Explaining, Assessing the Digital Services Tax Dilemma

By Samuel Handwerger, CPA, MS-Tax, CGMA, CrFA

It was quite the diplomatic whiplash recently. President Trump announces “terminating all discussions on trade with Canada” because of their digital services tax (DST), calling it "a direct and blatant attack on our country." He threatened to announce new tariffs within a week.

But literally hours before Canada was supposed to start collecting the first payments from this tax, Prime Minister Mark Carney caved. Canada announced it was rescinding the entire digital services tax to get back to the negotiating table.

A great win for the USA? Yes. But to further answer that question, we must understand what a DST really is.

Here’s the simple version: When you buy something at a physical store in Canada, that store pays various taxes to Canada: sales tax, income tax, etc. But when a Canadian buys something from Amazon for delivery from America, or when a Canadian business buys advertising from Google or when you use Facebook and they make money from showing you ads, these US companies might not pay much in taxes to Canada at all— even though they're making money from Canadians.

This is because the core concepts governing how countries tax multinational businesses date back to the 1920s and 1930s, when the bite at the tax apple meant hitting where businesses had physical presence — physical offices, warehouses, employees—in a taxing jurisdiction.

Google today can make billions from French users while having no physical presence in France. Amazon can dominate Canadian operations there. So, the sales to residents of these countries go untaxed in those very countries where the profit has been made. The old rules simply aren’t designed for this reality.

Enter the DST, where countries like France, for example, have instituted a tax on sales made in their country by large companies not having physical presence. The 30 or so countries that have started such a tax do so at a rate similar to a sales tax on the digital sales in their country. And America doesn’t like it because most of the taxable income on these digital sales is made by companies here in the US.

OECD’s Pillar 1 (And its Long Odds)

A proposed solution to this whole mess has actually been in the works for years. It's called “Pillar 1,” and it’s being developed by the Organisation for Economic Co-operation and Development (OECD)—basically a club of the world’s developed economies.

Pillar 1 is essentially a global agreement to fundamentally rewrite how we tax the biggest multinational corporations. Instead of requiring physical presence, it would let countries tax a portion of the “excess profits” of the largest global companies based on where their sales occur.

Here’s how it would work: Take a massive company like Apple. Under Pillar 1, if Apple makes more than a 10% profit margin globally (which most tech giants do), then 25% of those "excess profits" above 10% would be reallocated to countries based on where Apple actually makes its sales. So, if 8% of Apple's global sales are in Canada, Canada would get to tax 8% of that reallocated profit pool.

It creates a global formula for fairly dividing up the tax pie based on where companies

make their profits, regardless of physical presence. The genius of Pillar 1 is that it would make digital services taxes unnecessary and indeed calls for the OECD countries to abandon DST when the new system is agreed upon.

Unfortunately, the prospects of Pillar 1 succeeding are not good. To go into global effect, Pillar 1 must be ratified by the US, an unlikely event as it has been highly opposed by Republicans for some time. Without the US, Pillar 1 is a mathematical no-go since to be ratified by the OECD, it takes 600 points out of 999; the US alone accounts for 486 points.

So, we have this perfect catch-22: Countries keep implementing digital services taxes because the global solution isn't working, but the global solution isn't working largely because the US won't implement it, and the US opposes the global solution partly because other countries keep implementing digital services taxes.

Where This All Leads

The broader pattern here is becoming clear. More than 30 countries have either implemented or proposed digital services taxes. They’re popular with voters (Who doesn't want big tech to pay more taxes?), and they generate revenue. Countries like France, the UK, Italy, Spain and others aren’t backing down from their versions.

The likely result is an escalating series of trade disputes, as more countries implement digital taxes and the U.S. responds with threats or actual tariffs. We're essentially watching the international tax system fragment in real time, with countries taking unilateral action because the multilateral solution remains politically impossible.

The most frustrating part of this whole story might be that the cost to the US is not worth the fight. Since the US accounts for approximately 30% of global consumer spending, the feared loss of tax revenue may turn out to be much ado about nothing. Some estimates show the tax loss to range from .3% to 2.4% of today's current corporate tax revenue, with the higher range translating to approximately $12 billion of the $490 billion annual corporate tax intake. Taken into context, the 2025 projected federal deficit is holding at around $1.9 trillion.

Samuel Handwerger is a full-time lecturer in the accounting and information assurance department at the University of Maryland’s Robert H. Smith School of Business. He serves as faculty advisor to UMD’s Financial Wellness Center and to TerpTax, a nonprofit organization affiliated with UMD that provides free tax preparation services for low to mid-income individuals in the University of Maryland, College Park community, according to VITA/TCE guidelines.