The Lead Untangles: Digital Services Tax and why it exists
You'll hear Donald Trump mention this - and call for its abolition - when he visits the UK next week.
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At a glance facts
Last month, President Donald Trump repeated calls for Digital Services Taxes (DSTs) placed on US tech companies to be abolished, and threatened retaliation in the form of tariffs.
Writing on his social media platform Truth Social, the President said: “As the president of the United States, I will stand up to countries that attack our incredible American tech companies.
“Unless these discriminatory actions are removed, I, as president of the United States, will impose substantial additional tariffs on that country’s exports to the USA, and institute export restrictions on our highly protected technology and chips.”
As Trump and a string of Silicon Valley's top executives (including OpenAI’s Sam Altman and Meta’s Mark Zuckerberg) prepare to visit the UK next week, questions have been raised about whether the UK will follow in the footsteps of Canada and abolish DSTs to appease Trump, who appears to be operating misconceptions regarding the temporary tax.
What actually is the Digital Services Tax and why does it exist?
Large tech companies, like social media platforms, online marketplaces, or search engines, make money from users all over the world, including in countries where they don’t have offices. This means that they could make large profits in countries where they pay no taxes.
While countries attempt to reach a global agreement on how digital technologies should be taxed, many, including France, Canada, Italy, the UK and others, introduced a temporary Digital Services Tax (DST).
The UK’s DST taxes tech companies 2 per cent on revenues from UK users.
It only applies to large businesses with worldwide revenues over £500 million from digital services, and at least £25 million a year from UK users.
It does not apply to the direct sale of physical products, streaming services, or financial services.
According to estimates by the think tank TaxWatch, the DST will bring in between £4.4 billion and £5.2 billion between 2024 and 2029, and has already generated around £1 billion for the treasury.
Context
Earlier this year, the US government said it would drop out of the international tax agreement intended to replace DSTs. Donald Trump has said that such taxes are designed to disproportionately and negatively impact US companies. However, an FOIA request by TaxWatch found that around a third of companies affected by the UK’s DST are not headquartered in the US.
During Trump’s tariff wars, the US stood firm on its DST. But just one day after securing a trade agreement with the US, the UK government suggested it was still under discussion. The government has to conduct a review of the DST by the end of 2025, and the Prime Minister has refused publicly to rule out changes.
However, a YouGov poll carried out for the campaign group Tax Justice UK, two thirds (67 per cent) of people want the UK to enforce its laws on Big Tech even if it strains relations with Trump.
The US government is being lobbied by US tech firms to act on DSTs. In June, coordinated by the Computer and Communications Industry Association (the online tech industry lobby group whose members include Amazon, Apple, Google and Meta), called on the US government not to conclude a trade deal with the UK unless the UK abolished its DST.
Donald Trump’s presidency is inextricably linked with Big Tech. Before their spectacular falling out, Big Tech’s biggest name, Elon Musk, was appointed a special government employee. Meta and Amazon each donated $1 billion to Trump’s inauguration fund.
What are people saying?
Faiza Shaheen, Executive Director at Tax Justice UK said: “Our government needs to be clear that any cuts to the Digital Services Tax are not on the negotiating table. Millions are struggling with affording the basics; public services including hospitals and schools need more funding to deliver what the country needs; and the Chancellor is scrambling around to fill a reported financial black hole.
“The public are right to think that the government must hold their position on this. Our tax system is asking too much of everyday people and small businesses - if anything, big corporations like Amazon and Google should be paying more.”
Liberal Democrat leader Ed Davey said: “Now Labour’s even talking about scrapping Britain’s tax on social media giants. Well, appeasement never works with bullies, and it doesn’t work with Trump. And you can see that he’s already put his tariffs on British steel.”
Clive Lewis, the Labour MP for Norwich South, said: "We are rolling out the red carpet for these tech companies, and we are not getting much in return.
"If you are going to give tax cuts to some of the wealthiest corporations on the planet just as you have taken billions from welfare - how do you think that is going to look to the public? It's going to look absolutely horrific.
"I understand the argument of hugging America close - but this is not the way to do it."
What happens next?
Donald Trump’s visit to the UK next week is likely to address issues surrounding the UK’s DST. The government has until the end of the year to present a review on the tax policy to parliament.
About The Lead Untangles: In an era where misinformation is actively and deliberately used by elected politicians and where advocates and opposers of beliefs state their point of view as fact, sometimes the most useful tool reporters have is to help readers make sense of the world.
The Lead Untangles is delivered each Friday by The Lead and focuses on a different complex, divisive issue with each edition. Is there something you’d like us to untangle, email ed@thelead.uk
About the author: Ella is a freelance journalist specialising in worker's rights, housing, health, harm reduction and lifestyle. You can find her work in Prospect Magazine, Dazed, Observer Magazine, Women’s Health and - most importantly - here at The Lead.