## Taxing Cross-Border Services (IMF Working Paper — content unit)

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### Executive summary — core findings
- Services now account for "one-fifth to one-quarter of global trade" and in 2024 services accounted for "27.2 percent of world trade".
- Cross-border services trade reached 16 percent of world GDP in 2024.
- Digitally delivered services can be supplied remotely, at scale, and without any physical footprint in the market country, undermining physical-presence (permanent establishment) based tax rules.
- Value creation is increasingly linked to user data and market engagement, complicating profit allocation.
- Two connected country challenges:
  - How to tax profits from remote services supplied into their markets.
  - How to protect their tax base from deductible outbound payments for services that facilitate profit shifting.
- In absence of a comprehensive global agreement, a proliferation of unilateral instruments has emerged with overlapping legal scope, economic incidence, and behavioral effects.
- Main conclusion: "broader reliance on destination-based taxation would address the concerns raised by digital services trade more effectively than the narrower and more distortionary unilateral measures that have proliferated in its absence."
- OECD/G20 Pillar One (Amount A) currently covers "fewer than 100 multinational groups and less than 2 percent of global profits" and its ratification remains highly uncertain.

### VAT and destination-based taxation (preferred policy direction)
- Destination-based VAT is identified as "the most coherent and least distortionary instrument among those examined."
- Modern VAT tools for imported digital services: place-of-supply rules; simplified non-resident registration; reverse-charge mechanisms for business purchasers; platform-based collection.
- Central task: "effective implementation."
- VAT applied to digital services can raise revenue and offers a coherent destination-based approach compared with gross-basis measures.

### Digital Services Taxes (DSTs) — assessment, evidence, and design
- Nature and rationale:
  - DSTs tax gross revenues from specified digital services by reference to market/user location as an attempt to secure taxing rights where net-income taxation grants little or no source right.
  - They tax gross revenue rather than profit and are described as "inherently distortionary."
- Economic incidence and pass-through evidence:
  - Event-study (PPML) evidence: DST adoption is associated with reduced digital‑services imports relative to non-digital services, consistent with pass‑through to consumers or business users.
  - French ex ante assessment: burden shares estimated around 55 percent consumers, about 40 percent businesses, and about 5 percent by targeted large internet companies.
  - Company disclosures and studies (Google, Amazon, Langenmayr and Muddasani, 2025) show substantial pass-through to third-party sellers and consumers.
- Design features and practicalities:
  - DSTs generally low-rate, narrow-base, destination-sourced, and limited by high global and domestic thresholds concentrating liability in a few very large MNEs.
  - Self-assessed and paid by the supplying MNE group; administrative systems and third-party reporting often required.
  - Macro revenue: generally raised less than 0.1 percent of total tax revenue in most implementing jurisdictions; micro-level impact can be large for in-scope firms.
- Comparative country parameters (selected exact figures preserved):
  - Austria: Introduction January, 2020; Rate 5%; Scope thresholds EUR 750 million global revenue, and EUR 25 million domestic revenue; Tax base: Gross revenues from online advertising services.
  - Canada: Introduction June, 2024; Status Stalled in June, 2024; Rate 3%; Scope thresholds EUR 750 million global revenue, and CAD 20 million domestic revenue; Tax base: Gross revenues from online advertising services, online intermediation services and transfer of user data.
  - France: Introduction January, 2019; Rate 3%; Scope thresholds EUR 750 million global revenue, and EUR 25 million domestic revenue.
  - India: Introduction April, 2020; Status Repealed in August, 2024; Rate 2%; Scope thresholds EUR 220,000 domestic revenue (NB: limited to non-resident suppliers).
  - Italy: Introduction January, 2020; Rate 3%; Scope thresholds EUR 750 million global revenue, and EUR 5.5 million domestic revenue.
  - Nepal: Introduction July, 2022; Rate 2%; Scope thresholds EUR 12,000 domestic revenue (NB: limited to non-resident suppliers).
  - Spain: Introduction January, 2021; Rate 3%; Scope thresholds EUR 750 million global revenue, and EUR 3 million domestic revenue.
  - Türkiye: Introduction March, 2020; Rate 5%* (* Rate reduced to 2.5% as from January 2027.); Scope thresholds EUR 750 million global revenue, and EUR 375,400 domestic revenue.
  - United Kingdom: Introduction April, 2020; Rate 2%; Scope thresholds GBP 500 million global revenue, and GBP 25 million domestic revenue.
- Key analytical implications:
  - DSTs are sector-specific turnover taxes distinct from income and traditional consumption taxes; they risk cascading taxation, ring-fencing, administrative complexity for revenue sourcing, and double-taxation interactions with VAT and income taxes.
  - Thresholds lead to very few taxpayers in scope (e.g., fewer than twenty MNE groups paid UK DST in 2024; about thirty-seven MNEs in scope of the French DST in 2021).

### Income-tax-based instruments — nexus, source rules, and anti-base erosion
- Overview:
  - Income-tax responses aim to bring services into the net-income tax or protect the domestic tax base against deductible outbound payments rather than taxing revenue directly.
  - Observed approaches: expand nexus (digital PE / significant economic presence), withholding/source rules, and anti-base-erosion measures.
- Expanding nexus (digital PE, SEP):
  - Concepts: "Digital PE" and "Significant Economic Presence" (SEP) deem taxable presence based on non-physical digital connections.
  - Practical requirements: define economic interaction threshold and determine profit attribution once nexus exists.
  - Constraints: treaty limits tied to PE concept; profit attribution may allocate "little or no profit to the deemed presence" if no local personnel, assets, or risks.
  - Jurisdiction examples: India; Indonesia; Colombia; Kenya; Nigeria; Slovakia; Colombia combines interaction and customer thresholds; Kenya’s 2024 SEP framed as nexus but operates like a turnover tax; Nigeria combines SEP with withholding.
- Source rules and withholding taxes:
  - Aim to tax cross-border payments (royalties, technical service fees, management fees) at source, often on gross basis via withholding.
  - Empirical note: higher withholding taxes associated with lower imports of royalties and technical service fees (Liu et al., 2025).
  - Treaty constraints often limit effectiveness; withholding taxes may be credited in residence but treaty departures can impede credits and invite treaty shopping.
  - Jurisdiction examples: Uruguay, Paraguay, Malaysia, Nigeria.
  - Administrative attraction: relative simplicity; weakness: taxes gross payments not net income and often resemble gross-basis levies.
- Anti-base-erosion rules and related measures:
  - Denial of deductions for outbound payments (triggers: destination, recipient tax rate, lack of substance); EU defensive measures and Australia examples.
  - Diverted profits taxes: UK and Australia history; UK repealed diverted profits tax in Finance Act 2026 and replaced with corporation tax charge on unassessed transfer pricing profits while modernizing dependent-agent PE provisions.
  - Targeted deemed-PE rules: apply to specific avoidance structures (Australia’s Multinational Anti-Avoidance Law; New Zealand’s PE anti-avoidance rules).
  - Trade-offs: may affect genuine business payments; evidence on interest-limitation rules suggests adverse investment effects (Bashir et al., 2024; De Simone et al., 2025).

### Overlap and interaction among instruments
- The three income-tax approaches are analytically distinct but can overlap in practice and can be layered on the same transactions.
- Example overlaps (preserved language):
  - Deductible payment by a local affiliate to a foreign related party (cloud-computing support, AI and data services, digital advertising support) may be subject to withholding taxes, trigger anti-base-erosion rules, and be treated as giving rise to an expanded nexus.
  - Foreign digital platform supplying services remotely could be subject to expanded nexus, withholding by local customers, and anti-base-erosion scrutiny.
- HMRC empirical illustration (exact figures preserved):
  - £735 million in net diverted profit tax receipts
  - £4.436 billion in additional corporation tax from transfer-pricing and diverted profits taxes work
  - £2.662 billion in additional VAT associated with business restructurings
  - Combined associated yield of about £7.8 billion
- Policy implication: careful instrument design and treaty coordination are critical to avoid cumulative or inconsistent taxation.

