Ten EU member countries (as well as the UK) have digital services taxes (DSTs) in 2025, with more European countries considering the levies. Is the trend towards continent-wide consensus on the levies, or will there be further fragmentation under geopolitical pressure?

Leopoldo Parada and Doron Narotzki offer two perspectives on DSTs, one from Europe and the other from the United States. Both advocate the same path between uniformity and abandonment: taxation of digital services through existing value added tax (VAT) frameworks. There’s at least some consensus amidst the turmoil.

Leopoldo Parada (King’s College London), Balancing DSTs and Geopolitics: The European Dilemma, 119 Tax Notes Int’l 1013 (Aug. 18, 2025):

Seven years have passed since the failed EU DST directive, and the world has changed considerably. The latest Trump administration announced early this year its complete departure from the global tax deal that includes all negotiations at the inclusive framework regarding the OECD’s pillars 1 and 2. The United States also escalated its response to foreign DSTs by launching a new round of investigations and threatening retaliatory tariffs . . . . In the current geopolitical scenario, can the EU still forge an EU-wide DST?

The intuitive answer is no, especially considering the risk of retaliation from the United States. However, an EU-wide DST may remain viable if implemented with a balanced and carefully structured approach . . . .

This requires: (1) making a clear decision on whether to commit to current or new multilateral frameworks or to abandon them entirely in favor of an EU-wide DST applied permanently; (2) ensuring EU-wide coordination; (3) avoiding discriminatory pitfalls; and (4) engaging in strategic diplomacy.

Although a DST strategy may in principle work, Europe has perhaps a more efficient tool to deal with the taxation of digital services: the EU VAT system. This option, although focused on consumers, with apparently reduced redistributive effects, and potentially abnormal compliance costs, still runs with advantages vis-à vis other alternatives, especially a DST. Most notably, VAT is inherently nondiscriminatory, highly harmonized across Europe, and trade-neutral, making it a superior option.

We are in mid-2025, and the world still struggles to find a permanent solution to the taxation of business income in the absence of a physical presence. Maybe it is time to start looking beyond the binary discussion between multilateralism and DSTs and explore a wider range of options. They can certainly be found.

Doron Narotzki (Akron, Daverio Sch. Acct.), The U.S. Case Against the Digital Services Tax,189 Tax Notes Fed. 63 (Oct. 6, 2025):

[European] DSTs emerged as a temporary tool meant to create leverage over the United States to reach a comprehensive agreement at the OECD.

However one looks at it, the bottom line is the same. U.S. technology firms earn large profits; EU tax authorities believe they deserve a share of revenue generated in their markets, yet under current rules those profits are often outside their reach. That is the DST story. It was, and still is, about perceived fairness. I do not challenge that point; in fact, I agree with it. The EU should have some tax rights here, and a solution is needed sooner rather than later. My claim is different: DSTs were an attempt to solve a problem that inadvertently created several new ones. . . .

In what follows, I briefly explain why I believe DSTs failed in practice from the U.S. perspective and focus on three key points: (i) EU member states could not agree on the specific details of DSTs; (ii) several national DSTs clearly targeted U.S. companies and invited retaliation; and (iii) DSTs tried to force a redesign that the United States was never going to accept while ignoring the more viable and administrable alternative: VAT. . . .

Parada argued, and I agree, that instead of taxing digital services in Europe with DSTs, the EU should have used VAT. In my view, this is where the United States truly has no leg to stand on, and where the EU should have focused from the start. VAT is neutral, or at the very least, VAT is much less distortionary than other taxes as it is destination based and already harmonized in Europe. Additionally, from a U.S. perspective, the lack of a U.S. federal VAT is not a valid reason to object to Europe using its own VAT to tax consumption tied to its markets.

Put simply, VAT is the most appropriate tool here. U.S. companies already collect VAT across multiple jurisdictions, therefore the compliance burden (which at least in theory was a U.S. concern . . . ) is significantly weaker.

When Europe tightens VAT collection and platform rules in a neutral way, no specific nation is targeted and there is nothing for Washington to contest. Furthermore, this would have allowed the EU to present a unified front, which would change the power dynamic in the negotiations. The United States should prefer the VAT path to DSTs. Better VAT enforcement reduces the perceived need for ad hoc gross receipt taxes, avoids double taxation and non-creditability problems, and keeps profit allocation in the income tax and negotiated rules, where it belongs. DST, unlike VAT, was in some ways an attempt to reinvent the wheel. It had very little chance to succeed if only because of this. . . .