The Unfinished Fiscal Map: Who Gets to Tax the Dig…
When France first levied a 3% tax on the domestic revenues of large technology companies in 2019, the move was presented as a modest, temporary fix. Five years later, the temporary fix has become a global patchwork. More than 20 countries now operate some form of digital services tax, the United States has threatened retaliatory tariffs, and the multilateral replacement intended to tidy it all up remains unsigned.
The question at the heart of the scramble is disarmingly simple and technically complex: where should a company that sells everywhere but is physically located almost nowhere pay its taxes?
For most of the last century, international tax rules rested on physical presence. A company was taxed where it had offices, factories, or personnel. That principle struggled as companies like Google, Amazon, and Meta built business models in which value is derived from users, data, and online advertising in one country, while profits are booked in another, often lower-tax, jurisdiction.
The scale of the mismatch sharpened after the 2008 financial crisis. The Organisation for Economic Co-operation and Development (OECD) launched its Base Erosion and Profit Shifting (BEPS) project in 2013, estimating that profit-shifting cost governments $100 billion to $240 billion annually in lost revenue. By 2018, public pressure to act on highly visible technology firms accelerated political timelines faster than the OECD process could move.
The result was the rise of the unilateral digital services tax, or DST.
Unlike corporate income taxes, DSTs are typically levied on gross revenues, not profits, generated from specific digital activities online marketplaces, search engines, social media platforms, and targeted advertising within a country’s borders. Rates are low, generally 2% to 5%, but they apply broadly. The United Kingdom’s 2% DST raised over £800 million in 2024-25. France, Italy, Spain, Austria, India, Turkey and others adopted similar measures, each with slightly different thresholds, definitions, and scopes.
Proponents argue DSTs restore a basic link between economic activity and taxation. “If a platform earns substantial revenue from French users watching French ads, the French tax base should reflect that,” a senior official at the French Ministry of Finance said in 2023. For many developing economies, where consumption of digital services is large but physical presence of providers is minimal, DSTs are also a matter of fiscal sovereignty.
Critics, including the technology companies themselves and the U.S. government, point to three problems. First, taxing revenue rather than profit can penalize low-margin businesses and be passed on to small businesses and consumers who use the platforms. Second, the proliferation of different rules creates compliance complexity and the risk of double taxation, where the same income is taxed in multiple jurisdictions. Third, Washington has long argued DSTs are discriminatory by design, targeting predominantly American firms.
That third argument carried trade consequences. Under Section 301 of the U.S. Trade Act, the Office of the U.S. Trade Representative (USTR) investigated DSTs adopted by France, India, Italy, and others, concluding that several did discriminate against U.S. companies. Tariffs of up to 25% on selected imports were prepared, then suspended pending a global deal.
That deal was meant to be Pillar One.
In October 2021, 136 countries and jurisdictions representing more than 90% of global GDP agreed to a two-pillar framework brokered by the OECD/G20 Inclusive Framework. Pillar Two, a 15% global minimum corporate tax, has largely moved forward and is now in force in dozens of countries. Pillar One is the more ambitious and more fragile.
Under Pillar One’s Amount A, a portion of the residual profits of the world’s largest and most profitable multinationals those with global turnover above €20 billion and profitability above 10% would be reallocated to market jurisdictions where their customers and users are located, regardless of physical presence. The scope was deliberately expanded beyond tech; excluding extractive industries and regulated financial services, it would cover roughly 100 multinationals across sectors.
In exchange, countries would be required to withdraw DSTs and similar measures and commit not to introduce new ones. A Multilateral Convention (MLC) would implement the rules, replacing a web of unilateral taxes with a single, coordinated mechanism. The OECD estimated in 2023 that Pillar One would reallocate $200 billion in profits and generate $13 billion to $36 billion in additional global tax revenue annually, a figure comparable in aggregate to existing DST receipts, though distribution would differ markedly by country.
Negotiations have since slowed. The original goal of signing the MLC in 2023 was missed. A target for 2024 was also missed. In 2025 and early 2026, several governments, including the UK, revised their internal planning assumptions to 2027, while confirming that their DSTs “remain in operation” until a convention enters into force.
Several factors explain the delay. The convention requires ratification, including in the United States, where any tax treaty must secure a two-thirds majority in the Senate. Bipartisan skepticism about ceding taxing rights and concerns about revenue impacts have made ratification uncertain. Some emerging economies have argued that the thresholds for Pillar One are too high and the reallocation too small to benefit them meaningfully, preferring instead to retain DSTs or pursue a parallel negotiation at the United Nations on international tax cooperation that could run until 2027. In Washington, meanwhile, successive administrations have maintained that any acceptable deal must include robust DST withdrawal provisions.
The result is a holding pattern with real costs. In October 2021, Austria, France, Italy, Spain, the UK and the United States announced a transitional agreement: as long as Pillar One progressed, the U.S. would not impose retaliatory tariffs, and European DST liabilities would be creditable against future Pillar One obligations. That truce has largely held, but it depends on continued progress.
For businesses, the uncertainty complicates planning. A multinational may face a DST in India, a diverted profits tax in the UK, a Pillar Two top-up in the EU, and the prospect of Pillar One reallocation all with different calculation bases and documentation requirements. Tax directors at several large firms interviewed for this article described building parallel compliance systems for scenarios in which Pillar One enters into force, fails, or enters into force partially.
For governments, the trade-off is fiscal and diplomatic. DSTs offer immediate, predictable revenue and domestic political appeal. Pillar One offers stability, prevention of double taxation, and a brake on trade disputes, but its benefits are diffuse and longer-term.
No outcome is likely to satisfy all parties. A full implementation of Pillar One would mean the end of headline-grabbing taxes on tech giants, but would institutionalize a new principle that market countries deserve a share of residual profits even without physical presence a precedent that extends well beyond Silicon Valley. A collapse of Pillar One would likely entrench and expand DSTs, increasing the risk of fragmented digital taxation and tit-for-tat trade measures.
What began as an argument over how to tax search ads and online marketplaces has become a test of whether 140-plus jurisdictions can rewrite tax rules built for factories for an economy built on intangible assets. Until that map is redrawn, the titans will continue to be taxed just not under a single system.
*An accomplished jurist with profound acumen in constitutional and corporate jurisprudence, advising both public institutions and private enterprises, and shaping contemporary legal and policy thought.
