What Is a Digital Service Tax? (SaaS Guide)

Digital Service Taxes (DSTs) are becoming a major compliance headache for growing companies. If you sell software, digital ads, or online services internationally, you might already owe DST in multiple countries, even without a local office or entity.

DSTs are taxes on gross revenue (not profit) that countries charge digital service providers earning money from their citizens. They typically range from 2-7.5% and kick in when you hit specific revenue thresholds. Unlike traditional corporate taxes, DSTs don't care where your company is based. Instead, DSTs are based on where your users are located. 

DSTs started as a way for countries to tax tech giants like Google and Facebook. The goal was to capture value from the foreign digital platforms selling digital services to citizens. But DSTs now catch mid-market companies too. If your business is scaling globally, it’s vital to understand DST compliance.

The Global Shift That Led to DSTs

Countries started passing DSTs because their traditional tax systems weren’t set up to handle digital business. The old rules were simpler. If you had an office, store, or warehouse somewhere, you paid taxes there. But when a company in California can sell software to someone in France without ever setting foot in the country, those old rules break down.

Think of it from France’s point of view. French citizens use American software, generating billions in revenue that flows straight to Silicon Valley. France provides the infrastructure, education, and market that makes these sales possible, but gets zero tax revenue in return. That's the problem DSTs aim to fix.

After France passed a DST, other countries started following their lead. While DST isn’t widely implemented yet, it’s clear that this is a huge change in international tax policy that is not going away.

Digital Services Taxes By the Numbers

What Services and Revenues Are in Scope?

In-Scope Digital Activities

DSTs typically target four main categories of digital services. If your business falls into any of these buckets, you're potentially on the hook:

• Online advertising services include any platform where businesses pay to reach users. This covers display ads, sponsored content, and programmatic advertising. Even if you're not Google or Facebook, if you run ads on your platform, you might qualify.

• Online marketplaces and platforms connect buyers and sellers. Think Amazon, Etsy, or Uber. But it also includes B2B marketplaces, talent platforms, and any service that facilitates transactions between parties.

• Social media platforms aren't just Facebook and Twitter. Any platform where users create profiles, share content, and interact counts. That includes professional networks, dating apps, and community forums.

• User data sales covers any business model where you monetize user information. This includes selling anonymized data, providing analytics services, or licensing user insights to third parties.

Gross Revenues as a Tax Base

One significant pain point about DSTs is they tax your gross revenue, not your profit.

Let's say you're a SaaS company with $100 million in revenue but only $5 million in profit. Under corporate tax, you'd pay tax on the $5 million. Under DST, you pay on the full $100 million. 

For a company operating at 5% margins, a 3% DST effectively wipes out 60% of your profit in that country. DSTs hit scaling companies especially hard because you can't offset them against expenses or losses like you can with corporate tax.

Which Companies Are Subject to DST?

Revenue Thresholds and Jurisdictional Triggers

Most DSTs use a two-threshold system. You need to hit both a global revenue threshold and a local revenue threshold to trigger the tax.

For example, in the UK your company needs to make:

• £500M in global digital services revenue
• £25M in UK digital services revenue

These thresholds were designed to tax tech giants while exempting smaller businesses. However, these taxes also catch fast-growing startups.

Nexus Without Physical Presence

In the traditional tax system, a company had to have a “permanent establishment” in a country in order to owe tax to that country. But with DST, all that matters is:

• Where your users are located
• How much revenue you generate from them
• Where you hit the country’s revenue thresholds

This means that even if your company has zero physical presence in Europe, you could hit the thresholds in European countries with DST, sometimes even simultaneously. That means you’re suddenly paying taxes to multiple countries with varying sets of rules to follow.

DST Calculations, Rates, and Variability

DST Rate by Country

DST rates can vary significantly by country: 

Turkey tops out the list with a 7.5% DST. It’s also important to keep in mind that DST’s are on revenue, not profit.

How DST Is Calculated

DST is calculated by:

Taxable revenues x DST rate = tax owed

But determining which revenue is taxable can get complicated fast. To calculate what’s taxable you need to:

• Identify qualifying revenue streams: Remember not all revenue is in-scope for DST
• Allocate revenue by user location: This requires robust user data tracking 
• Convert to local currency: DST threshold are in the local currency
• Apply for any exemptions: Some B2B  transactions may be excluded
• Calculate separately for each activity type: Advertising vs. marketplace revenue may be subject to different rules depending on the country

How DST Differs from Corporate Tax

Tax Base and Profitability

Corporate tax is based on profit. You subtract expenses from revenue, apply various deductions and credits, and pay tax on the remainder. If you’re not profitable, you generally don’t owe corporate tax.