### Empirical regularities and tax-relevant statistics
- Cross-border services composition and concentration:
  - In high-income economies, total services trade to GDP rose from about 11 percent in 2005 to nearly 18 percent in 2023.
  - Digitally deliverable services in high-income economies rose from roughly 5 percent to nearly 11 percent of GDP (time series referenced).
  - Business services accounted for roughly 32 percent of global services imports in 2005 and by 2023 had reached about US$3.2 trillion.
  - By 2023: computer services imports rose by a factor of 5.4 relative to 2005; business services overall rose by a factor of roughly 3.8; IP charges and royalties rose by a factor of 2.8 relative to 2005 (not shown in figure).
- Concentration:
  - A small group of seven jurisdictions record between 21 and 31 percent of digital services imports across advanced, emerging, and developing economies; share rose from about 21 percent to nearly 29 percent between 2005 and 2023.
  - By 2023 digital services accounted for roughly 18–19 percent of these jurisdictions’ services exports, compared with about 9 percent elsewhere.
  - Domestic value-added shares in IT-sector exports are 24–38 percent in some of these jurisdictions compared with 85 percent or more elsewhere.
  - Firm concentration: Sweden — ten largest companies accounted for 30 percent of Sweden’s total services trade in 2023.
- Related-party shares (U.S. BEA, 2023):
  - Affiliated trade accounted for 37 percent of U.S. services exports and 27 percent of U.S. services imports.
  - For digitally deliverable services, affiliated trade accounted for 54 percent of U.S. exports and 49 percent of U.S. imports.
- Data limitations: standard services statistics (e.g., EBOPS) do not reveal B2B/B2C splits or related-party status; policymakers need firm-level, affiliate, and value-added data supplements.

### WTO moratorium on customs duties on electronic transmissions (Box 1)
- Historical status:
  - Since 1998 WTO practice repeatedly renewed moratorium on customs duties on electronic transmissions.
  - At MC13 (Abu Dhabi, 2024) moratorium extended to MC14 or 31 March 2026.
  - At MC14 (Yaoundé, March 2026) members did not reach agreement; moratorium lapsed at end of March 2026. Discussions continue in Geneva.
  - 23 members have confirmed intention to continue not imposing customs duties on electronic transmissions amongst themselves.
  - No countries have implemented digital customs duties to date.
- Revenue comparison:
  - Hypothetical tariff revenue on digital flows replacing physical imports estimated around 0.01 to 0.33 percent of total government revenue.
  - VAT on same transactions can raise as much or more revenue and is more efficient (non-discriminatory, exempts intermediate inputs).
- Income-tax alternatives:
  - Some proposals treat payments for software and related digital products as royalties subject to withholding (UN Model 2025 expanded Article 12 to include payments for software; Australia draft ruling 2024 considered royalty withholding on software payments).

### UN developments and treaty innovations (Section 6.5)
- UN Framework Workstream II is developing an early protocol on taxation of income from cross-border services; draft text scheduled for UN General Assembly in 2027.
- Core trade-off under debate: gross-basis withholding taxes at source versus a broader sales-based right to tax a share of multinational groups’ net income.
- Treaty instruments in play: Articles 12A, 12AA, 12B, and amended Article 12 expand source-country taxing rights for specified services and automated digital services; scope and acceptance remain uncertain.
- Policy tension: administrative feasibility, alignment with income-tax principles, risk of overbreadth, compliance costs, and economic incidence.

### Policy recommendations and implementation priorities (preserved framing)
- Prioritize destination-based VAT modernization:
  - Strengthen place-of-supply rules.
  - Simplify non-resident registration regimes.
  - Ensure effective reverse-charge and platform-collection mechanisms.
- Be cautious with gross-basis instruments (DSTs) given distortionary effects, incidence uncertainty, and treaty/double-taxation risks.
- Where income-based source measures are pursued, ensure:
  - Clarity on nexus and profit-attribution rules.
  - Coordination with treaty obligations.
  - Assessment of incidence and potential pass-through to consumers or business users.
- Strengthen anti-base-erosion measures targeted at deductible related-party payments, but recognize limits when market participation is through users rather than resident payers.
- Advocate for multilateral solutions where feasible to reduce risk of overlapping and inconsistent unilateral measures.

*Source: Hebous S., Crowley, B., Das, R., Hanappi, T. Hillier, C., Jakubik, A., Robert, E., and Waerzeggers, C. (2026). Taxing Cross-Border Services. IMF Working Paper WP/26/152*

### conclusion is that broader reliance on destination-based taxation can address many of the core problems

### Taxing Cross-Border Services

### Executive summary — key findings
- Cross-border trade in services has expanded rapidly, with digitally delivered services growing especially quickly; over the past two decades services now account for "one-fifth to one-quarter of global trade" and in 2024 services accounted for "27.2 percent of world trade".
- Digital services can be supplied remotely, at scale, and without any physical footprint in the market country where they are used, undermining traditional tax rules that rely on physical presence (permanent establishment).
- Value creation is increasingly linked to user data and market engagement, not only to the service itself, complicating profit allocation.
- Two connected challenges for countries:
  - How to tax profits from remote services supplied into their markets.
  - How to protect their tax base from deductible outbound payments for services that facilitate profit shifting.
- In the absence of a comprehensive global agreement, a proliferation of unilateral instruments has emerged; their legal scope, economic incidence, and behavioral effects overlap and interact.

### VAT and destination-based taxation — preferred policy direction
- Destination-based VAT is identified as "the most coherent and least distortionary instrument among those examined."
- Modern VAT systems can bring imported digital services into the tax net via:
  - place-of-supply rules;
  - simplified non-resident registration;
  - reverse-charge mechanisms for business purchasers;
  - platform-based collection.
- The central policy and legal task for VAT is "effective implementation."
- Potential revenue and application of VAT to digital services are emphasized as a coherent destination-based approach.

### Income-based unilateral instruments — assessment and limits
- Digital Services Taxes (DSTs)
  - DSTs attempt to source revenue to the market using user or customer location.
  - They tax gross revenues rather than profits and are therefore "inherently distortionary."
  - DSTs are selective, raising "challenges of ring‑fencing," and their incidence is uncertain.
  - Evidence in the paper shows "DST adoption is associated with reduced digital‑services imports," consistent with pass‑through to consumers or business users rather than effective taxation of the foreign provider’s profits.
  - DSTs are legally designed to sit outside the traditional scope of tax treaties, amplifying risks of double taxation.
- Withholding taxes and broad source rules
  - Can apply to outbound payments for a broader set of services than DSTs.
  - Work best when there is a resident payer or identifiable intermediary in the source jurisdiction.
  - Less effective when the market connection is the location of users rather than the residence of the payer.
  - Can be distortionary; their incidence and real economic effects need further research.
  - Often restricted or eliminated by tax treaties.
- Expanded nexus rules (digital permanent establishment and significant economic presence)
  - Seek to bring remote market participation within the ordinary net-income tax system.
  - Deeming nexus to exist does not resolve profit attribution to the market jurisdiction.
  - With no local personnel, assets, or risks, traditional profit-attribution rules may allocate "little or no profit to the deemed presence."
  - Treaty provisions such as UN Article 12B create a source-country taxing right for automated digital services without requiring a PE.

