Navigating the Digital Tax Landscape

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• Increased tax scrutiny of big tech
• What to expect in 2025?
• What to do now? 

The rise of digital services has prompted domestic and international reconsideration of traditional tax structures. Technology companies are subject to digital services taxes (DSTs) and new international tax regulations, as well as extraterritorial VAT/GST regulations, to address the tax challenges arising from the digitalization of the economy.

We provide actionable insights for tech companies navigating increased tax scrutiny and a changing landscape.

It’s complex for multinational technology companies managing layers of local, regional and global tax legislation.

Kate Alexander, Chair of the Technology Sector Group and Tax Partner, London

 

Increased tax scrutiny of big tech

Addressing the tax challenges raised by digitalization has been a top priority of the OECD/G20 Inclusive Framework (IF) in Base Erosion and Profit Shifting (BEPS) since 2015. The OECD established its groundbreaking plan for a Two Pillar solution in 2021 and more than 140 countries have joined the initiative. Pillar One Amount A, which shapes how residual profits of the largest tech companies would be reallocated to market jurisdictions, while Amount B aims to simplify the way certain marketing and distribution transactions are valued between related entities. Pillar Two sets a global minimum effective tax rate of 15% for in scope multinational enterprises (MNEs).

Domestically, many countries have introduced their own DSTs to capture revenue from tech multinationals that generate significant income within their borders without a physical presence. France was one of the first countries to introduce a DST in 2019. Over 25 countries worldwide have implemented DSTs, and several others have proposals to do so. In addition, over 60 countries have introduced an extraterritorial VAT/GST system to levy VAT/GST on consumption of digital services rendered by non-resident service providers.

DSTs commonly target revenues from online advertising and online platform intermediation. However, DSTs vary in scope and apply different tax rates. Some DSTs are much broader than others. Other digital taxes have also been implemented by some jurisdictions to target revenues from video on demand and music streaming and may come in addition to DSTs for certain taxpayers.

Ariane Calloud, Tax Partner, Paris

 

What to expect in 2025?

Pillar One on the rocks?

Securing the necessary cooperation for international tax reform was always going to be difficult. Nevertheless, DSTs introduced by OECD countries have largely been viewed as interim measures pending the new international framework. A political agreement between OECD IF members, reached on 8 October 2021 provided for a two-year moratorium on DSTs with ”appropriate coordination” of removing existing measures, while negotiations on Pillar One progressed. Under a multilateral agreement reached on 21 October 2021, Austria, France, Italy, Spain, the UK and the US agreed on terms for transitioning away from DSTs once Pillar One rules were implemented, including roll-back provisions. Those agreements were extended in 2023 in line with a revised deadline of 30 June 2024 for the adoption and signature of Pillar One.

Despite intensive negotiations, the extended deadline for an agreement on Pillar One passed without a deal. The main hurdles have been geopolitical and economic disagreements among member countries of the OECD/G20 IF. On 13 January 2025, the OECD released a statement by the co-chairs of the IF on BEPS on their progress, which indicated they intend to continue working to achieve consensus on the remaining issues (around the Amount B Framework) and so, an overall deal on Pillar One.

However, the missed deadline and ongoing disagreements, is making Pillar One’s future look increasingly uncertain.

Further change in the international tax landscape

The Trump Administration has expressed unwillingness for the US to cooperate with the OECD’s Two Pillar proposal. Hours after taking office, President Trump signed a memorandum clarifying that the previous administration’s commitments regarding the OECD’s “Global Tax Deal” “have no force or effect in the United States.” The memorandum also instructs Trump’s key advisors within 60 days to work together on a report identifying options for actions that the US may take in response to countries that impose taxes that are extraterritorial or disproportionately affect US companies. On 21 February 2025, a further memorandum by Trump directed a review by the US Trade Representative to decide whether to renew investigations from Trump’s first term into DSTs imposed by France, the UK, Italy, Spain, Austria and Turkey. The review is also to determine whether the DSTs of other countries, including specifically Canada, should be investigated.