DST ignores profitability. It’s a straight percentage of your gross revenue. Your business could be operating at a loss and still owe millions in DST.

This creates particular challenges for:

• High-growth companies reinvesting everything into expansion
• Companies with thin margins
• Businesses in competitive markets with pricing pressure

Risk of Double Taxation

DSTs create a double taxation problem for companies. You’ll pay DST on your gross revenue in the market country, then corporate tax on profits in your home country.

Some countries allow DST as a deductible expense against corporate tax, but not all. The US, notably, doesn't recognize DST payments as creditable foreign taxes. This means US companies pay DST abroad and full US corporate tax at home. For companies operating on slim margins, that can make the difference between profit and a loss.

Where Are DSTs Currently Enforced?

European Union

Europe pioneered DST, though implementation varies by country. Many of these countries have vowed to repeal their jurisdiction-specific DST once the Organisation for Economic Co-operation and Development (OECD)’s proposed measures go through.

In 2019, France was the first to pass their 3% DST. The UK followed in 2020 with a 2% rate. Spain and Italy are more aggressive with their tax, with Spain having a low €3 million local threshold and Italy aggressively pursuing US tech companies. They both charge 3%. Austria has one of the highest rates in Europe at 5%, but their version of the tax only applies to online advertising.

North America

Canada’s DST took effect in 2024, retroactive to January 2022. However, the 3% tax sparked tensions with their top trading partner, the US, and the tax is not currently being enforced. The United States strongly opposes DSTs and has none in effect.

Asia-Pacific and Latin America

While India technically doesn’t have a DST, it does have a 6% equalization levy on digital advertising and e-commerce transactions that serves a similar function. Australia has DST legislation ready, but hasn’t passed it yet. Brazil is implementing a DST in 2026 as part of their broader tax reforms. 

DST Compliance Requirements: What Finance Teams Need to Know

Reporting and Filing Rules

DST compliance is similar to compliance with other taxes. 

Most countries require that you register as soon as you hit their thresholds, and have penalties and interest for failing to register in a timely manner.

Each country has different deadlines and filing frequencies. For example, France wants annual returns while the UK wants to hear from you quarterly. And your return may be due the 15th of the month in one country but the 30th in another.

Payment methods vary. Some countries require payment with a local bank account while others accept wire transfers. 

And don’t forget language requirements. Most countries require that you file in the local language, which often means hiring local tax advisors or using specialized software.

Recordkeeping and Audit Risk

DST authorities are getting aggressive about audits, especially for US companies. To stay compliant, you must maintain:

• User location data: IP addresses, billing addresses, or self-declared location
• Revenue attribution records: How you allocated revenue to each country
• Service categorization: Which revenues qualify for DST and which don't
• Currency conversion documentation: Exchange rates used and sources

You’ll need to keep everything for at least 6 years, and sometimes longer, in case of an audit. 

Also, be wary of underreporting. France charges 80% penalties for deliberate under-declaration. The UK adds interest from the date the tax was due. And if authorities think you are evading deliberately, that can become a criminal offense. 

Systems and Data Requirements 

Your tech stack needs to support DST compliance. At minimum, you’ll need:

• Product-level revenue tracking to separate DST-applicable services from exempt ones. Your billing system must tag transactions by service type.
• Geographic attribution capabilities to determine where revenue originates. This means capturing and storing user location data at the transaction level.
• Multi-currency reporting to handle conversions and local currency requirements. You'll need historical exchange rates, not just current ones.
• Audit trails for every allocation decision. When authorities question why you attributed revenue to one country over another, you need documentation.

Most ERPs weren’t built with the relatively new DST in mind. You’ll likely need specialized technology to fill the gap.

The OECD’s Global Tax Deal and the Future of DSTs

Pillar One and Inclusive Framework

The OECD has been working on a permanent solution to digital taxation since 2015. Their two-pillar approach aims to replace the patchwork of DSTs with a unified system.

Pillar One would give market countries the right to tax 25% of profits above a 10% margin for the largest multinationals. Only companies with €20 billion in revenue and 10% profitability would qualify. These are much higher thresholds than current DSTs.

Pillar Two creates a 15% global minimum tax, ensuring companies pay at least that much regardless of where they book profits.

The deal has 138 countries signed on in principle. But implementation keeps getting delayed. Originally planned for 2023, it's now pushed to 2025 at the earliest. Some doubt it will happen at all.

What Happens if the Deal Fails?

If the OECD framework collapses, expect more DSTs. Countries will expand existing taxes and create new ones. We're already seeing this in Canada, where Parliament proceeded with DST despite US objections. Other countries are following suit.