### Curbing profit shifting — anti-avoidance and deduction limits
- Instruments aimed at limiting deductible outbound payments and profit shifting include:
  - transfer pricing rules;
  - deduction limitation rules;
  - diverted profits taxes;
  - targeted deemed PE rules;
  - treaty-based provisions such as UN Articles 12A, 12AA, and the amended royalties article.
- These measures primarily address outbound payments and related-party arrangements and often function economically like withholding taxes.
- Anti-avoidance rules work best when the market connection is the residence of a business payer, but even then they are "imperfect tools for addressing structural limits in the existing international tax framework."

### Comparative insight and systemic implications
- The instruments cannot be evaluated in isolation; their legal scope, economic incidence, and behavioral effects overlap in ways that can reinforce or undermine policy objectives.
- The main conclusion: "broader reliance on destination-based taxation would address the concerns raised by digital services trade more effectively than the narrower and more distortionary unilateral measures that have proliferated in its absence."
- In a world where services can be supplied globally without physical presence, tax systems are likely to continue shifting toward granting greater taxing rights to market jurisdictions.
- If a multilateral solution is not agreed, the likely outcome is "a multi-player landscape marked by overlapping and inconsistent instruments, increasing both administrative complexity and the risk of double taxation."
- Reference to the OECD/G20 Pillar One outcome: Amount A is intended to be implemented by multilateral convention but currently covers "fewer than 100 multinational groups and less than 2 percent of global profits" and its ratification remains highly uncertain.

### Policy recommendations and implementation priorities
- Prioritize destination-based VAT modernization as a coherent, less distortionary tool to tax final consumption of imported digital services through:
  - strengthening place-of-supply rules;
  - simplifying non-resident registration regimes;
  - ensuring effective reverse-charge and platform-collection mechanisms.
- Be cautious with gross-basis instruments (DSTs) given distortionary effects, incidence uncertainty, and treaty/ double-taxation risks.
- Where income-based source measures are pursued, ensure:
  - clarity on nexus and profit-attribution rules;
  - coordination with treaty obligations;
  - assessment of incidence and potential pass-through to consumers or business users.
- Strengthen anti-base-erosion measures targeted at deductible related-party payments, but recognize their limits when market participation is through users rather than resident payers.
- Advocate for multilateral solutions where feasible to reduce the risk of overlapping and inconsistent unilateral measures.

*RECOMMENDED CITATION: Hebous S., Crowley, B., Das, R., Hanappi, T. Hillier, C., Jakubik, A., Robert, E., and Waerzeggers, C. (2026). Taxing Cross-Border Services. IMF Working Paper WP/26/152*

### 2. What Are Cross-Border Services and Why Do They Matter for Tax?

### 2. What Are Cross-Border Services and Why Do They Matter for Tax?

### Empirical regularities: scale, composition, and concentration
- Cross-border services trade reached 16 percent of world GDP in 2024.
- In high-income economies, the ratio of total services trade to GDP rose from about 11 percent in 2005 to nearly 18 percent in 2023.
- Digitally deliverable services (used as a proxy for digital services) in high-income economies rose from roughly 5 percent to nearly 11 percent of GDP (time series referenced in Figure 1, panel C).
- Business services drove much of services-trade expansion:
  - Business services accounted for roughly 32 percent of global services imports in 2005 and by 2023 had reached about US$3.2 trillion.
  - By 2023, computer services imports had risen by a factor of 5.4 relative to 2005.
  - By 2023, business services overall rose by a factor of roughly 3.8 relative to 2005.
  - By 2023, IP charges and royalties rose by a factor of 2.8 relative to 2005 (not shown in figure).
- A disproportionate share of digital services imports is recorded through a small group of seven jurisdictions:
  - Across advanced, emerging, and developing economies, between 21 and 31 percent of digital services imports are recorded through these seven jurisdictions.
  - The share rose from about 21 percent to nearly 29 percent between 2005 and 2023.
  - By 2023, digital services accounted for roughly 18–19 percent of these jurisdictions’ services exports, compared with about 9 percent elsewhere.
  - Domestic value-added shares in IT-sector exports are 24–38 percent in some of these jurisdictions compared with 85 percent or more elsewhere.
- The geography of digital services trade is narrow and highly concentrated in a few bilateral corridors (examples cited: Ireland–United States, Ireland–Germany, Canada–United States, Chinese mainland–Hong Kong SAR).
- Services trade is highly concentrated at the firm level; a relatively small number of firms account for a disproportionately large share of total services trade.
- Standard services trade statistics do not distinguish B2B vs B2C, nor related-party vs unrelated-party flows—key distinctions for tax analysis.
- Related-party services trade is quantitatively important, especially for digitally deliverable services (U.S. BEA affiliation data, 2023):
  - Affiliated trade accounted for 37 percent of U.S. services exports and 27 percent of U.S. services imports.
  - For digitally deliverable services, affiliated trade accounted for 54 percent of U.S. exports and 49 percent of U.S. imports.
- Firm-level and country evidence:
  - Italy: about one-third of imports of intellectual property products and headquarters services are sourced from the country where the importing firm’s parent company is located (lower-bound proxy for intra-group trade); for other services the share is below 10 percent.
  - Sweden: the ten largest companies accounted for 30 percent of Sweden’s total services trade in 2023; expansion tied to intra-group transactions.
- Modes of supply differ by sector (WTO TISMOS, 2005–22):
  - Mode 1: cross-border supply (service crosses border).
  - Mode 2: consumption abroad (consumer goes abroad).
  - Mode 3: commercial presence (supplier provides service through foreign affiliate/branch).
  - Mode 4: presence of natural persons (individuals move abroad temporarily).
  - Travel, tourism, and education are more tied to Modes 2 and 4; computer, professional, and other business services are much more amenable to Mode 1 (remote/digital delivery).
- Digitalization is displacing some imports of physical goods with electronically delivered products:
  - Upper-bound counterfactuals (Hanappi et al., 2024) assume a constant growth rate of 10.8 percent after 2010 for digitizable goods; observed imports diverge from that counterfactual, consistent with substitution toward electronic delivery of books, music, software, games.

### Tax-relevant features and pressures
- Two broad directions of tax pressure from rise of remotely deliverable services:
  - Pressure to establish taxing rights in market jurisdictions where services are consumed or users are located, even absent local presence of the provider—affecting both consumption taxation and income taxation.
  - Importance of related-party services reinforces concerns about base erosion through related-party payments for services and intangibles (transfer mispricing and profit shifting).
- AI-related services are expected to intensify these tax pressures in both B2B and B2C contexts.
- The WTO practice of refraining from customs duties on electronic transmissions (agreed in 1998) was not renewed at the 14th WTO Ministerial Conference (MC14) and thus expired on 30 March 2026—affecting customs-duty considerations for electronic transmissions.
- Tax instruments grouped by main function (functional taxonomy):
  - Instruments designed to tax domestic consumption: VAT.
  - Instruments to tax gross receipts earned by non-resident providers in the market jurisdiction: DSTs and equalization levies.
  - Rules to bring non-resident firms within domestic income-tax net by establishing sufficient nexus to tax profits: source rules, withholding taxes, expanded nexus concepts.
  - Anti-avoidance rules to protect domestic tax base against deductible payments and profit-shifting arrangements.
- Transaction-type mapping to tax issues (summary):
  - Cross-border consumer-facing services primarily raise consumption-tax concerns (VAT is the natural instrument; DSTs may also affect consumption but in a narrower, less neutral way).
  - Cross-border business services raise income-tax concerns with questions about whether/how the market country can tax income from remotely supplied services.
  - Where payments are to related parties, the central policy focus is protecting the domestic tax base against deductible service fees and payments for digital services that shift profits abroad (mispricing).
- Observational limitation: standard international services statistics (e.g., EBOPS) are informative about scale and direction but do not reveal B2B/B2C splits or related-party status—making precise quantification of tax bases difficult; crude approximations can still sharpen policy discussion.

