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The European Union, with the Brussels Effect, became a regulatory power, giving the union the authority to regulate global market environments. In turn, this has shaped how international regulations and standards are set in the global business according to the European laws. With this potential superpower, the EU and the Brussels Effect are often viewed as major players in influencing policy areas of climate change, data protection , financial markets, and consumer health, safety and wellbeing.
While these policy areas have adopted the EU set of regulations without much contention, the taxation of the digital economy has become a recent topic of debate. This debate has brought into view the EU’s jurisdiction to tax multinational corporations in today’s scenario where digital economies are so complexly intertwined. The implementation of the Digital Services Tax (DST) by several EU Member States has brought attention to this matter. One consequence of this implementation is the rising diplomatic tensions with the United States. Current US President Donald Trump’s imposed, planned and threatened tariffs have spurred a discussion to introduce a unified DST in the EU. These heightened economic and diplomatic tensions have indicated how taxation is evolving into a geopolitical tool of influence in this digital age.
Understanding the Digital Services Tax (DST)
The services sector has emerged as the driving force of economic transformation around the world, signalled through its contribution to the Gross Domestic Product (61.8 percent in 2023 according to the World Bank), employment and trade. Within the services sector, the digital economy comprises more than 15.5 percent of the world’s GDP. Digital economy is referred to as the economic activities which involve digital technologies for connecting people and businesses. Thus, with minimal physical infrastructure, the digital economy dominates the services sector.
However, as opposed to the traditional mechanism of tax framework for firms based on the number of tangible assets and their physical presence in a given territory, the corporations operating in the digital sphere do not have the same level of physical footprint, often functioning seamlessly across the borders. Therefore, in the year 2016, a new kind of tax, the Digital Services Tax (DST), was introduced as a method to regulate taxes on digital activities. A DST is a gross revenues tax on a multinational corporation whose main activities include providing digital services to users within a specified jurisdiction.
In March 2018, the European Commission presented two proposals, one of which introduced the DST as an interim to revolutionize the revenue collected from the firms working in the digital space. This consisted of a uniform tax rate of 3% on primarily revenues arising from online advertising, a fee on the intermediary digital spaces used for buying/selling between the users, sales from data generated through user-provided information. The proposal also provided thresholds, crucial for the DST to be applied. These included (1) a total worldwide revenues of €750 million or more and (2) EU revenues of €50 million or more, fulfillment of both the criterias was essential for the implementation of the DST as well as ensuring a fair distribution of the tax burden on the digital economy.
Despite consistent efforts, the proposal was deferred in 2019 as the Economic and Financial Affairs Council was unsuccessful in achieving unanimous support for the same. However, at the national level several countries were able to implement the DST. One of the first organizations to notice the advent of digital firms and the potential revenue from them was the Organisation for Economic Cooperation and Development (OECD). Within the EU and contemporaneously members of the OECD, countries including France, Spain, Italy, Austria and Portugal went on to adopt the DST. While DSTs have been applied differently in different parts of the world, their structure mostly includes these elements:
- The DST calculates the tax volume based on the company’s national presence.
- These elements are applicable to a set of activities that fall under the scope of digital services.
- The system establishes a revenue threshold for each company.
- Applying the DST on the gross revenues.
As of May 2025, the DST has been implemented in the EU member States of Austria, Denmark, France, Hungary, Italy, Poland, Portugal, and Spain but the scope of the tax varies among them. Spain’s Google Tax applies a 3% levy on tech firms with a domestic threshold of €3 million.
The DST bill in France (known as FDST) has proved to be more controversial. Since its adoption in July 2019, the bill has undergone amendments to encompass a wider range of activities. Targeting many US-based multinational corporations, the FDST levied a tax on two types of services: interfacing and advertising. The recent dilemma surrounding the rising state budget deficit of the French government has prompted the officials to consider amending the bill, raising the tax rate from 3% to 5%, leading to an increase in revenue by €500 million.
Precedents: Taxation and Regulation of Big Tech in the EU
Currently, tech giants such as Amazon, Apple, Google, Microsoft, Meta, and X are already required to pay certain taxes in the European Union, such as VAT. As is well known, VAT is the only tax harmonised at the European Union level; therefore, the rules dictated by the Community Directive in force are applied uniformly in all Member States. This requirement has been a sticking point for Trump. The United States considers that this tax acts as a disguised tariff that penalises its companies.
In parallel, the European Commission is set to fine Apple and Meta for violating digital competition rules, the first such fines to be issued under the DMA (Digital Market Act). Its flagship technology laws, such as the Digital Markets and Services Acts (DMA and DSA ), are not designed to serve as retaliation.
In parallel, the European Commission issued its first fines under the Digital Markets Act (DMA), targeting tech giants Apple and Meta for breaching digital competition rules. These actions coincide with an important moment in the EU’s digital regulation landscape, as the Commission begins enforcing its new suite of landmark laws—particularly the DMA and the Digital Services Act (DSA). Therefore, the Commission has fined Apple and Meta €500 million, and €200 million respectively. Once again, the White House reaction was not long in coming and classified these fines as a “novel form of economic extortion” that the United States will not tolerate. The White House considers the DMA discriminatory against American companies.
These measures impose strict responsibilities on “gatekeepers” to guarantee equitable competition and protect user rights on the internet. Instead, they form part of a broader legislative framework aimed at curbing market dominance and promoting a level playing field. For example, the Commission has expressed concerns over Apple allegedly limiting third-party app stores on iOS devices and Meta’s bundling of services like Facebook and Instagram, which could hinder consumer choice and stifle competition.
