions.
  • Monitor adjacent developments, including DAC7, expanded nexus rules and VAT rules for digital services.

2. Build data capability and infrastructure

  • Invest in data systems that capture digital revenue in near real-time, user activity and platform interactions.
  • Collaborate with IT and analytics teams to develop dashboards that support DST and VAT compliance.

3. Clarify governance and align strategy

  • Define clear ownership for DST compliance within the tax or finance function.
  • Align tax with legal, trade, operations and technology teams to ensure a coordinated response.
  • Train tax and finance teams to recognize DST triggers and jurisdiction-specific rules.

4. Enhance resilience and respond to future risk

  • Model scenarios involving overlapping tax regimes and evolving reporting requirements.
  • Reassess supply chain and entity structures to find ways to manage DST exposure.
  • Create contingency plans to address potential trade friction or sudden policy shifts.

The changing policy landscape surrounding DSTs and similar measures is once again gaining attention. While the long-term trajectory of these measures remains uncertain, recent developments suggest that tax teams are operating in a more reactive environment than in previous years. Current considerations reflect a convergence of pressures including the expiration of the Inclusive Framework’s DST stand-still and the possibility unilateral DSTs and other similar measures may return. An increasingly complex relationship between tax and trade policy is also a pressure point. In response, many organizations are reassessing data infrastructure, governance models, and cross-functional coordination.

Some businesses are already acting. They are reviewing supply chain structures, examining transfer pricing arrangements, adapting reporting processes, and investing in more agile systems. These early moves address today’s obligations while helping build resilience for what comes next.

The digital tax environment will continue to evolve, particularly as global negotiations develop, and jurisdictions refine their approaches. While outcomes remain uncertain, organizations that focus on visibility, flexibility and strategic alignment are likely to be better placed to manage change and respond to the next phase of taxation of the digital economy.


Summary

Ongoing delays to the OECD’s BEPS 2.0 framework and the withdrawal of US support under the Trump administration have prompted several jurisdictions to revisit DSTs and similar measures. Originally paused in anticipation of multilateral reform, these unilateral measures are now reappearing in varied and complex forms. While it remains unclear how far this trend will extend, the current direction of travel suggests a more fragmented and reactive tax environment. For multinational companies, particularly those in the tech sector, this raises new questions around compliance, data readiness and the role of tax in managing geopolitical risk.

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