In the 2020-21 tax year, the UK collected £358 million from digital services taxes. In 2020, Google reportedly paid France around €50 million in DST. As of 2024, the digital services tax landscape continues to evolve, with rates, procedures, thresholds and subjected business activities varying by country and region. 

So, what exactly is the Digital Services Tax? What are the rates worldwide, and should you pay it as a video game developer, publisher, digital service provider, or vendor of digital goods? Read this article to find out.

What is Digital Services Tax?

In the last 15 years, we have observed an increase in the digitalization of the economy, which has allowed large international corporations to generate revenue from users abroad without being subject to corporate income tax in the users' countries due to the absence of physical presence. To "restore fairness," many countries have introduced a Digital Services Tax (DST), a tax on specific streams of gross revenue of large digital companies. Typically, the tax is a percentage charge of turnover from in-scope activities, with a sales threshold based on in-country and global income. 

Digital Services Tax (DST) is a mix of gross receipts taxes and transaction taxes that apply to receipts from, for example, the sale of advertising space, the provision of digital intermediary services, and the sale of user data. DSTs are distinct from income and online sales taxes and are not VAT/GST/CT.

Who Should Pay Digital Services Tax?

The Digital Services Tax (DST) is designed to be paid by large digital companies that meet certain criteria. These criteria can vary significantly by country, but generally, the companies required to pay DST are those that meet the following conditions:

1. Revenue Thresholds: companies with annual global revenues exceeding a specified amount, often set in the hundreds of millions of dollars, and a significant portion of those revenues derived from digital activities in the taxing country.
2. Type of Activities: companies engaged in specific digital services, including:
   • Online advertising: companies generating revenue from targeted advertisements displayed to users in the taxing country.
   • Digital intermediary services: companies operating platforms that enable users to interact or transact, such as social media platforms, marketplaces, and ride-sharing services.
   • Data monetization: companies selling user data collected through digital activities.
3. Local Revenue Thresholds: Companies that also surpass a certain level of revenue generated from digital services provided within the taxing country.

For example, DST implementation in France specifies that companies with global revenues exceeding €750 million and local digital services revenues exceeding €25 million must pay the tax.

Exemptions and Special Cases

• Small and medium-sized enterprises (SMEs) typically do not meet the revenue thresholds and are therefore exempt from DST.
• Some countries may exempt certain types of digital services or provide reliefs to avoid double taxation where similar taxes are already being paid elsewhere.

Overall, DST is aimed at large, multinational digital companies that generate substantial revenues from users in a country without a commensurate physical presence, ensuring they contribute a fair share of tax to the jurisdictions where they derive their income.

Global Overview of Digital Services Taxes

In most countries that have implemented a Digital Services Tax (DST), the application threshold is based on both the global turnover of the digital company and its turnover within the specific country. 

For instance, Turkey imposes DST on digital companies with a global turnover of at least €750 million and a domestic turnover of 20 million TRY. However, many countries tax digital sales from the first transaction, regardless of turnover, such as Paraguay.

Each country that has introduced DST has done so independently, according to its domestic legislation. Therefore, these taxes differ not only in rates but also in the types of digital services they apply to. For example:

• Austria and Hungary: These countries tax only revenues from online advertising.
• Denmark: Applies DST solely to streaming services.
• France: Has a much broader tax base, including revenues from providing a digital interface, targeted advertising, and transmitting data collected about users for advertising purposes.

The tax rates also vary significantly:

• Poland and Portugal: 1.5%
• Hungary and Turkey: 7.5% (although Hungary's tax rate has been reduced to 0% until December 2024).

These differences highlight the diverse approaches taken by various countries in taxing digital services. For a full list of Digital Service Tax rates, please consult the following table: 

Europe Digital Services Taxes (DST)

Asia Pacific Digital Services Taxes (DST)

Americas Digital Services Taxes (DST)

Africa & Middle East Digital Services Taxes (DST)

Businesses Challenges Associated with Digital Services Tax

One of the main challenges businesses face in adapting to DSTs is the lack of a unified global approach. With different countries and regions implementing their own tax rules, companies must navigate a complex web of regulations, which can be time-consuming and costly.

Another challenge is the potential for double taxation, as some countries may not provide credit for DSTs paid in other jurisdictions. This can lead to a higher overall tax burden for businesses operating in multiple markets. The implementation of DSTs has also sparked a global conversation about the need for a more comprehensive reform of international tax rules.

Future of Digital Services Tax

Since 2012, the Organisation for Economic Co-operation and Development (OECD) has been working with over 140 countries to improve the international tax system for the digital economy, addressing the issue of unfair taxation of income from digital multinational corporations. This initiative led to the introduction of "Pillar 1," which requires large multinational companies to pay part of their income taxes in the countries where their consumers are located.

Pillar 1 aims to replace the current Digital Services Taxes (DSTs) that many countries have independently introduced. The transition process to this new system was expected to be completed by June 2024. However, the OECD missed the March 31 deadline to finalize the agreement due to unresolved disagreements over the complex formula for reallocating tax rights on the sales of multinational enterprises. Some countries and businesses have criticized the proposals, arguing that they are too complex and could lead to double taxation.

Many countries have paused the introduction of alternative unilateral DSTs in the hope that these negotiations will soon reach an agreement. This moratorium is in place until 2025, providing more time for the OECD and countries to finalize discussions on Pillar 1. However, it remains uncertain whether the necessary consensus for implementing this proposal will be achieved by next year.

Conclusion

Determining whether you are subject to Digital Services Tax can be complex, as it involves understanding the specific laws of each country. Generally, most countries apply these taxes to companies with significant turnovers. In the video game industry, leaders like Valve, EA Games, Sony, Tencent, and Ubisoft are typically subject to these taxes. Similarly, major digital services providers such as Netflix, Google and Spotify also fall under these regulations.

If you operate on a smaller scale, you may be exempt from such taxes in many jurisdictions. However, some countries apply the tax from the very first transaction. For example, Paraguay imposes taxes on digital sales starting with the first transaction, regardless of turnover.

Even if you are not subject to Digital Services Taxes (DST), you are very likely still required to pay Sales Tax (VAT/GST/CT). These taxes are increasingly applied to video games and digital services worldwide. To ensure full compliance with VAT regulations globally, consider contacting experts like 1D3, who can help you stay 100% VAT compliant. This will help you avoid any potential legal issues and ensure smooth operations across different markets.