### Key implications for policy design
- VAT remains central to taxing imported consumer-facing digital services; attention is required to ensure imported digitally delivered products are effectively included in broad-based consumption taxes.
- For income taxation of cross-border business services:
  - Considerations include expanding nexus concepts, withholding taxes, and source rules to capture remotely earned income in market jurisdictions.
  - Anti-avoidance measures are critical where related-party payments enable base erosion.
- Given concentration of digital services through a small set of jurisdictions and firms, country-to-country coordination and scrutiny of conduit routing and low domestic value-added exporting jurisdictions are important.
- Data limitations imply policymakers should supplement standard trade statistics with firm-level, affiliate, and value-added data to better design targeted tax measures.

*Source: IMF working paper chapter — "2. What Are Cross-Border Services and Why Do They Matter for Tax?"*

### Box 1. WTO Moratorium on Customs Duties on Electronic Transmissions

### Box 1. WTO Moratorium on Customs Duties on Electronic Transmissions

### Status and recent developments
- Since 1998, WTO members have repeatedly renewed the practice of not imposing customs duties on electronic transmissions.
- At the 13th Ministerial Conference (MC13) in Abu Dhabi in 2024, members agreed to maintain the moratorium until MC14 or 31 March 2026, whichever is earlier.
- At MC14, held in Yaoundé in March 2026, members did not reach agreement—some sought a longer extension of up to five years, with a review after four, while others favored a shorter extension with earlier review—and the moratorium lapsed at the end of March 2026.
- Discussions on a possible draft text continue at the WTO in Geneva.
- 23 members (to date) have joined a statement confirming their intention to continue not imposing customs duties on electronic transmissions amongst themselves.
- No countries have implemented digital customs duties to date.
- The plurilateral track on electronic commerce advanced separately: according to WTO reporting from MC14, the E-Commerce Agreement includes a commitment to a permanent moratorium on customs duties on electronic transmissions and 66 members have decided to implement it through interim arrangements.
- Co-sponsors of the E-Commerce Agreement continue to seek its full incorporation into the WTO legal architecture.
- Many regional and bilateral trade agreements also contain commitments not to impose such duties, and several recent U.S. Agreements on Reciprocal Trade go further by committing parties to support a permanent moratorium at the WTO.

### Scope and rationale
- “Electronic transmissions” is not formally defined but is generally understood to cover software and other digitally transmitted cross-border content, such as music, films, video games, and design files.
- Principal case for the moratorium: it preserves an open, predictable, and non-discriminatory environment for digital trade (Ruta and Jakubik, 2023).

### Revenue evidence and comparison with VAT
- Estimated hypothetical tariff revenue on digital flows replacing physical imports is small—around 0.01 to 0.33 percent of total government revenue (Andrenelli and López González, 2023).
- Such potential tariff revenue would, in practice, be further constrained by regional trade commitments.
- By contrast, VAT applied to the same transactions can raise as much or more revenue, while being more efficient because it is non-discriminatory and exempts intermediate inputs (Section 3 of this paper; Hanappi et al., 2024).

### Income-tax-based alternatives and related developments
- Some countries and model-based proposals have explored treating at least some payments for software and related digital products as royalties, preserving source-country taxing rights through withholding taxes rather than customs duties.
- The trend is visible in the 2025 UN Model, which expanded Article 12 to include payments for software.
- Australia’s 2024 draft ruling considered when payments under software arrangements are subject to royalty withholding tax.
- These developments do not create customs duties and do not solve the broader problem of taxing all electronic transmissions, but they show that, in the absence of a multilateral trade solution, some jurisdictions are exploring income-tax-based alternatives.

*Source: Box 1. WTO Moratorium on Customs Duties on Electronic Transmissions*

### 4.1 DSTs

### 4.1 DSTs

### Overview and Rationale
- DSTs (digital services taxes) are taxes on the gross revenues derived from specified digital services in a market jurisdiction, rather than taxes on profit.
- Rationale: to secure some taxation of non-resident firms’ market-linked income where ordinary income-tax rules leave the market jurisdiction with little or no taxing rights.
- DSTs were introduced in part as “interim” or “temporary” measures pending multilateral reform; Pillar One of the 2021 OECD/G20 Inclusive Framework agreement was intended, inter alia, to support withdrawal of existing DSTs and a standstill on new DSTs, but those efforts have stalled and DSTs continue to be used in practice.

### Legal and Practical Distinctions
- DSTs vs tariffs and VAT:
  - Like tariffs, DSTs can be passed through to domestic consumers and may generate trade frictions, but unlike tariffs they are not confined to imports and can apply to comparable domestic supplies.
  - Unlike VAT, DSTs are not designed as broad-based taxes on final domestic consumption; they apply to selected producers’ gross revenues, including intermediate transactions, without credits to relieve business users or prevent cascading.
- DSTs vs withholding taxes:
  - Withholding taxes are typically collected by a local payer on a specific cross-border payment and tied to legal characterization of the payment.
  - DSTs are generally self-assessed and paid directly by the in-scope multinational group, often annually, on destination-sourced gross revenues from specified digital services, using user-location or customer-location proxies.
  - Example (online advertising): an advertiser in country A buys services from a platform in country B, viewed in country C — a DST in country C may tax revenue by reference to user location, whereas a withholding tax would ordinarily require a local payer in country C.

### Economic Incidence and Neutrality Concerns
- Key design issues:
  - DSTs tax gross revenue rather than profit, applying irrespective of profitability and imposing a relatively heavier burden on low-margin businesses.
  - DSTs can apply to both B2C and B2B transactions and generally do not provide credits or refunds for tax paid at earlier stages, creating potential cascading and higher production costs.
  - DSTs can overlap with VAT (example: in the United Kingdom, in-scope digital services may be subject to both DST and VAT).
- Possible incidence channels:
  - Burden may fall on shareholders (lower profits), business users (higher input costs), or final consumers (higher prices).
- Theoretical results:
  - In multi-sided platform models, a DST modeled as an ad valorem tax on advertising revenue may act as a tax on inframarginal rents if operating costs are negligible and not change platform behavior (Kind and Schjelderup, 2025). This result is sensitive to assumptions and may not hold with platform competition.
  - Kind et al. (2025) find a DST can lower tax revenue in the implementing country, weaken downstream price competition, and reduce consumer surplus by shifting activity toward the untaxed side of the market.

