Digital Services Tax – A Unilateral Solution for Taxing the Digital Economy?

While BEPS Action 1 focuses on addressing the tax challenges arising from the digitalization of the economy, concise solutions were not found, eventually leading to the two-pillar solutions. Although the OECD has been striving to establish a worldwide agreement through its inclusive framework, numerous countries have taken independent actions to safeguard their tax revenues and base from specific digital activities conducted within their borders. One example of these measures is the implementation of digital services taxes (DSTs).

Digital Services Tax

Digital Services Tax (DST) is a type of tax imposed on the gross revenues (not profits) that large digital companies earn from providing certain digital services in a country, even if they don’t have a physical presence there. DST is viewed as a policy tool designed to ensure that digital companies pay their fair share of taxes in the markets where they operate.

Unlike traditional corporate taxes, which are based on profits, DSTs are applied to revenue generated from services such as:

• Online advertising
• Digital marketplaces
• Social media platforms
• Streaming services
• Sale of user data

This tax is typically aimed at companies with significant global and local revenues, ensuring that only the largest players are affected. DSTs have been adopted with the aim of levelling the playing field between digital and traditional businesses by capturing value created by user participation and data to ensure fairness in global taxation. Several countries have introduced DST, each with its own structure and rates. For example, India has an equalization levy on digital advertising and e-commerce services, and the United Kingdom has a 2% DST on revenues from search engines, social media, and online marketplaces.

Criticism of DST

While DST is a well-intentioned response to the evolving digital economy, it has sparked significant debate and concern across multiple fronts.

Double Taxation: One of the most pressing concerns is the risk of double taxation, where a digital company might be taxed in its home country under corporate income tax rules and simultaneously taxed in another country under DST for the same revenue stream. This undermines the principle of tax neutrality and increases the overall tax burden on businesses, potentially discouraging cross-border digital trade and innovation.

Complex Compliance and Administrative Burden: DSTs vary widely in scope, thresholds, and implementation across countries, creating a patchwork of rules that companies must navigate. Each country defines taxable services, thresholds, and filing requirements differently. As a result, companies must invest in legal, accounting, and IT resources to ensure compliance in each jurisdiction. Moreover, smaller digital firms or startups looking to expand internationally may find the compliance burden too high, stifling competition and innovation.

Trade Disputes and Retaliation: DSTs have become a flashpoint in international trade relations, particularly between countries that impose the tax and those where most digital giants are headquartered. The United States has argued that DSTs unfairly target American companies, leading to investigations and threats of retaliatory tariffs on goods from countries like France, the UK, and India. These disputes complicate broader trade negotiations and can escalate into broader economic conflicts. Some countries have agreed to suspend DSTs temporarily in anticipation of a global solution, but tensions remain high.

Expert Opinions

Michael Devereux from the Oxford University Centre for Business Taxation questions whether the DST is in effect a tariff itself. He argues that if DSTs are essentially tariffs, it is hard to justify keeping them while arguing against US tariffs on UK goods and services.

Heman Jeetun emphasizes that DSTs are designed to ensure that digital companies pay their fair share of taxes in the markets where they operate. He highlights the importance of capturing value created by user participation and data to ensure fairness in global taxation.

DST in Mauritius

Mauritius does not have a DST regime. However, in August 2020, Mauritius implemented Value Added Tax (VAT) on digital or electronic services supplied by a foreign supplier (i) over the internet or an electronic network which is reliant on the internet or (ii) is dependent on information technology for its supply under the VAT Act. The VAT Act defines a foreign supplier as a person or business with no permanent establishment in Mauritius, whose place of abode is outside Mauritius, and who supplies digital services to Mauritian residents.

Although the VAT Act allows for further interpretation through the issuance of prescribed regulations, no such regulations have been issued by the relevant authorities to date. Therefore, although Mauritius does not have a dedicated DST, the VAT imposed on foreign digital services functions similarly by ensuring that offshore digital companies contribute tax revenue when generating income from Mauritian consumers. However, due to the absence of prescribed regulations, these laws have not been enforced by multinational corporations operating in Mauritius, nor have they been subject to testing by the Mauritius Revenue Authority.

Conclusion

Looking ahead, the global tax landscape remains uncertain. While the OECD has made progress on Pillar Two, Pillar One continues to face political and technical challenges. Some countries are hesitant to repeal their DSTs without assurance that the new system will deliver comparable revenue. If a global agreement is reached, DSTs are expected to be phased out. If not, more countries may adopt or expand DSTs, potentially leading to a fragmented and contentious international tax environment. The next few years will be critical in determining whether the world moves toward a unified tax system or a patchwork of national digital taxes.