Digital services taxes, trade and development
The rapid growth of the digital economy has created a pressing and unresolved challenge for governments worldwide: how to tax value generated through digital transactions that cross borders invisibly, involve no physical presence in the consuming market, and do not fit neatly within traditional international tax frameworks. This report examines that challenge in depth, with particular attention to the trade implications of the proliferating unilateral digital services taxes (DSTs) that have emerged in the absence of a multilateral solution.
Published in December 2020 as Working Paper by the University of Adelaide’s Institute for International Trade and sponsored by members of the Global Services Coalition, this report argues that unilateral DSTs — however understandable from a fiscal perspective — carry significant economic and geopolitical risks. A growing number of jurisdictions, including France, Austria, India, Kenya, Turkey, and the United Kingdom, have adopted or are contemplating their own digital tax regimes, each with different rates, thresholds, and product coverage. The result is a fragmented patchwork of rules that increases compliance costs for businesses, creates legal uncertainty, risks double taxation, and, critically, sets the scene for trade retaliation.
The report traces how this dynamic has already begun to unfold. The United States launched Section 301 proceedings against France in 2019 and subsequently opened investigations against nine other jurisdictions plus the European Union, alleging that their DST arrangements discriminate, in intent or in effect, against U.S. companies. The report argues this is a preview of wider trade conflict unless a multilateral framework is secured.
A substantial portion of the report examines the WTO-consistency of DSTs, an angle that has received limited attention in the broader debate. The analysis centers on the General Agreement on Trade in Services (GATS) and its non-discrimination principles — most-favored-nation and national treatment. The report finds that while clear-cut de jure violations may be identifiable in some cases, much of the discriminatory potential of existing DST designs is de facto in nature, arising from features such as revenue thresholds, product ringfencing, and the targeting of suppliers rather than products. This ambiguity, combined with thin GATS jurisprudence on digital economy issues and limited binding commitments by members in relevant services sectors, means the WTO is poorly equipped to adjudicate these disputes.
The report also reviews the OECD’s two-pillar approach under its Base Erosion and Profit Shifting framework, outlining both its promise and its remaining complexities, and considers the merits of a consumption or sales tax alternative as a potentially simpler and more WTO-compatible approach.
The report concludes by setting out a series of recommendations for policymakers. It calls for restraint in adopting further unilateral measures, greater coordination between the WTO and the OECD on the intersection of trade rules and digital taxation, and renewed negotiations on market access and national treatment commitments under the GATS. It also raises the question of whether a broader consumption or sales tax approach might offer a simpler and more WTO-compatible alternative to profit-based digital services taxes, and suggests that improved product nomenclature for services trade would contribute to greater legal clarity in this area.