More concerning is the trend toward lower thresholds and broader scope. Countries that initially targeted tech giants are expanding to catch smaller companies. What starts as a "Google tax" becomes a tax on any digital business.

If the OECD deal fails, we’re at real risk of seeing more countries adopt DSTs in order to take their piece of the digital pie.

Strategic Risks: Trade, Tax, and Growth Implications

Retaliation and Tariffs

The US, home of Silicon Valley, views DSTs as discriminatory to many American companies. They’ve threatened 25% tariffs on European goods in response. The same goes for Canada, where tension with the US caused the country to back off DST for now. Right now companies are caught in the middle of tense international negotiations.

Pricing and Profit Shifting Pressure 

DSTs are also forcing difficult business decisions. Companies have to decide whether to absorb the tax and accept lower margins, or pass it on to customers through price increases. Or they could restructure operations to minimize exposure. 

Many multinational companies are choosing to restructure. This includes creating local subsidiaries to book revenue differently, splitting services to minimize DST-applicable revenue, or shifting away from marketplace models. While restructuring is complex, larger businesses can often realize money savings from doing so.

Reputation and Policy Scrutiny

Media coverage of DSTs often paints big tech companies in a negative light. However, with the US fighting so intensely against DSTs, a US-based company capitulating to them can damage their reputation at home. 

Further, DSTs can be a gateway to further tax compliance woes. Once authorities start looking at a company’s digital revenues, they often expand their review to transfer pricing, permanent establishment, and other tax matters.

How Finance Leaders Can Prepare

Map Exposure Across Jurisdictions

The first step to understanding your DST compliance needs is to determine your exposure. 

1. Calculate your local digital services revenue per country
2. Determine which services qualify for DST
3. Check against both global and local thresholds
4. Project when you’ll cross thresholds

Don’t forget to consider indirect revenue through partnerships, revenue through acquisition, and currency fluctuations. This process allows you to foresee where you’ll next risk exposure.

Evaluate Internal System Readiness

Most companies discover that their systems are not ready for DST compliance. 

Determine if:

• Your billing system can tag transactions by service type and location
• Your customer location data is accurate 
• Your billing system or ERP can create the reports that DST taxing authorities require

If you find your system lacking, it’s best practice to get it up to date to handle these increasingly prevalent taxes. 

Align with International Tax Strategy

Tax authorities are increasingly focusing on ensuring that they get their bite of the apple from international businesses. When preparing to pay DST, you should also make sure that your entity structures, transfer pricing policies, and permanent establishment risk are also aligned. 

Work with tax advisors who understand both traditional international tax and digital economy developments. The rules are changing too fast for generalists to keep up.

Automating DST Compliance with Sphere (2026)

What Sphere Will Cover

Starting in 2026, Sphere will offer comprehensive DST automation across core markets. Our platform will handle: 

• Real-time threshold monitoring across all DST jurisdictions
• Automated DST filings 
• Currency conversion
• Audit-ready documentation and reporting 
• DST remittance to global tax authorities 

The platform integrates with your existing billing and ERP systems, pulling transaction data automatically. No more spreadsheets or manual calculations.

Who it’s For

Sphere's DST solution targets finance teams at scaling companies, particularly those hitting or approaching DST thresholds in multiple countries.

You’re a perfect fit if you:

• Sell to customers in multiple countries with current or pending DST
• Have limited tax and finance department resources 
• Want to automate before compliance becomes mandatory
• Need audit-ready documentation 

Why it Matters

Manual DST compliance is unsustainable. As more countries implement DSTs and thresholds drop, the complexity multiplies exponentially. If you have DST obligations in even 5 countries, that means 5 different registration processes, filing schedules, and calculation methodologies.  Not to mention potential audit requests from five different countries. 

Because of the steep fines and penalties associated with DSTs—up to 80%---getting it right the first time matters. 

Digital Tax Pressure Is Mounting. Automation Is the Release Valve

DSTs aren't going away. Even if the OECD framework eventually replaces them, we're looking at years of complex compliance requirements. And the trend is toward more countries, lower thresholds, and stricter enforcement.

For growing companies, this creates an impossible situation. You can't avoid international expansion. But manual compliance across dozens of jurisdictions will overtax your finance team. 

The solution is treating DST like any other operational challenge. Just as you automated billing, payments, and accounting, it's time to automate tax compliance.

Sphere is building the infrastructure to make DST compliance as simple as sales tax. Our AI-powered platform will handle the complexity while you focus on growing your business.
Digital taxation is only getting more complex. Build the right foundation now, and you'll be ready for whatever comes next.