The Destination Service Tax, Multisided Platform Firms, and Local Firms: The Role of Tax Havens

Several countries have implemented a unilateral Digital Services Tax (DST) on revenue from large digital companies. We study how the DST affects competition, consumer prices and tax revenue when a two-sided multinational platform firm competes against a local firm. The platform firm located in a low-tax country (tax haven) derives revenue from exporting a good to its retailer in a high-tax country and by selling advertisement from its tax haven location. The profitability of selling ads is a positive function of how much the retailer sells (network externality). We show that if the network effect between the platform’s two sources of revenue is sufficiently strong, the DST reduces consumer prices and profit shifting.