A digital services tax (DST) can be due on revenue from specified digital services even when the company’s costs leave it with little profit—or a loss. That is because DSTs are generally designed around covered gross revenue, not profit after expenses. The rules are jurisdiction-specific: a DST does not necessarily apply to every sale a company makes, and its scope, thresholds and rate depend on local law.
What does “income” mean in a DST?
“Income” can mean revenue—the money a business receives—or profit, what remains after costs are deducted. The distinction matters. A tax calculated on profit takes account of expenses in determining the taxable amount. A tax calculated on covered gross revenue generally does not deduct the costs of providing the service from that revenue base.
The OECD characterizes DSTs generally as taxes on gross revenue from certain digital services, rather than income taxes. It also describes them generally as applying in addition to a jurisdiction’s ordinary income tax, not instead of it. These are broad descriptions, not rules that apply identically in every country; local statutes may define the base and provide allowances or alternative calculations.
Why can a company owe tax while making a loss?
Suppose a company earns revenue from a service covered by a DST but spends nearly as much—or more—on operating that service. Its profit may be very small or negative. If the local DST calculation is based on the covered revenue and does not subtract those operating costs, the company may still have a DST liability. The OECD’s 2020 assessment discusses this possibility for loss-making firms.
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This does not mean the tax is necessarily charged on all of the company’s sales. The relevant question is whether the revenue comes from an activity and users covered by that jurisdiction’s rules, and whether the business meets the applicable thresholds and other conditions.
How do the UK and Canadian examples differ?
The UK and Canada illustrate why the country and date matter. HM Revenue & Customs’ guidance, updated July 31, 2024, describes a UK DST regime. The Canada Revenue Agency’s 2026 notice says Canada’s Digital Services Tax Act was repealed and the tax and related obligations no longer apply.
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| Rule | United Kingdom | Canada |
|---|---|---|
| Status in the cited official guidance | HMRC guidance updated July 31, 2024 describes the UK DST rules. | The CRA says the Act was repealed after Royal Assent on March 26, 2026; the tax and related obligations no longer apply. |
| Covered activities or revenue | HMRC identifies social media services, internet search engines and online marketplaces. The tax is on the service provider’s revenue, not the value of goods sold through its marketplace, according to the UK government’s review. | Current covered activities and revenue base: not applicable to an operative DST, because the CRA says the tax no longer applies. |
| Thresholds and allowance | Under the rules described by HMRC, a group must exceed both £500 million in worldwide digital services revenue and £25 million of UK digital services revenue attributable to UK users. The first £25 million of UK digital services revenue is an annual allowance. | Current DST thresholds and allowance: not applicable after repeal, according to the CRA. |
| Rate or calculation | HMRC says the normal rate is 2% on UK digital services revenue above the annual allowance. The UK government’s review also describes an alternative charge basis intended to mitigate effects on low-profit-margin businesses; the reviewed information does not set out its calculation. | No current DST rate or calculation applies, according to the CRA. |
| Payments already made | Not stated in the cited HMRC guidance. | The CRA says it will refund DST payments it received, including interest as described in its notice. |
The UK figures above are parameters of the UK rules described in HMRC guidance, not general DST thresholds. For the UK alternative basis or a particular group’s filing position, consult current HMRC rules rather than assuming how the calculation works.
Does a marketplace DST tax the value of everything sold?
Not in the UK example described by the government review: the charge is on the marketplace service provider’s revenue, not the value of goods sold through the marketplace. That distinction separates revenue from providing the digital service from the transaction value of products traded on the platform. It should not be generalized to other countries without checking their rules.
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What should a business check before deciding whether a DST applies?
A group assessing exposure needs to work from the specific jurisdiction’s rules and the relevant tax period. The useful checks include:
- Covered activity: Identify which services the local law brings within scope.
- Local connection: Determine how the rules attribute revenue to users, customers or transactions in that jurisdiction.
- Thresholds: Check whether the law uses worldwide and local revenue thresholds, and whether both must be met.
- Tax base and relief: Establish which covered revenue is included, what allowance applies, and whether a low-margin alternative or other relief is available.
- Current legal status: Confirm that the tax remains in force for the period in question and check current filing and payment obligations.
- Other taxes: Consider the DST alongside ordinary corporate income tax; a DST generally does not replace it.
For the UK, the HMRC manual cited here was updated July 31, 2024, so businesses should check current guidance before acting. For Canada, the CRA’s 2026 notice says the tax and related obligations no longer apply following repeal on March 26, 2026; older descriptions of Canadian thresholds, rates or filing duties should not be treated as current obligations.
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