The Trump Administration’s actions also have consequences for Pillar Two. The global minimum tax under Pillar Two is already a reality having been adopted in an increasing number of jurisdictions since the beginning of 2024. In October 2024, the OECD estimated that based on the countries already implementing a minimum tax, approximately 60% of MNEs in scope of the rules would be subject to the minimum tax regime in 2024 with the number going up to 90% in 2025. While Pillar Two may not be dead, pressure from the US (perhaps through tariffs or increased tax rates on non-US corporations and individuals) on countries that have adopted Pillar Two rules may result in changes to the Undertaxed Profits Rule (UTPR) or other measures to mitigate the effects of the interaction between Pillar Two and US tax rules.

The future for DSTs

Without a global agreement on Pillar One, the commitments previously made around the roll back of DSTs have fallen away. The UK reportedly raised around GBP 678 million last year from its DST. DSTs are also a significant contributor to the tax revenues of other countries that have introduced them. Austria's Ministry of Finance reported that it collected EUR 103 million in DST revenue in 2023, a 7.4% increase from 2022. The French Tax Authorities confirmed DST collections in 2023 of EUR 680 million and estimate collections of EUR 780 million for 2024.

More countries are likely to consider implementing DSTs, with consensus on Pillar One increasingly unlikely. Countries with established DSTs may choose to increase tax rates.

Countries that have or introduce DSTs risk trade disputes, and retaliatory measures from the US or other countries. Recent reports confirm that the UK’s DST is under discussion as part of UK – US trade talks.

As of 1 April 2025, India abolished its 6% equalization levy applicable to non-residents on digital advertisement services. India’s 2% equalization levy on e-commerce supplies was removed from 1 August 2024.

The longevity of DSTs is up in the air. However, with tax authorities under pressure to raise much needed revenue, countries are unlikely to easily give up or significantly change DSTs.

Tax authorities will also rigorously enforce these measures, and increase audit scrutiny. Extraterritorial VAT/GST systems are relatively new. Over time, multinational suppliers will also face more audit activity in this area.

The OECD’s Two Pillar response to digitalization of the economy has been continuing despite different stances from significant jurisdictions, such as the US, China and India. However, the recent US policy shift on the global tax deal is likely to bring about further significant change to the tax landscape.

Ethan Kroll, Tax Partner, Los Angeles

 

What to do now?

Technology companies are experiencing unprecedented shifts in the global tax landscape, with rising tax transparency and additional compliance requirements. Businesses have been dealing with the implementation of Pillar Two, adding significant complexity. Recent developments in the US will impact Pillar Two, though the specific outcomes remain uncertain. A consensus on Pillar One is looking increasingly unlikely.

• Engage in tax policy advocacy. By participating in industry associations and working with policymakers, companies can influence decision making. Now is a critical time for companies to help shape future digital tax policies as geopolitical factors suggest further changes in the global tax landscape are also probable.
  
  
• Identify potential tax risks and opportunities. Tech companies must stay vigilant and adapt to developments to remain compliant and competitive. To make informed decisions, it is critical to review changes in the tax landscape and identify potential tax risks and opportunities. Key risk areas for global tech companies include the interaction between Pillar Two and US tax rules (which could result in the adverse treatment of the same income stream across multiple jurisdictions). Tech companies should also review the impact of DSTs, especially if the expectation previously was for Pillar One to have been introduced by now.
  
  
• Consider the tax implications of new products and services. As the global tax landscape experiences unprecedented change so does the technology sector. Companies want to maximize the commercial opportunities and revenue from complementary products, new services and additional business streams, with AI being a key driver. Engaging tax professionals with commercial teams early on is vital, to discuss taxation issues and modeling, and to avoid adverse business outcomes. By adapting their business models, companies can better manage their tax exposure and optimize their revenue streams.
  
  
• Coordinate cross-border tax filings. Proactive planning is critical, considering a significant increase in both tax transparency measures and tax authorities use of data interrogation tools supported by digital capabilities. A clear strategy is vital to reduce the risk of audits and investigations. Ensuring a consistent approach across all jurisdictions is key, as tax authorities may exchange information. Errors and inconsistencies increase the potential for full blown controversies to arise.

Companies can mitigate risks and leverage strategic advantages by assessing the impact of the current tax landscape and taking proactive steps to address tax obligations. 

Jan Snel, Tax Partner, Amsterdam