Taxation of digital services has come back in focus | EY
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.
link
