Putting the Digital Services Tax on the table in US negotiations sends worrying signal on UK digital sovereignty

It would likely be unpopular for a government that has cut welfare services and introduced new taxes on UK businesses, but it also risks undermining wider attempts to regulate big tech. 

Expert comment Published 2 April 2025 4 minute READ

Alex Krasodomski

Programme Director, Digital Society Programme

Olivia O’Sullivan

Director, UK in the World Programme

The UK’s Digital Services Tax (DST) was originally introduced as a stopgap measure, passed in 2020 pending an international agreement to reform the international tax framework (the agreement never materialized). The DST looked to make tech multinationals not headquartered in the UK pay a tax on the revenues they made from their UK users. 

The tax, set at 2 per cent on the revenues of search engines, social media services and online marketplaces, raises a modest amount – £800 million a year, on average. But it holds significant symbolic value: corporate tax avoidance is a bugbear for the UK public. 

The tax may be popular domestically, but it is anything but across the Atlantic.

Persistent rumours that the UK government plans to reduce or eliminate the DST for US tech giants, in hopes of persuading President Donald Trump to row back or reduce tariffs on UK goods, will naturally worry some in the Labour Party. Announcing tax breaks for US tech conglomerates immediately after squeezing the UK welfare system, and months after raising UK employers’ national insurance contributions, will in the words of Labour MP Clive Lewis, ‘look absolutely horrific’.  

But the UK government is in a difficult position: the tax may be popular domestically, but it is anything but across the Atlantic. President Trump has likened the medley of digital taxes, regulatory fines and other costs levied by other governments on US tech companies as ‘overseas extortion’.  

Within a month of taking office, Trump had withdrawn the US from OECD negotiations on a global tax system, and issued an executive order ‘Defending American Companies and Innovators From Overseas Extortion and Unfair Fines and Penalties’, targeting precisely those digital services taxes ‘designed to plunder American companies… through extortive fines and taxes’.  

The UK’s goldilocks zone

To date, the UK has sought to position itself in a ‘Goldilocks zone’ between the US and EU positions on technology governance, emphasizing sovereignty and growth. The hope is that the UK can be both a friend of Europe and, through less stringent regulation than the EU, the best place East of the Atlantic to scale technology products and services. 

The UK should think hard about how much control it is willing to cede to improve US relations.

The offer to reduce or ditch the DST follows other moves that on the surface emphasize this British ‘middle way’. The UK was the only country to join the US in not signing a joint statement emerging from the recent International AI summit in Paris, citing national security concerns among others.  

But it’s unlikely the UK can maintain this strategy for long. The Trumpian approach to technology development, of minimal regulation to bolster big tech’s contribution to the stock market, and maintain a technological edge over China, is unlikely to fly in the UK. The British public is broadly supportive of tech regulation, particularly on the issues of online harms and young people growing up online. And most expect companies doing business in the UK to pay their fair share of tax. 

That would seem to incline the UK more towards the EU approach. The EU has been at the forefront of regulating big tech, including via its AI Act, similar digital tax regimes to the UK in countries like France, Italy and Spain, and GDPR data privacy laws with which most UK workers are familiar.  

More fundamentally a combative US will force other countries to confront a difficult question. How much sovereignty over domestic technology is sufficient? 

The UK should think hard about how much control it is willing to cede to improve US relations. It must realistically assess its ability to shape and influence the technology on which increasing parts of its social, economic and political foundations rest, but also whether concessions to the US will really deliver benefits. 

The EU may be grappling with how to stay globally economically competitive while maintaining its regulatory approach. But its strategy towards big tech is nonetheless one of the most meaningful attempts to use pooled democratic power to manage and rein in the influence of these companies. Piecemeal concessions to the US in exchange for the uncertain prospect of tariff exemptions or trade deals might be less beneficial than aligning with the EU approach.  

These questions were easier to dodge when big tech and social media platforms seemed compliant and values-aligned with European democracies. But that illusion has faded. Emboldened by a new US administration, industry leaders like Elon Musk and Mark Zuckerberg have been vocal in their plans to move their technology out of lockstep with European regulation.  

A clear choice

Meanwhile the challenge created by social media platforms’ extraordinary ability to influence democratic processes, much debated for the last decade, has still not been overcome. In the last six months, Musk publicly stated his support for the far right German AfD party on his X platform; and Romania annulled its presidential election result after allegations that Russia influenced the outcome via a massive TikTok campaign. Such events, and long-standing fears about the vulnerability of online services to manipulation by state and non-state actors, demand policymakers ask whether the status quo is fit for purpose.

If scrapping the DST leads to a sweetheart deal for the UK that avoids the worst of US tariffs, it might prove a masterstroke. But that is highly uncertain – the president’s application of tariffs has been in constant flux. 

It is more likely that the UK is eventually compelled to abandon the goldilocks zone and make a clear choice on its alignment both on trade and tech matters. Adhering to the governance approach of its closest neighbour and largest trading partner, the EU, may well prove the only logical option.  

What is clear is that countries like the UK will have their resolve tested time and again in the years to come: how far are they willing to push major technology companies into acting in line with their laws and values and the expectations of their publics? Surrendering crucial tools like taxation for short-term economic gain is hazardous indeed. The UK is right to try and avoid the pain of trade war. But that cannot come at the cost of sovereignty over the foundational digital infrastructure on which so much of modern life is built.