The 2 key problems with digital service taxes

DSTs in one form or another have been unilaterally enacted by around 15 jurisdictions, including Austria, France, Spain, Kenya, the UK, Italy, India, Tunisia and Turkey.

There are some big differences among DSTs that have been enacted or proposed, in terms of rate levels, thresholds and the activities covered which we will look at shortly.

DSTs are calculated on revenues instead of profits. This makes it simpler for tax authorities as revenues are generally harder to underreport.

There are generally 2 key disadvantages to DSTs

Firstly, as they are a tax on gross revenue, companies with a low profit margin can suffer a high effective tax rate. So, for instance a company with digital sales of 10M would suffer tax of 400,000 if the DST rate was 4%. If its profit margin was 10%, this equates to a 40% effective tax rate.

The other is as they are a tax on gross revenue and not profits they are generally outside the scope of double tax treaties. As such, they don’t qualify for treaty relief and generally no tax credit in the residence jurisdiction.