EU holds back on Digital Services Tax as US raises retaliation threat

Brussels gives OECD Pillar One another chance as US lawmakers propose new tax measures against countries imposing DSTs

The European Commission has resisted renewed French calls for an immediate EU-wide Digital Services Tax (DST), but has left the door open to introducing one if attempts to reach a global agreement fail.

The decision comes as pressure is also building in Washington against countries imposing digital taxes. Just days before the latest EU intervention, US Republican Congressman Ron Estes introduced legislation that would specifically penalise countries operating DSTs or other taxes regarded by the US as discriminatory against American businesses. President Trump’s dislike of DST’s is well documented as he calls them recriminatory.

The two developments highlight the growing international stand-off over how highly digitalised multinational businesses should be taxed.

EU Tax Commissioner Wopke Hoekstra said Brussels’ preferred solution remains the OECD’s Pillar One agreement. But if international negotiations ultimately fail, the Commission could return to an EU-level digital levy, potentially as soon as 2027.

France pushes for €5 billion EU digital tax

France has renewed its call for a common EU Digital Services Tax, arguing that it could provide a substantial new source of revenue for the EU budget and reduce reliance on contributions from Member States.

European Commission analysis reportedly estimates that an EU digital levy could raise around €5 billion annually, depending on its design.

France, Italy, Spain and Austria already operate national DSTs. These typically tax gross revenues from specified digital activities rather than corporate profits and are aimed at large multinational groups.

Paris argues that moving from individual national taxes to an EU-wide regime could also make individual Member States less exposed to bilateral pressure from Washington.

That argument may soon be tested.

Washington prepares a countermeasure

On 17 September, Congressman Ron Estes introduced the U.S. Innovation and Global Competitiveness Act of 2026, setting out proposals for the next stage of US international corporate tax reform.

One provision is particularly relevant to the European DST debate.

The bill would introduce a high-tax exception under the US Base Erosion and Anti-Abuse Tax (BEAT) for certain payments to related foreign companies subject to an effective tax rate of at least 18.9%. However, that exception would be denied where the recipient country imposes a DST or another tax regarded as discriminatory against US companies.

Estes also states explicitly that DSTs and other discriminatory taxes targeting American companies should continue to be treated as base-eroding measures under US tax rules.

The bill is currently a legislative proposal rather than enacted US law. Estes describes it as a starting point for the next round of US international tax changes, with further feedback expected through the remainder of 2026 and into the next Congress.

But it provides another indication of the direction of the US debate.

The OECD caught in the middle

The EU previously shelved plans for its own digital levy following the 2021 OECD/G20 agreement on reforming the taxation of multinational businesses.

Under Pillar One Amount A, part of the profits of the world’s largest and most profitable multinational groups would be reallocated to countries where their customers and users are located, regardless of whether the business has a conventional physical presence there.

Crucially, the Pillar One settlement was also designed to facilitate the removal of existing DSTs and prevent the introduction of similar measures.

Progress has since stalled.

The G7 has asked the OECD to report by the end of December 2026 on progress towards a common approach to taxing the digital economy. Hoekstra says the EU should exhaust those international possibilities before pursuing its own solution.

However, Brussels does not appear prepared to wait indefinitely. A decision on whether to revive an EU-level digital tax could come around the end of 2026.

EU-US digital tax collision?

This leaves Europe facing a difficult choice.

A successful OECD agreement could provide a multilateral solution while allowing existing national DSTs to be withdrawn. Failure would strengthen the case being made by France and others for an EU-wide alternative.

But an EU tax could arrive just as Washington is considering stronger mechanisms for countering foreign DSTs.

The result is that 2027 could see the digital tax debate shift from stalled OECD negotiations towards a much more direct EU-US tax dispute.

For now, Brussels is giving Pillar One another chance. Washington’s latest proposals demonstrate what could be waiting if that chance runs out.

Europe Digital Services Taxes (DST)