Explained: What are digital services taxes and why Trump is furious

As US President Donald Trump warns of additional tariffs, here's what digital services taxes mean, how they work across countries, and why US tech firms like Google and Amazon are most affected

US President Donald Trump has found his new villain, ‘digital taxes.’ In a characteristically fiery post on social media platform Truth Social on Tuesday (August 26), he warned that countries imposing ‘digital taxes’ on big American tech firms could face “additional tariffs” on their exports to the US unless those taxes are withdrawn. He framed such levies as discriminatory against companies like Apple, Amazon, Google and Meta. The warning follows an earlier order this year to revive trade investigations into these measures under Section 301 of the US trade law.

 

But this dispute is not new. In 2021, the US Trade Representative (USTR) had concluded in its report that a number of national digital services taxes (DSTs) discriminated against US digital companies. The findings had paved the way for the US’ threats of tariff back then as well.

 

 

What exactly is a digital services tax? 

A DST is typically a gross-revenue tax (not a corporate income tax) on specific digital activities where user participation in a country is seen as creating value. Most government's tax revenues from online advertising, digital intermediation and marketplaces, and the sale of user data. They generally apply only to large groups above high global and in-country revenue thresholds.

 

DSTs are destination-based taxes in which the liability is tied to user location, not company headquarters. Tax is charged on in-scope gross revenues which is attributable to users in the taxing country, after a firm exceeds both the global and local thresholds. Most regimes require group-level assessment and allow limited deductions or safe harbours, but unlike corporate income tax, they generally do not tax profit.

 

Which countries levy them and at what rates? 

A number of US allies have national DSTs. For example, the United Kingdom (UK) levies 2 per cent on revenues from search engines, social media, and online marketplaces linked to UK users. The rule applies to groups with over £500 million global revenues and more than £25 million from UK users.

 

Similarly, France applies 3 per cent DST on revenues from targeted advertising, digital intermediation and the sale of user data, for groups above €750 million worldwide and €25 million in France. Meanwhile, Spain has a 3 per cent tax on online advertising, intermediation and data sales, with the threshold being €750 million worldwide and €3 million in Spain.

 

In Italy, the tax is 3 per cent on similar services, with the threshold for the firms being at €750 million worldwide in revenue and €5.5 million in Italy. Austria, on the other hand, applied a higher 5 per cent DST on digital advertising by large groups (generally €750 million worldwide and €25 million Austrian revenues).

 

Turkiye imposes a high 7.5 per cent DST on certain digital services revenue, with statutory thresholds, with a caveat that the president may adjust the rate within set bounds.

 

Canada had enacted a 3 per cent DST in 2024, which was designed to apply retroactively from 2022. But in late June this year, Ottawa announced it would pull back the law to restart the broader US-Canada trade talks.

 

Are American companies the hardest hit? 

In economic terms, the largest affected platforms are predominantly US-headquartered, so a substantial share of the DST burden falls on American firms. Legally, most DSTs are nationality-neutral. However, in 2021, USTR formally found several DSTs (including those in Austria, India, Italy, Spain, Turkiye and the UK) to be discriminatory and burdensome to US companies. The findings gave rise to the threats of tariffs at the time but were never imposed. However, now Trump has revived the tariff warning for what he says are rules that put American tech firms at a disadvantage and ‘singling out American technology companies.’

 

Where does India stand in digital taxation of American firms? 

India pioneered the Equalisation Levy: first a 6 per cent charge on certain online advertising services (from 2016), then a broader 2 per cent levy on e-commerce supplies by non-resident operators (from April 1, 2020). However, the policy has markedly shifted since that. The 2 per cent e-commerce levy was withdrawn with effect from August 1, 2024, as part of a transition tied to the OECD process.

 

Meanwhile, the original 6 per cent levy on specified advertising services was switched off from April 1, this year through amendments to Section 165 of the Finance Act, 2016 (enacted in the Finance Act, 2025). It explicitly stated that no equalisation levy shall apply to any consideration in respect of online advertisement services received or receivable by a non-resident on or after April 1, 2025. This change marked a full withdrawal of the tax that previously applied to cross-border digital advertising services targeting Indian users.

 

So while Trump's tariff threat does not impact India directly, experts have noted that India did find itself at a disadvantage during these Trump tariff negotiations as DSTs would have been a leverage (even if a really small one) in the trade talks. Nonetheless, the newest tariff warning raises the heat on European DST holdouts and any country considering new digital taxes.