### Empirical Evidence and Pass-Through
- Event-study evidence:
  - Authors estimate a triple-difference specification comparing imports of digital services with bilateral imports of non-digital services across DST-adopting and control countries around the year of DST adoption. The estimating equation reported is:
    - E[y_ipst | X] = exp( ∑_k β_k [1{t − T_i = k} × D_s × DST_i]_{k≠−2} + υ_ipsc + φ_iptc + ψ_st ), where y_ipst denotes bilateral imports of service category s from exporter p to importer i in year t, estimated by Poisson pseudo-maximum likelihood (PPML). Event time is defined as k = t − T_i. Coefficients β_k trace the dynamic response of digital services imports relative to non-digital services for treated importers, normalized to event time k = −2. Fixed effects υ_ipsc, φ_iptc, and ψ_st absorb, respectively, time-invariant bilateral trade costs specific to each service and cohort, importer and exporter multilateral resistance varying by year and cohort, and global demand shifts common to all service categories. Data cover 2005–2023 (OECD–WTO BaTIS).
  - Result: a negative and statistically significant effect of DST adoption on digital services imports relative to non-digital services, consistent with DSTs raising the domestic user cost of imported digital services and reducing demand for those inputs.
- Additional suggestive evidence:
  - French ex ante impact assessment of a proposed DST estimated burden shares as: around 55 percent borne by consumers, about 40 percent by businesses using digital platforms, and only about 5 percent by the targeted large internet companies.
  - Company practices indicating pass-through:
    - Google states DST fees or regulatory operating costs may be charged in addition to advertising costs with currently listed surcharges including: 5 percent in Austria, 2 percent in the United Kingdom, 2 percent in France, 2.5 percent in Italy, and 3 percent in Spain.
    - Amazon applies digital services fees to certain seller and FBA charges in the UK, France, Italy, and Spain.
  - Langenmayr and Muddasani (2025): using Amazon Fulfillment by Amazon fee data in France, Italy, Spain, and the United Kingdom and product-level price data, they find substantial pass-through of DST-induced fee increases to third-party sellers and, in turn, to consumers.

### Design Features, Coverage, and Administrative Aspects
- Rates and narrow bases:
  - DSTs have generally been introduced at relatively low rates and with narrow bases. Examples: United Kingdom applies a 2 percent DST on in-scope revenues; Austria applies a 5 percent tax limited to online advertising services.
- Narrow scope and ring-fencing risk:
  - DSTs typically cover only a limited set of activities (commonly online advertising and online intermediation) and often apply to both resident and non-resident suppliers to align with non-discrimination standards.
  - Narrowness reduces definitional and political problems but increases the risk of ring-fencing (predominantly taxing imported services) and boundary problems between taxed and untaxed services.
- Destination-based sourcing rules:
  - DSTs rely on detailed destination-based sourcing rules using proxies tied to user location, customer location, or transaction location; implementing these typically requires taxpayers to set up systems that allocate revenues across jurisdictions and categories and can require tax administrations to invest in administrative infrastructure and third-party reporting obligations.
- Thresholds and concentration:
  - DSTs are generally limited to very large multinational groups through high global and domestic revenue thresholds. Example (United Kingdom): applies only where a group has at least £500 million of worldwide in-scope revenue and more than £25 million attributable to UK users.
  - Thresholds sharply limit the number of taxpayers, intensify line-drawing problems, and can reinforce ring-fencing by concentrating the tax on a small number of very large, predominantly foreign, multinational groups.
- Concentration of payments:
  - United Kingdom, 2020–21 tax year: 18 business groups made a DST payment; five of those 18 paid about 90 percent of total DST revenue (NAO, 2022).

### Revenue Magnitude and Distributional Implications
- Macro revenue:
  - DSTs have generally raised less than 0.1 percent of total tax revenue in most implementing jurisdictions.
- Micro/firm-level importance:
  - Despite modest aggregate revenue, DSTs can be non-negligible for firms in scope due to high concentration of liability among a few large groups.

### Other Related Taxes: Excises and Transaction Taxes (Section 4.2 summary)
- Distinction from DSTs:
  - Excises and transaction taxes considered in the Pillar One discussions were treated as falling outside DST category. These measures are generally not conditioned on who the taxpayer is and apply to any transaction or activity in scope regardless of turnover.
  - Often tied to sector-specific regulatory or cultural-policy objectives (e.g., support for domestic film, audiovisual, music, or media funds) and usually tied more directly to a taxable transaction or regulated activity occurring in the implementing jurisdiction.
- Economic similarities and differences:
  - Economically, these levies may resemble DSTs in targeting digital transactions, using destination-based proxies, and imposing taxes on gross receipts or per-transaction bases that may be passed forward into higher prices.
  - Classification rationale: DSTs are selective taxes on gross revenue introduced in response to perceived shortcomings in international income-tax nexus and profit allocation; sector-specific levies are narrower, often motivated by regulatory or cultural objectives, tied directly to specific transactions, and frequently earmark revenues for related purposes. Grouping them with DSTs would obscure this important distinction.

*Source: IMF Working Paper — section 4.1 (DSTs) and accompanying discussion in 4.2 (Other Related Taxes: Excises and Transaction Taxes).*

### 5. Taxing Cross-Border Services via Income Taxes

### 5. Taxing Cross-Border Services via Income Taxes

### Overview: income-tax responses vs VAT/DSTs
- Income-tax responses aim to bring cross-border services within the scope of business income tax or to protect the domestic income tax base against deductible outbound payments, rather than taxing revenue or transactions directly.
- Amount A under Pillar One of the Two-Pillar Solution sought to allocate taxing rights to market jurisdictions without physical presence; its adoption remains uncertain.
- Broadly observed responses in the absence of a global solution:
  - Expand nexus so remote service provision may create a taxable presence without a traditional PE.
  - Secure source-country taxation of cross-border service payments via withholding taxes.
  - Use anti-base-erosion instruments to discourage or neutralize profit-shifting through service payments or related charges.
- These approaches differ in legal design and the transactions they naturally address:
  - Expanded nexus: primarily remote cross-border services supplied into a market (B2B and B2C), less suited to related-party payments.
  - Withholding taxes: mainly B2B payments (unrelated or related), rely on identifiable payer/withholding agent.
  - Anti-base-erosion instruments: chiefly related-party B2B transactions, operate via domestic treatment of the resident payer (e.g., limiting deductions), potentially less constrained by treaty allocation of taxing rights though treaty analysis remains required.

### 5.1 Expanding Nexus: Digital PE and Significant Economic Presence
- Goal: expand nexus threshold for net-based taxation so remote cross-border service provision may give rise to taxing rights without physical presence; distinct from DSTs/withholding as an income-tax instrument deeming taxable business presence.
- Key concepts:
  - “Digital PE”: broad label for rules deeming a PE or PE-like taxable presence based on non-physical/digital connection.
  - “Significant economic presence” (SEP): a specific design of digital nexus; considered under OECD BEPS Action 1 with revenue thresholds and user- or digital-based factors.
- Practical requirements for any nexus-expansion rule:
  - Define what level of economic interaction creates nexus.
  - Determine how profits should be attributed once nexus exists — nexus vs profit attribution distinction is central.
- Constraints and challenges:
  - Treaty constraints often limit SEP-type rules because most treaties tie business-profit taxation to a PE concept grounded in physical presence.
  - Enforcement difficulties if foreign supplier has no personnel, assets, or legal presence in the market.
  - Under arm’s-length approaches, few or no functions/assets/risks may be located in the market jurisdiction, potentially allocating very limited profits.
  - Combining nexus expansion with turnover-based taxation or withholding can raise double taxation and interaction issues with existing profit allocation rules.
- VAT analogy and limits:
  - VAT shows non-resident suppliers or platforms can be required to register, report, and remit tax where services are consumed, but VAT is transaction-based and does not require profit attribution; treaty constraints do not apply to VAT.
  - Digital PE/SEP may establish taxable presence but, without formulaic allocation, gross-basis charge, or withholding, profit-attribution remains unresolved.
- Jurisdictional examples of SEP-type or digital PE measures:
  - India: thresholds based on revenue and user interaction.
  - Indonesia, Colombia, Kenya, Nigeria, Slovakia: introduced non-physical nexus rules with varying design and legal effect.
  - Colombia: combination of deliberate and systematic interaction with customer thresholds.
  - Kenya: 2024 Significant Economic Presence Tax framed as nexus but operates more like a turnover tax.
  - Nigeria: combines SEP concepts with final withholding at source.
  - European Commission: 2018 proposal for a digital PE directive (not adopted).

