The Taxation of Digital Services as a Rent-Extracting Policy

The use of digital services is largely nonrival. Profitable supply requires the exercise of market power. Monopolization of supply incentivizes countries to levy import taxes. Small countries are particularly incentivized, which contrasts with well-known findings in trade theory. Indeed, various countries have already introduced special taxes on digital services. If such practice spreads, the quality of digital services will be negatively affected. This paper argues that countries exporting digital services have good reason to respond by promoting an international tax regime in which the profit earned on the remote supply of digital business services is split between the countries involved.