The Trump Administration’s trade negotiators are reportedly signing trade agreements with several nations that will be announced within the next two weeks, which could bring a welcomed end to escalating tariffs. President Trump’s self-imposed trade deal deadline is quickly approaching, with tariffs expected to rise for most countries on August 1, some to an egregiously high level above 90%.
As the U.S. government pursues trade negotiations with more countries, it has an opportunity to reach bilateral agreements to phase out or not establish digital services taxes (DSTs). DSTs effectively act as tariffs on digital services and disproportionately affect American tech companies. Combined with eliminating tariffs, restricting DSTs through trade agreements would boost U.S. exports, provide certainty for American businesses, and allow countries to bolster bilateral economic cooperation.
DSTs remain a persistent issue as many governments perceive that digital service providers earn a profit within their jurisdiction without paying tax on those profits. Profits are generally taxable in the country where a company is headquartered, not necessarily where its customers are based. The U.S. has found that DSTs disproportionately harm American businesses based on their revenue thresholds which could carve out all other local or smaller businesses.
In light of this challenge, trade negotiations can serve as an appropriate venue for bilateral cooperation to end DSTs. The Canadian government is ending its DST as part of trade negotiations with the United States. Canada’s DST regime is one of the most punishing for businesses as it is applied retroactively to the beginning of 2022. The Administration should make this understanding official by signing a formal agreement with Canada that agrees to rule out any current or future DSTs.
Ongoing trade negotiations with the U.K. would also benefit from an agreement to end DSTs. While the Trump Administration negotiated a trade deal with the U.K. on May 8, the deal mainly addresses trade in goods. In a statement about the deal, the Office of the U.S. Trade Representative (USTR) stated that it is “disappointed that the UK was unwilling to agree to fully address its discriminatory DST.” The deal agreed between the two countries stipulates that negotiations will continue to develop a trade framework for steel, aluminum, and pharmaceuticals. The U.S. should push to reach an agreement in which the UK offers to end its DST.
Whereas ending DSTs is important for the U.S. government, U.S. trading partners are likely more interested in a deal that lowers tariffs. President Trump continues to push for elevated tariff rates across the board, which could hike prices by $2.5 trillion over the next ten years, increase inflation, and reduce productivity. The Administration is generally enforcing a 10% floor on tariff rates, keeping rates at or above 10% in its recent trade agreements. Ultimately, a zero-for-zero reciprocal tariff would be ideal and foreign countries could help facilitate this goal by agreeing to end DSTs.
While the politics surrounding DSTs can be complex, countries levying DSTs would also benefit their citizens and economies by ending them. Meanwhile, there are growing legal challenges to DSTs in multiple countries. For instance, France’s DST is currently subject to a legal challenge to further examine whether its provisions are consistent with the French constitution.
Ending DSTs can have an immediate positive effect on strengthening economic cooperation. In 2020, several U.S. companies announced that they would add an additional fee for advertising on their platforms in countries such as Germany, Italy, the United Kingdom, Canada, Austria, Turkey, Spain, and India. In some cases, advertisers may have to pay these surcharges even if their content is inadvertently shown in a country with a DST. In light of Canada’s announcement that it will end its DST, the concerned U.S. companies already decided to end DST-related fees for Canadian advertisers.
Agreements to phase out or not introduce DSTs have particular relevance in trade negotiations with the European Union and individual European countries, several of which have enacted DSTs. Beyond Europe, that could also inform future U.S. approaches to negotiations with other countries, especially as the Administration hopes to seal bilateral deals with more than 150 countries. Combined with eliminating tariffs, removing non-tariff barriers like DSTs should be a long-term U.S. goal.