The legitimacy of such regulatory measures has often been upheld by the European Court of Justice (ECJ), which has consistently reinforced the Commission’s authority in enforcing competition law. In Case C-413/14 P – Intel v Commission, the ECJ emphasised that dominant firms have a special responsibility not to impair competition, reaffirming the Commission’s right to impose fines for anti-competitive practices. Similarly, in Case C-252/21 – Meta Platforms Inc. and Others v Bundeskartellamt, the Court acknowledged the compatibility between data protection concerns and competition enforcement, paving the way for digital oversight that transcends traditional market abuse. These precedents underscore the legal robustness of the DMA and DSA frameworks, even as they test the limits of regulatory reach in the digital age.
DST as a Geopolitical Instrument in Trade Disputes
The DST has now emerged as a geopolitical instrument amidst rising global trade tensions, especially with the US, though it was originally conceived as a fiscal response primarily to fund the EU. The tax has been widely unpopular among the American tech organisations, with the most observable impact on the Big Four, tech firms Google, Amazon, Facebook, and Apple (GAFA). The American tech organisations argued that the tax is a distortion of international rules and is disproportionate and unfair to their firms. Therefore, as EU member states began to adopt the new regulation, the US launched investigations under Section 301 of the Trade Act over charges of discrimination against US-based MNCs. France’s DST was the first to face scrutiny. The US Trade Representative concluded that the French tax was discriminatory and proposed retaliatory tariffs of up to 100% on French exports worth €2.08 billion. Similar investigations soon followed against other European countries pursuing similar digital levies, including Italy, Austria, and Spain; however, no formal legal action or retaliation took place.
Now, amidst Trump’s threats and subsequent impositions of tariffs on goods produced in the EU, the union has announced its strategy to counter the effects of the levied duties, with the DST emerging as its central element. Keeping in mind that the EU has had a steady deficit with the US in trade of services, the list of retaliations to correct this imbalance and reciprocate the sentiments primarily includes taxing the GAFA. Pointing out the market presence of these firms in the European Union, European Commission president Ursula von der Leyen stressed the necessity of taxing tech groups if Brussels and Washington failed to arrive at a reasonable conclusion. This measure, if implemented, would be monumental for the EU and the US as it would differ from the DST, being applied to the EU as a single market. Apart from a digital services tax, other measures considered to counterstrike Trump’s tariffs include restricting the business of JP Morgan, an American financial MNC, in the EU; limiting the extent of intellectual rights of the US companies; and exercising control over their bidding rights over European government contracts.
While the EU has not yet formulated a response to the US with regard to tariff retaliation, the initiation of the use of DST as a potential response presents novel possibilities for using it as a tool in trade disputes. In a highly globalised world, tech power has emerged as a strategic domain of political and economic influence. They possess the capabilities of redressing global power asymmetries. Unlike tariff regulations, which challenge the WTO rules, the DST borders on the grey legal zone where the opposition to such taxes under the WTO framework falls short. Thus, the departure of the EU from viewing DST as a source of revenue to a geopolitical instrument is a first instance but serves as a catalyst for many emerging economies.
Conclusion
The European Union can no longer afford to act as a privileged bystander on the global power stage. If the United States persists in using tariffs as a weapon under the pretext of economic protectionism, Brussels must respond not with diplomatic concessions but with its true strength: its legislative machinery. For years, the EU has cultivated its identity as a regulatory superpower, imposing strict environmental, technological, and competition standards that many economies have simply had to follow. The Digital Services Tax (DST) is a crucial tool that can challenge American dominance in the tech sector
While Washington uses tariffs as a form of trade punishment, the EU has a more sophisticated and long-lasting tool at its disposal: reshaping the global digital game. By implementing structured taxes, demanding transparency, enforcing interoperability standards, and dismantling abusive practices by digital “gatekeepers,” Brussels can effectively target American multinationals at the core of their business model. Instead of succumbing to a tariff war, which is more appropriate for a 20th-century industrial economy, the EU has the ability to act strategically. The case of Apple restricting app stores or Meta bundling its services shows that weakening the dominance of these corporations doesn’t require tariffs, but political will to enforce the rules. The European legal framework, backed by the Court of Justice of the EU, firmly upholds the Commission’s powers against giants such as Intel and Meta, providing an unbreakable barrier for those who anticipate digital impunity.
Ultimately, if there is continued insistence on punishing Europe with tariffs, the response should not take the form of commercial retaliation but rather of an unrelenting legislative offensive. For true power today is no longer measured in tonnes of steel or litres of exported wine, but in the ability to write the rules that govern algorithms, data flows, and digital monetisation models. The EU need not engage in bellicose actions; instead, it should focus on its expertise in precise legislation. The era of the “regulatory empire” has arrived, with Brussels wielding the power to reshape the rules of global digital trade.
For further thought:
- Could this lead to the potential misuse of DST?
- How can the EU ensure national fiscal sovereignty while implementing the DST?
- Is the DST as a tool also feasible for developing economies?
Suggested readings:
- Poitiers, N. and Görlich, D., (2020). Geopolitical Aspects of Digital Trade: In-depth Analysis Requested by the INTA Committee. European Union.
- Pirlot, A. and Culot, H. (2021). When international trade law meets tax policy: The example of digital services taxes. Journal of World Trade, 55(6).
- James, S. and Quaglia, L. (2024) Bigtech finance, the EU’s growth model and global challenges, Economic Governance and EMU Scrutiny Unit (EGOV).
