The United Kingdom is preparing to respond to the series of tariffs President Donald Trump has introduced since taking office. New taxes on everything from pure-bred horses to bourbon are on the table, but the Labour government seems more interested in a conciliatory approach, and it’s considering sacrificing a popular tax on American tech companies in order to sweeten the deal.
Prime Minister Keir Starmer has confirmed that trade talks have included “questions about the appropriate way to tax digital services,” as The Guardian reports that UK negotiators have offered to water down the Digital Services Tax (DST) in exchange for lower tariffs, following earlier reports that UK negotiators were willing to scrap the tax entirely. It’s a move that could save Silicon Valley tech giants hundreds of billions, while mounting pressure on other governments worldwide to follow suit. In the UK, it would signal capitulation to American big tech — but pragmatically, some think it might not be a huge loss.
Instead of taxing profits — which are easy to obfuscate or assign to tax havens — the DST taxes tech companies at a rate of 2 percent based on the revenue generated from UK users, which is a little more cut-and-dried. It’s designed to target large search engines, social media networks, and online marketplaces, and the revenue thresholds are set intentionally high: in 2022, only 18 businesses paid the tax. Google, Amazon, Apple, and eBay have all confirmed that they pay it, and it’s likely that the majority of the others are American, too.
Between them, the 18 companies paid £358 million (around $464 million) in the 2020–2021 tax year — a few million more than they collectively paid in Corporation Tax — and this year, the DST is expected to bring in more than double that.
Still, that’s small fry on the scale of the UK’s annual tax take. “It’s really very modest and it’s kind of almost designed that way,” Claire Aston, director of think tank TaxWatch, told me, explaining that it’s been constructed to hit “a handful of major players.” The government itself admits the DST is meant to ensure that large businesses “make a fair contribution to supporting vital public services.” It’s as much about optics as it is about tax revenue, showing the British electorate that big tech is being made to pay its share.
Up for negotiation
Perhaps you can see why Trump isn’t a fan. “The Americans view it as discrimination,” explains Dan Neidle, head of the nonprofit Tax Policy Associates, and “they’re kind of correct.” A White House memorandum in February 2025 labeled the DST — and equivalent taxes in other countries — “extortive” and said it was “designed to plunder American companies,” threatening to impose tariffs in response. It seems that’s now happened, with “discriminatory practices affecting trade in digital products” cited in the executive order imposing Trump’s latest tariffs.
The UK has avoided the worst of Trump’s tariffs so far. It’s subject to the 10 percent baseline tariff Trump has implemented worldwide, which is still in effect despite the pause on higher rates, but was never hit by one of the elevated tariffs initially assigned to the likes of China, Vietnam, and the European Union. But it was also hit by the earlier 25 percent tariffs on steel, aluminum, and cars — a particular problem when the auto industry is the UK’s single biggest exporter to the US, with 1 in 8 British cars going to American buyers. While the UK government insists that it doesn’t operate a trade deficit with the US — the main justification Trump’s AI-adjacent tariff math uses for imposing tariffs elsewhere — the DST gives American negotiators another excuse to impose its charges.
The UK’s priority in negotiations has been escaping that 25 percent tariff on cars. Negotiators led by business secretary Jonathan Reynolds are trying to walk the line between stick — preparing retaliatory tariffs of their own — and carrot — offering concessions like cuts to the DST, reduced rates on imports of US beef and chicken, and a review of the controversial Online Safety Act. The DST might be a tempting sacrifice because the government is legally required to review the tax by the end of 2025, so a decision has to be made about its future either way. The Guardian reports that the latest offer is to reduce the headline tax rate while making up for it by lowering eligibility thresholds so that more companies have to pay up.
Weakening the DST would be made easier by the fact that it’s often not the tech giants that foot the bill anyway. Google, Apple, and Amazon simply raised fees for advertisers and sellers, passing the costs on to British businesses — though, to its credit, eBay announced it would not. Then there’s X. There’s already been speculation that Elon Musk’s influence might be playing its part in negotiations since “it’s fairly clear X should pay the DST,” according to Neidle, though we don’t know for certain that it does — or if it raised its advertising rates to compensate. X might well be paying the 2 percent tax, but it’s just as likely that its British advertisers are.
That makes it sound like the DST wouldn’t be missed, but there might be wider consequences from any concessions. If the UK folds, it could undercut other countries that have joined a global movement to tax big tech. More than a dozen countries, including Canada, France, and Italy, operate similar levies, and most have faced pressure from the US over them. India has already scrapped a similar 6 percent tax on digital advertisers, which lifted on April 1st — perhaps not coincidentally, just one day before Trump announced the latest tariffs.
It wasn’t meant to be this way
The thing is, none of these taxes were meant to still be around. The UK’s DST was introduced as a stopgap, a quick-and-dirty way to tax big tech while the country waited for the long-term fix: the Organisation for Economic Co-operation and Development’s (OECD) international “two-pillar” solution to global corporate taxation. Officially announced in 2021, but in development for years before that, this solution is a two-step plan to fix international corporate tax: first, give countries the right to tax large multinational companies based on where they generate their revenue, rather than where they have their offices; second, introduce a global minimum corporate tax rate set at 15 percent. Put the two together, and you reduce the power of tax havens while helping smaller nations tax companies that profit from their citizens, regardless of where they’re based — but it only works if everyone is on board.
Fortunately for the OECD, it had former President Joe Biden in its corner. While his administration threatened to impose tariffs on the UK and five other countries over digital services taxes, it lifted that threat when it was agreed the taxes were temporary measures that would only apply until the OECD’s first pillar came into effect. But things changed when Trump took power. Among his flurry of day-one executive orders, Trump put out a memorandum declaring that the OECD’s global deal “has no force or effect in the United States.” Experts I spoke to disagreed on what that meant for some details of the two-pillar plan but were unanimous on one thing: the plan to redistribute tax jurisdiction is dead.
That leaves digital services taxes like the UK’s in the lurch. What were once quick fixes now need to last in the long term. The US would rather they disappear entirely but has pulled away the only prospect for a global replacement.
“A cynical tax”
If the UK succeeds in avoiding the worst of Trump’s tariffs by weakening its tax, without scrapping it entirely, expect to see that approach repeated elsewhere. Lowering rates allows Trump to claim that he’s saving Silicon Valley its money, while broadening the tax base allows him to spin the line that it no longer discriminates against the US, even though nationality was never among the eligibility criteria. And if the UK gets its numbers just right, it might avoid losing any tax revenue in the process.
This may be exactly the kind of result that Trump’s tariffs were supposed to produce — strong-arming trading partners into concessions they would otherwise never have made — but the question for the UK, and other countries with similar taxes in place, is how much of a concession it really is.
Aston, at least, is clear on that. When I ask her how she would improve the DST if she could, she’s bullish on its virtues. She supports an expansion to the thresholds, including widening the scope to pick up AI companies, which aren’t currently covered. She’s also in favor of raising the headline rate, not lowering it, on the basis that the UK still isn’t doing enough to tax the world’s biggest tech companies.
Not everyone feels that way, though. Neidle calls the idea of raising the rate a “diplomatic minefield” and thinks it’s a “rubbish tax” anyway. Instead of saving the Digital Services Tax, he argues we should “identify specific new ways that tax is being avoided” and close them down. And if this tax gets traded to Trump in the meantime, so be it.
“It’s a cynical tax,” Neidle tells me. “And if we get rid of it for a cynical reason, that seems entirely fitting.”