### 5.2 Source Rules and Withholding Taxes on Cross-Border Services
- Approach: strengthen source-country taxation via withholding taxes supported by broad source rules; taxes relevant payment on gross basis when payment is made from jurisdiction or service is used/connected to jurisdiction.
- Functions:
  - Directly taxes payments and can discourage large outbound payments (services, royalties, management fees) to lower-tax jurisdictions.
  - Evidence: higher withholding taxes associated with lower imports of royalties and technical service fees (Liu et al., 2025); underlying service-trade data do not distinguish related vs unrelated-party imports.
- Domestic law flexibility:
  - Countries can define source and categories of income for withholding on services; taxes may apply because payment is made by resident firm/PE or because services are used in local activities or linked via user location.
  - Historically relevant for B2B, but increasing extension to remote B2C services with third-party reporting/collection obligations (online platforms, financial intermediaries).
  - Withholding taxes can often be credited in recipient’s residence country, but credits may be unavailable or limited if measure departs from international norms; contractual gross-up obligations can change tax burden incidence.
- Treaty constraints and risks:
  - Treaties often prevent business profits from being taxed in source country absent a PE; royalty articles may allow reduced-rate withholding; some treaties permit withholding on technical service fees.
  - Lower treaty withholding rates can facilitate treaty shopping through intermediary jurisdictions.
  - Estimates: 13–25 percent of bilateral royalty flows are tax-motivated and associated with global revenue losses of US$3.3–8 billion in 2018 (Lejour and van ’t Riet, 2025).
  - OECD BEPS Action 1 considered withholding taxes but did not recommend them as basis for a coordinated multilateral solution.
- Jurisdictional examples:
  - Uruguay: audiovisual services supplied over the internet to users in Uruguay treated as Uruguayan-source income with collection through withholding by designated financial intermediaries.
  - Paraguay: source taxation for digital services used or exploited in Paraguay with withholding by business payer in B2B and by financial intermediaries in B2C.
  - Malaysia: expanded definition of royalties subject to withholding to include payments for “visual images or sounds” transmitted through information and communication technology.
  - Nigeria: combines SEP-type digital activity treated as taxable with withholding as practical collection mechanism.
- Assessment:
  - Administrative simplicity is an attraction.
  - Weaknesses: taxes gross payments rather than net income and are heavily constrained by tax treaties; in operation often resemble a gross-basis levy more than ordinary tax on business profits.

### 5.3 Anti-Base-Erosion Rules and Related Instruments
- Objective: protect domestic tax base against deductible outbound payments and artificial arrangements around domestic sales, rather than redefining taxing-rights origins.
- Underlying concerns:
  - PE thresholds may be too easy to avoid.
  - Transfer-pricing rules may allocate profits to entities with limited substance.
  - Jurisdictions with low tax rates or attractive features may attract mobile service income.
- Three broad instrument types:
  - Denial of deductions:
    - Deny deductions for certain outbound service payments using triggers like payment destination, recipient tax rate, or lack of economic substance.
    - Parallel to interest-deduction limitation rules under BEPS Action 4 (fixed-ratio rule referencing earnings).
    - Target related-party payments, intangible-related charges, or counterparties in listed/low-tax jurisdictions; may include escape clauses for business purpose or substance.
    - EU “defensive measures” list-based option and Australia’s rule disallowing deductions for certain payments by very large groups to related parties in jurisdictions with tax rates below 15 percent cited as examples.
    - Alternative: separate minimum tax assessment (e.g., U.S. BEAT) to reverse tax benefits without formally denying deductions.
    - Trade-off: may affect genuine business payments; evidence on interest-limitation rules suggests adverse effects on investment and real outcomes (Bashir et al., 2024; De Simone et al., 2025).
  - Diverted profits taxes:
    - Aim primarily to change taxpayer behavior rather than raise revenue.
    - UK and Australia adopted diverted profits taxes at rates above ordinary corporate tax to discourage avoidance of PE status or profit shifting lacking substance.
    - UK: applied where non-resident avoided UK PE despite substantial sales activity and where resident made payments producing effective tax mismatch and lacking substance; UK repealed the diverted profits tax in Finance Act 2026 and replaced it with a corporation tax charge on unassessed transfer pricing profits while modernizing dependent-agent PE provisions.
    - Australia: more focused on effective mismatch arrangements.
    - Higher rates and rule design intended to induce restructuring so more income falls within ordinary corporate tax or transfer-pricing net.
  - Targeted deemed-PE rules:
    - Deem a PE where multinationals sell into a market while structuring local presence to avoid treaty/domestic PE thresholds.
    - Not general digital-presence tests; target specific avoidance structures (e.g., Australia’s Multinational Anti-Avoidance Law; New Zealand’s PE anti-avoidance rules).
    - Typically apply when a large multinational makes supplies to local customers or via an agent and one main purpose is securing a tax benefit by avoiding PE status; if met, foreign seller may be deemed to have a local PE and normal profit-attribution rules apply.
- Distinction from expanded nexus:
  - SEP-type rules extend taxing rights without physical presence.
  - Anti-base-erosion rules target arrangements that already involve some physical presence but undermine the domestic tax base, focusing on protecting existing taxing rights rather than redefining where they arise.

*Source: IMF Working Paper chapter "5. Taxing Cross-Border Services via Income Taxes" (content unit).*

### 5.4 Possible Overlap

### 5.4 Possible Overlap

### Analytical distinctions and complementary roles
- The three income tax–based approaches (expanded nexus rules, source rules/withholding taxes, anti-base-erosion rules) are analytically distinct but not mutually exclusive.
- Functional aims:
  - Expanded nexus rules: bring non-resident firms within the scope of net-basis taxation where they participate substantially in a market without a traditional physical presence.
  - Source rules and withholding taxes: tax cross-border payments as such, typically on a gross basis, where a payer, intermediary, or other collection mechanism can be identified.
  - Anti-base-erosion rules: protect the domestic corporate tax base against deductible outbound payments and avoidance structures that shift profits abroad or circumvent ordinary nexus thresholds.
- These instruments address different margins of the same problem: who is taxable in the market, which payments can be taxed at source, and how the domestic base can be protected from erosion.

### Empirical illustration (HMRC, UK)
- HMRC statistics cited in the text:
  - £735 million in net diverted profit tax receipts
  - £4.436 billion in additional corporation tax from transfer-pricing and diverted profits taxes work
  - £2.662 billion in additional VAT associated with business restructurings
  - Combined associated yield of about £7.8 billion

### Potential overlaps in application
- A single payment or service may fall within more than one category depending on domestic-law design and treaty constraints.
- Examples of overlapping treatment:
  - Deductible payment by a local affiliate to a foreign related party for cloud-computing support, AI and data services, digital advertising support, or other management and technical services:
    - May be subject to withholding taxes (gross-basis).
    - May trigger anti-base-erosion rules if the charge is excessive, insufficiently substantiated, or routed to a low-tax jurisdiction.
    - In some systems, the foreign supplier may be treated as having an expanded nexus or SEP-type taxable presence.
  - Foreign digital platform supplying services remotely into a market without physical presence:
    - Expanded nexus rules may deem a taxable presence (sustained market interaction).
    - Withholding taxes may apply to payments by local business customers.
    - The same service could be approached through deemed net-basis taxation, gross-basis source taxation, or both.
  - Multinational structuring third-party sales through an affiliate or agent performing significant local functions while avoiding formal PE status:
    - May be targeted by a deemed-PE rule or a diverted profits tax.
    - May raise source-based questions if related payments flow out of the jurisdiction.
- Domestic tax law instruments should be designed to avoid double taxation to the extent possible.

