Digital VAT, DST, retaliatory taxes and US laws

THIS article explores the legal and policy mechanisms the United States employs to counter foreign trade practices, with a particular emphasis on Digital Services Taxes (DSTs) and how they differ from Value Added Taxes (VAT).

- By Suresh R.I. Perera

It also analyses the Trump administration's strategic use of these tools especially trade threats and Section 301 of the Trade Act of 1974 investigations to challenge DSTs, which are often seen as discriminatory toward US tech companies.

Retaliatory tariffs to be added on to 30%

President Trump, upon unveiling the new tariff rates recently (30% for Sri Lanka), warned that any nation striking back with retaliatory tariffs, would find those surcharges effectively piled onto their existing US tariff obligations.

"If for any reason you decide to raise your tariffs, then, whatever the number you choose to raise them by, will be added onto the 30% that we charge" (July 9, 2025 letter from White House)

Digital VAT Vs. Digital Services Tax

A central issue in the debate over the potential for USA to top up 30% with additional 18% on account of digital VAT to be introduced from October, is the widespread confusion between two fundamentally different forms of digital taxation: the Digital Value Added Tax (VAT) and the Digital Services Tax (DST).

Digital VAT: A standard consumption tax

Digital VAT is a consumption-based tax imposed on the end-user of digital services. For example, Sri Lanka's 18% VAT on nonresident digital service providers who provides services via electronic platform, requires these companies to register locally and collect VAT from Sri Lankan consumers who purchase services such as streaming, online gaming, or cloud-based software, etc.

This system mirrors the treatment of other goods and services consumed domestically, ensuring tax neutrality and fairness. It also aligns with the OECD's VAT/GST guidelines, which recommend taxing consumption at the point of use known as the "destination principle." has been widely adopted by countries around the world, including, Australia, New Zealand, and EU member states.