Tax News & Views International Weekly: The Digital Tax Gulf

Digital services taxes took a back seat to Pillar Two over the past year, but that relative lull may be ended.

The issue pushed its way back to the headlines recently after President Trump issued another blunt threat last week, claiming he may put “a big tariff” on the United Kingdom if it doesn’t repeal the country’s digital services tax, which has been in place since 2020.

The United Kingdom defended the tax as a “fair and it’s a proportionate approach to taxing business activities undertaken in the U.K.,” and said it would only repeal the tax as part of a compromise reached at the Organization for Economic Cooperation and Development, where officials have fruitlessly looked for a workable solution for years. (Other countries such as Canada and Pakistan have rescinded their versions of the tax.)

While Pillar Two’s global minimum tax is still largely theoretical, DSTs have become part of the international tax landscape for years. According to the U.K., the tax raised more than a billion U.S. dollars from 2025-26, a record.

The British response to Trump’s threats underscores an important point—to DST supporters and the countries that have adopted them, this isn’t about trade at all. They claim that DSTs are necessary to patch a significant hole in the international system to tax corporate income, its reliance on physical presence and traditional benchmarks as the basis for taxation. That fails to adequately capture commerce that happens largely, or entirely, in the digital sphere that has become crucial to daily life. (This is distinct from the concern about profit-shifting through valuable intangibles like software or design intellectual property—although many see these as two sides of the same coin.)

While DSTs like the U.K.’s tax revenue, not profit, they’ve said this is only to ensure that the taxes aren’t avoided through manipulation of costs or other factors.

The U.S. Department of the Treasury, under administrations of both parties, as well as almost everyone in Congress views it differently. They all largely agree with the conclusion reached by USTR in its 2019 report on the French DST–that it’s a discriminatory cash grab targeting the U.S. in particular, without any principled basis.

This disconnect is one reason why the OECD’s project may be the only place where compromise can be reached. But the past suggests that the disconnect may be too wide for the organization to bridge.

Noteworthy Items This Week

EP Draft Says Pillar 2 Deal Creates ‘Structural Imbalances’ – Elodie Lamer, Tax Notes ($):

A draft European Parliament report on the EU’s corporate tax approach raises concerns about both the substance and the form of the pillar 2 side-by-side package.

The April 22 draft report by rapporteur Kinga Kollár, a Hungarian member of the EP from the European People's Party, says that the significant structural differences between U.S. minimum tax rules and pillar 2 will result in different effective tax rates that will disadvantage multinational enterprises that are headquartered in the EU and operating in the United States. The report's publication was delayed until April 27 to avoid interfering with Hungary's elections.

OECD Says Countries Should Focus on Expenditure-Based Tax Breaks – Stephanie Soong, Tax Notes ($):

President Donald Trump recently announced 100% tariffs on certain imported pharmaceutical products, with opportunities for drug companies to lower their tariff rates to zero, but questions remain about the requirements for preferential treatment and abilities to administer the regime.

On April 2, Trump ordered tariffs on imported pharmaceuticals under Section 232 of the Trade Expansion Act to begin in 120 days for the largest multinational corporations, and in 180 days for smaller businesses.

The law gives the president power to impose tariffs on imports deemed to pose a national security threat following an investigation by the U.S. Department of Commerce's Bureau of Industry and Security.

Refunds on Trump Tariffs Pose Accounting Dilemmas for Companies – Jorja Siemons, Bloomberg Tax ($):

Other publicly traded businesses headed into quarterly earnings season this May likewise will need to make judgment calls on the best way to account for refunds, should they get paybacks from the Trump administration now that a new request portal is live. The method they pursue could vary depending on how they decide to view the refund, with different accounting approaches for probable versus realized payments.

C-suite leaders will have to justify their financial reporting choices to boards, investors, and analysts—who likely will want to see how refunds could affect business profitability.

“Making the right decisions around this level of uncertainty—and providing the right amount of information to investors without over-claiming anything—is really important,” North Carolina State University assistant professor Carly Burd said.

One Certainty As Tariff Refunds Start: 'There Will Be Litigation' – Chris Villani, Law360 ($):

The rollout of the consolidated administration and processing of entries system, known as CAPE, has been well received, according to trade lawyers, and the government has promised refunds within 60 to 90 days of a claim being processed.

But Todd said businesses should be prepared to be dealing with tariff issues for at least the rest of Trump's term.

"The next three months will be critical, and the balance of the year will be critical to how companies set tariff management strategy for dealing with their business relationships and also litigation strategy," Todd said. "The broader issue that tariffs imposed could be found unlawful will remain. Companies who are preparing for this are ahead of the game."

California Panel Advances Bill to Tax More Foreign Income – Casey Murray, Bloomberg Tax ($):

If the legislation becomes law, California would become the first state to mandate worldwide combined reporting for all companies, under which all income generated by a company—regardless of locale—is considered in apportioning revenue to the state. Alaska is the only other state with a similar requirement, but its reporting mandate is reserved for oil and gas companies.

The bill passed out of the state Assembly’s Revenue and Taxation Committee on a 4-2 vote, though some supporters expressed doubts about the proposal.

Public Domain Superhero of the Week

Every week, a new character from the Golden Age of Comics, who’s fallen out of use.

This week’s entry: Captain Comet

Debut Year: 1953

Debut Publication: Danger Is Our Business! #1

Origin Story: In the far future, Captain Comet travels through space aboard the Starhope, fighting space pirates.

Superpowers: Technically a normal human with super-technology, he carries both a ray gun and "ceremonial sword."

Eide Bailly's International Tax Team and our affiliates at HLB, The Global Advisory and Accounting Network, stand ready to assist with your worldwide tax needs.