### Implications for policy design and international coordination
- Overlap does not imply the instruments collapse into one another; central logics remain distinct.
- Countries may layer different legal responses onto similar transactions or arrangements.
- This layering increases the importance of:
  - Careful instrument design
  - Treaty coordination
  - Attention to the risk of cumulative or inconsistent taxation

*Source: 5.4 Possible Overlap, wpiea2026152-source-pdf*

### 6.5 Broader UN Developments

### 6.5 Broader UN Developments

### Multilateral process and Workstream II
- Under the UN Framework Convention on International Tax Cooperation, Workstream II is tasked with developing an early protocol on the taxation of income derived from the provision of cross-border services in an increasingly digitalized and globalized economy.
- Draft text from Workstream II is scheduled to go to the UN General Assembly in 2027.
- The January 2026 Co-Lead’s Draft Options Paper explicitly covers a wide spectrum of services, including:
  - intragroup technical and managerial payments,
  - payments to unrelated parties for remote services,
  - automated digital services.

### Core design choices under debate
- The key design choice is framed as a trade-off between:
  - gross-basis withholding taxes at source, and
  - a broader sales-based right to tax a share of multinational groups’ net income.
- The sales-based right is described as “more appropriate if the aim is to cover a wide range of cross-border services rather than a narrow subset of digital activities” (Amaro and Picciotto, 2025).
- Positions remain contested:
  - some participants favor gross-basis withholding taxes for administrative reasons;
  - others prefer net-basis taxation more closely aligned with traditional income-tax principles.

### Connection to treaty developments and amended articles
- The amended royalties article (Article 12), Articles 12A, 12B, and 12AA, together with the emerging UN Framework Convention process, point toward alternatives to physical presence as the exclusive gateway to source taxation of services.
- These instruments collectively raise the question of whether other connecting factors—such as payment, use, deductibility, or sustained market interaction—can justify source-country taxing rights where physical presence is absent or insufficient.
- The treaty provisions differ in scope and purpose:
  - Article 12A: narrow class of managerial, technical, and consultancy services;
  - Article 12B: automated digital services (ADS);
  - Article 12AA: broader source taxation of cross-border service fees;
  - Amended Article 12: expands royalties category to capture certain software-related and analogous digital payments rather than establishing a general services rule.

### Uncertainty and policy implications
- Whether these UN and treaty developments will crystallize into a widely accepted multilateral regime remains uncertain.
- Nonetheless, they are already reshaping:
  - the treaty debate over cross-border services, and
  - the design of domestic tax measures.
- The evolving debate centers on balancing administrative feasibility, alignment with income-tax principles, risk of overbreadth, compliance costs, and economic incidence (including who ultimately bears the tax).

*Source: IMF Working Paper — Section 6.5 Broader UN Developments.*

### 4. International Monetary Fund, Washington DC.

### 4. International Monetary Fund, Washington DC.

### Key findings on digital trade provisions in U.S. Agreements on Reciprocal Trade (ARTs)
- Agreements on Reciprocal Trade are a new type of U.S. trade agreement introduced in 2025 that coexist with earlier Free Trade Agreements and other treaties.
- Principal novel features:
  - They determine the level of exceptional tariffs the United States applied in 2025 under emergency authority to the trading partner while the partner liberalizes part of its own tariff schedules or other market-access restrictions on a preferential basis with respect to the United States.
  - They contain wide-ranging provisions on non-tariff barriers, services, digital trade, economic security, investment, purchasing commitments, and other issue areas.
- Summary of ARTs’ commitments regarding digital services (coverage as of May 2026):
  - Trading partners listed (in order of agreement): Malaysia, Cambodia, El Salvador, Guatemala, Argentina, Bangladesh, Taiwan POC, Indonesia, Ecuador.
  - For each listed partner, commitments include combinations of:
    - Services Trade Provisions (marked ✔ in the source table for all listed partners).
    - Digital Trade Provisions (marked ✔ in the source table for all listed partners).
    - Commitment to refrain from Digital Services Taxes (DSTs) that discriminate against US companies in law or in fact (marked ✔ for Guatemala, Bangladesh, Indonesia, Ecuador; marked ✔ with “(SDR member)” notes for some partners in the table).
    - Commitment to Refrain from imposing Customs Duties on Digital Trade (marked ✔ for all listed partners).
    - Commitment to Support Permanent WTO Moratorium on Customs Duties on Digital Trade (marked ✔ for all listed partners).
    - Commitment to Implement WTO Agreement on Services Domestic Regulation (SDR) (marked “✔ (SDR member)” for El Salvador, Argentina, Taiwan POC, Ecuador; explicitly ✔ for Guatemala, Bangladesh, Indonesia).
  - Source for table: Office of the United States Trade Representative.
  - Note: Table includes agreements finalized as of May 2026.

### Annex II — Key design features of Digital Services Taxes (DSTs): comparative findings
- Comparative overview covers nine selected jurisdictions; core convergence across jurisdictions despite variations.
- Five common DST design features identified:
  1. Low-rate taxes on turnover.
  2. Targeted at a narrowly defined subset of digital services.
  3. Relying on destination-based revenue sourcing.
  4. Restricted to large multinational enterprise (MNE) groups with a significant domestic customer base.
  5. Assessed and paid directly by the MNE group supplying the taxable services.
- Several DSTs were also introduced as ‘interim’ or ‘temporary’ measures pending a multilateral solution (often reflected in legislative motives or explanatory memoranda, but typically not in legally binding provisions).

- Low-rate tax on turnover: findings
  - DSTs are taxes on turnover, levied on gross revenue rather than net income.
  - They apply to revenue from both B2C and B2B transactions.
  - No opt-outs or relief for loss-making businesses; no offsets against corporate taxes; imposed on top of existing taxes, including VAT.
  - Generally regarded as a deductible expense for income tax purposes and fall outside the scope of double tax treaties.
  - No credits or refunds for DST paid at earlier stages, creating cascading effects.
  - Reported and paid periodically, most often annually.

- Targeted scope (taxable services): consistent categories across DSTs
  - Online advertising services:
    - Usually defined as advertising displayed on a digital interface and targeted at a specific audience using data collected from users’ online interactions.
    - For these transactions, the tax base includes all revenue earned by the publisher—from displaying the advertisement online—regardless of whether payment is direct or through intermediaries.
  - Online intermediation services:
    - Generally refers to digital platforms or marketplaces that facilitate interactions or transactions between different categories of users.
    - Tax base is the revenue earned by the intermediary (for example, a commission fee), regardless of which side of the transaction is charged; does not include the value of goods or services exchanged through the platform.

- Destination-based revenue sourcing: practical implementation
  - DSTs tax domestic use or consumption of taxable services irrespective of supplier or customer residence; exports are excluded.
  - Revenue-sourcing rules rely on “place of use” or “final consumption” with proxies:
    - Online advertising: location of the user viewing the advertisement (“eyeballs”), using indicators such as IP addresses, geolocation data, or user profile information.
    - Online intermediation: location of buyer or seller in the intermediated transaction, using indicators like delivery address for goods or location of underlying property for short-term rentals.
    - Other services (streaming, cloud computing): often source revenue to location of paying customer; no “look through” of business customers when acquired as intermediate inputs.
  - Some jurisdictions specify detailed indicator order; others require reasonable methodologies or allow formulas/allocation keys (for example, number of domestic users relative to global users).
  - Market identification is not feasible transaction-by-transaction; taxpayers develop group-wide systems and analytics to allocate revenue.

