UK Digital Services Tax unchanged in US trade deal

UK avoids reduction in 2% Digital Services Tax to secure lower tariff quotas

The UK government avoided an anticipated reduction or withdrawal of its £800 million Digital Services Tax (DST) to win a limited trade deal with Trump administration on 8 May.

Instead, the two countries have agreed to work on a separate digital trade deal that will strip back paperwork for British firms trying to export to the US – opening the UK up to a huge market that will put rocket boosters on the UK economy.

There were withdrawal of higher rate 25% US tariffs on UK cars, aluminium and steel going into the US – they will switch to the universal US 10% rate. This is matched by opening up UK beef markets to US farmers. But the universal US 10% tariff introduced on 2 April remains intact.

In February, President Trump launched a DST investigation. Since then, there has been differing reactions:

• Italian DST compromises are on the way
• India cut equalisation levy on e-commerce to help win lower tariff deal.
• Uganda DST has been withdrawn for a more traditional Withholding Tax
• By contrast, Poland and Belgium are stepping-up their DST’s. See our global DST tracker.

The UK DST is a 2% flat levy on the UK revenues of the world’s biggest internet firms introduced five years ago. It’s expected to bring in £800 million in 2025. The tax applies to businesses with global revenues exceeding £500 million and at least £25 million from UK digital activities. The DST was intended as an interim measure until an international agreement on digital taxation is reached – but OECD Pillar 1 negotiations have stalled following a January 2025 US exit from talks.

March 2024: UK politicians consult with US counterparties on DST compromise

In March, the Technology Secretary Peter Kyle and Peter Mandelson, met some of those firms on the US, West Coast, while the Business Secretary, Jonathan Reynolds, held talks with Trump administration officials about ways the UK could avoid being hit by new US tariffs. Asked by the BBC about the possibility the UK could make changes to the tax as part of an economic deal, Mr Mandelson told the BBC that everyone knows it’s under discussion.

A Treasury spokesperson said a review of the Digital Services Tax had always been planned for this year, but it would be wrong to imply that meant there was any intention to repeal it.

Feb 2025 US launches DST investigation, naming UK as part of investigation into unfair digital taxation

On 21 February 2025, US President Trump signed an order to investigate potential tariff retaliations against countries which have implemented Digital Services Taxes. The memo targets 6 countries’ DST’s: France; the UK; Italy; Canada, Spain, and Turkey. A public consultation starts 6 March, and April 2025 to initial outcome will be published as part of the America First Trade Policy Memorandum.

It aims to identify policies that discriminate against US companies, burden US digital commerce, and undermine their global competitiveness.

USTR DST investigation

1. Review and Renewal of DST Investigations:
   • The USTR will consider renewing DST investigations under Section 301 of the Trade Act of 1974, which were initiated during Trump’s first term.
   • These taxes were previously found to violate trade agreements, leading to retaliatory tariffs, which were later suspended pending negotiations.
2. Withdrawal from OECD Tax Reform Negotiations:
   • On 20 January 2025, President Trump withdrew the US from the OECD’s global digital tax reform talks.
3. Identifying Discriminatory Policies:
   • The USTR, in collaboration with the Treasury and Commerce Departments, will examine foreign tax policies that:
     • Discriminate against US companies.
     • Inhibit US businesses’ growth or intended operations.
     • Jeopardize US intellectual property.
     • Undermine US companies’ global competitiveness.

Additional Considerations:

• Canada’s DST: The USTR will assess whether to initiate a dispute resolution panel under the United States-Mexico-Canada Agreement (USMCA) over Canada’s DST.
• EU and UK Policies: The USTR will investigate whether EU or UK regulations pressure US companies to modify content moderation, affecting freedom of speech and political engagement.
• Potential Tax Actions: The USTR and Treasury will evaluate whether any foreign tax policy violates US tax treaties or qualifies for retaliatory action under the Internal Revenue Code.
• Securing a Moratorium on Digital Tariffs: The memorandum calls for efforts to establish a permanent ban on customs duties for electronic transmissions, following the WTO’s temporary moratorium extension until 2026.

March 2025 Public consultation

• The USTR has opened a comment period until 11 March 2025, seeking feedback on unfair trade practices.
• The Federal Register Notice encourages submissions, especially concerning major G20 economies and countries with large US trade deficits.

The findings from this review will be published in April 2025 as part of the America First Trade Policy Memorandum.