Is the Digital Services Tax a tariff?

26 March 2025

Michael Devereux (Emeritus Director, Oxford University Centre for Business Taxation)

There is speculation that the UK government will soon abolish its Digital Services Tax (DST) in an attempt to stave off US tariffs on aluminium and steel and potentially a gathering tariff war. Some might see this as appeasement of an aggressive US position, noting that the DST was introduced as a way of generating some tax revenue from very large, very profitable, tech companies that are widely believed to pay little tax, especially in the UK. 

But how should we think of the DST itself? In particular, is it itself a tariff? If so, the case for keeping it whilst simultaneously objecting to US tariffs is weak.

What is a tariff? A dictionary definition is “a tax or duty to be paid on a particular class of imports or exports”. That has two key characteristics, relative to other taxes. First, it applies only to imports or to exports: domestic sellers are not liable to pay the tariff. Second, it applies only to specific goods (or services), not to all (or the vast majority) of goods and services, like a sales tax or VAT.  We could add a third characteristic: the tax base is typically the value of the good and services sold, that is revenue from the sale, rather than profit earned on the sale. 

HMRC describes the DST as a “2% tax on the revenues of search engines, social media services and online marketplaces which derive value from UK users”. So does the DST meet the definition of a tariff? 

The DST is clearly a tax on revenues (although there is some provision for an alternative charge on operating margin if profitability is very low). It also clearly applies only to specific services. But what of the first criterion: in particular, is it a tax on imports? 

The DST is unusual in that it applies to revenues earned from transactions in which the UK government considers non-UK businesses have derived “value from UK users”. That has two consequences which need some unpacking. 

First, for example, if I buy a good directly from Amazon, then no DST is levied: that would be a direct sale to a UK customer, which is explicitly not part of the DST tax base. But if I use the Amazon platform to buy exactly the same good from a third party, then Amazon is deemed to be acting as an online marketplace and is liable to the DST. 

Second, suppose I make a search on Google. I see an ad on my screen (in the UK), paid for by an advertiser located in, say, Switzerland, with the money received by Google in, say, Ireland. The only link with the UK is me. The UK collects the DST from Google, even if the revenue was not received in the UK. 

So the UK position is that the DST is not a tax on sales to UK consumers. To justify the tax, HMRC claims that “businesses derive value from their interaction and engagement with a user base” in the UK, which in principle should be subject to UK tax. This is highly questionable. But it also has the implication that it ties us into knots, having to identify exactly the process by which I purchase a good on Amazon, as well as collecting tax on financial transactions that do not take place in the UK.

But another question arises before we can decide whether the DST is a tax on imports. That is, are domestic businesses also subject to the tax? The legal answer to this is yes: the DST applies to any business that meets the threshold requirements. The practical answer is no: the vast majority of revenue raised from the tax reputedly comes from five US tech giants: Amazon, Google, eBay, Apple and Meta.

There seems to be some casuistry here. The DST was almost certainly designed in such a way as to be able to argue that it is not a tax on sales, and not a tariff - on the grounds that it is not a tax on the value of goods and services imported into the UK. Well, good luck in trying to convince the US of that position. This is a tax that falls primarily on revenues earned in the UK by giant US tech firms. If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck. 

Should we be concerned if the UK has to give up its DST in order to avoid a tariff war? The UK government is desperate for every billion of revenue (which is roughly what the DST raises), but is this really a tax worth defending? 

There is considerable international support for the principle of taxing profit in market countries, and that is a worthy aim. The UK government had already agreed to replace the DST on the implementation of the internationally-agreed Pillar 1 proposal, which would allocate some rights to tax global multinational profit to the market countries. Pillar 1 will not now happen, given that the US has withdrawn its support. But that does not justify keeping the tariff-like DST, even if better options seem a long way from coming to fruition.