- Box A1 — Destination Principle for DSTs vs VAT (example of online advertising)
  - VAT typically taxes place of the customer purchasing the advertising service (business customer); reverse-charge applies.
  - DST sources revenue to location of targeted users (the “audience” or “eyeballs”).
  - Illustrative scenario in source:
    - Business in country A purchases online advertising from platform in country B; advertisement targeted at users in country C.
    - VAT: service taxed in country A (business customer applies reverse-charge).
    - DST: revenue taxed in country C (where targeted users are located).
  - Rationale: VAT’s broad scope and input tax credits versus DST’s narrow scope limited to the advertising service without relief for cascading effects.

- Thresholds and scope restrictions: two cumulative thresholds (group-level in most jurisdictions)
  - Global revenue (group-level) threshold:
    - Austria, Canada, France, Italy, Spain, Türkiye: EUR 750 million (aligned with country-by-country reporting threshold) — note: Canada’s DST threshold includes all revenues of the MNE group, not only revenues from taxable services.
    - United Kingdom: GBP 500 million.
    - India and Nepal: no global threshold; scope limited to non-residents.
  - Domestic revenue threshold (annual, sourced revenue in taxing jurisdiction triggers liability):
    - France: EUR 25 million.
    - United Kingdom: GBP 25 million.
    - Canada: CAD 20 million.
    - Italy: EUR 5.5 million.
    - Spain: EUR 3 million.
    - Türkiye: EUR 375,400 (approximate phrasing in source: “approximately EUR 375,400”).
    - India: EUR 220,000 domestic revenue (NB: limited to non-resident suppliers).
    - Nepal: EUR 12,000 domestic revenue (NB: limited to non-resident suppliers).
  - Consequence: thresholds limit effective application to a very small number of firms (example evidence in source):
    - Fewer than twenty MNE groups were subject to the UK DST in 2024.
    - Estimated thirty-seven MNEs were in scope of the French DST in 2021.
  - Variations and notes:
    - Nepal and India apply their domestic revenue threshold entity-by-entity.
    - Canada and the United Kingdom use their local threshold as an allowance that exempts domestic revenue below those amounts from any DST liability.

- Administration and compliance: paid and self-assessed by the MNE group
  - All DSTs reviewed are self-assessed and paid directly by the supplying MNE group (supplier calculates, declares, and pays).
  - Filing obligations typically annual; some jurisdictions require periodic installments.
  - Compliance simplifications:
    - Single entity within the MNE group may fulfil DST obligations on behalf of the group in many jurisdictions (not applicable in India and Nepal).
  - Typical compliance infrastructure and procedures:
    - Fully digitalized registration, filing, and payment procedures.
    - Local tax representative may be required where no existing local tax presence exists for corporate income tax or VAT.
    - Payment mechanisms adapted to non-residents, including clear foreign exchange rules.
    - Possibility for MNE group to designate a single entity (typically a local subsidiary) to file and pay for all group entities with taxable services.
    - Joint liability rules covering locally based entities to secure collection.
    - Some legislations introduce new reporting obligations on third parties (for example, financial intermediaries) to reduce non-compliance risks.
  - Compliance levels: voluntary compliance generally high in jurisdictions with high global revenue thresholds, reflecting limited number of affected taxpayers and reputational exposure.

### Table excerpt (Key DST parameters by country) — exact figures preserved from source table
- Austria
  - Introduction: January, 2020
  - Status: In force
  - Rate: 5%
  - Scope Thresholds: EUR 750 million global revenue, and EUR 25 million domestic revenue
  - Tax Base: Gross revenues from online advertising services.
- Canada
  - Introduction: June, 2024
  - Status: Stalled in June, 2024
  - Rate: 3%
  - Scope Thresholds: EUR 750 million global revenue, and CAD 20 million domestic revenue
  - Tax Base: Gross revenues from online advertising services, online intermediation services and transfer of user data.
- France
  - Introduction: January, 2019
  - Status: In force
  - Rate: 3%
  - Scope Thresholds: EUR 750 million global revenue, and EUR 25 million domestic revenue
  - Tax Base: Gross revenues from online advertising services and online intermediation services.
- India
  - Introduction: April, 2020
  - Status: Repealed in August, 2024
  - Rate: 2%
  - Scope Thresholds: EUR 220,000 domestic revenue (NB: limited to non-resident suppliers)
  - Tax Base: Gross revenues from all digital services and the sale of goods by online platforms.
- Italy
  - Introduction: January, 2020
  - Status: In force
  - Rate: 3%
  - Scope Thresholds: EUR 750 million global revenue, and EUR 5.5 million domestic revenue
  - Tax Base: Gross revenues from online advertising services, online intermediation services and transfer of user data.
- Nepal
  - Introduction: July, 2022
  - Status: In force
  - Rate: 2%
  - Scope Thresholds: EUR 12,000 domestic revenue (NB: limited to non-resident suppliers)
  - Tax Base: Gross revenues from all digital services.
- Spain
  - Introduction: January, 2021
  - Status: In force
  - Rate: 3%
  - Scope Thresholds: EUR 750 million global revenue, and EUR 3 million domestic revenue
  - Tax Base: Gross revenues from online advertising services, online intermediation services and transfer of user data.
- Türkiye
  - Introduction: March, 2020
  - Status: In force
  - Rate: 5%*  (source note: * Rate reduced to 2.5% as from January 2027.)
  - Scope Thresholds: EUR 750 million global revenue, and EUR 375,400 domestic revenue
  - Tax Base: Gross revenues from online advertising services, online intermediation services, transfer of user data, online streaming services, and certain cloud-computing services.
- United Kingdom
  - Introduction: April, 2020
  - Status: In force
  - Rate: 2%
  - Scope Thresholds: GBP 500 million global revenue, and GBP 25 million domestic revenue
  - Tax Base: Gross revenues from online advertising services and online intermediation services.
- Source for table: Compiled by the authors.
- Note preserved: Some jurisdictions include special provisions (for example, the UK elective “safe harbour” mechanism allowing taxpayers to reduce effective tax rate based on operating margin; Canada excludes half of intermediary revenue in certain cases; the Equalisation Levy in India applied to the entire revenue of the underlying transaction).

### Analytical implications highlighted in the source
- DSTs are best understood as sector-specific turnover taxes, distinct from income taxes (based on profits) and traditional consumption taxes (which generally relieve taxation of intermediate inputs).
- Design choices (low rates, narrow scope, high global thresholds, destination-based sourcing, group-level compliance) produce practical consequences:
  - Narrow ring-fencing effect: DSTs often apply to a small set of large foreign MNEs.
  - Cascading taxation risks because DSTs tax gross revenues and typically do not grant input relief or credits.
  - Administrative complexity for accurate revenue sourcing, requiring sophisticated data systems for MNEs and tax administrations.
  - Interaction with VAT and income tax systems can create divergence in sourcing outcomes and double taxation risks that lawmakers have addressed through discretionary mechanisms (for example, partial exclusions or allowances).
- Policy trade-offs noted implicitly by design features:
  - Targeting large MNEs reduces administrative burden but increases concentration of tax incidence.
  - Destination-based sourcing aligns taxation with consumption but creates sourcing complexity and potential mismatches with VAT and income-tax sourcing rules.
  - Interim/temporary framing of DSTs reflects expectation of multilateral solutions but absence of legally binding sunset provisions in many jurisdictions.

*Taxing Cross-Border Services Working Paper No. WP/2026/152 — International Monetary Fund*

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_Source: https://www.imf.org/-/media/files/publications/wp/2026/english/wpiea2026152-source-pdf.pdf_