A Game Model Analysis of the International Digital Service Tax in an Asymmetric Market Duopoly

Introduction

Tariffs, as defined by customs authorities, are taxes imposed by sovereign states on goods exported through their customs territories in accordance with their respective laws. Typically, tariffs are considered to be high-level taxes set by the highest administrative unit of a country to determine tax rates. For countries engaged in extensive foreign trade, tariffs often constitute a significant portion of the national tax revenue and even national finances (Amiti et al., 2019; Fetzer & Schwarz, 2021). However, with the rapid growth of the digital economy, many multinational digital technology-based corporations can conduct transactions solely through information and communication technology in virtual spaces without the need for physical business entities. This allows them to effectively evade tax liabilities, resulting in a substantial reduction in their tax burdens.

Consequently, countries in which business income is generated face challenges in collecting taxes or only collect a portion of the taxes owed. In recent years, the issue of tax losses has compelled source countries to address tax collection and management in their digital economies (Tang et al., 2023; Zhu, 2021; Lee et al., 2021). Since 2018, the European Union, the United Kingdom, France, Spain, and other countries have proposed the implementation of the digital service tax (DST) to promote tax fairness and address the tax challenges posed by the digital economy (Shukla, 2020; Kofler & Sinnig, 2019). DST is levied on the revenue of large digital technology-based corporations that provide specific digital products or services through remote sales and service platforms. This business model encompasses social media corporations, e-commerce marketplaces, cloud services, and web-based service platforms (Kofler & Sinnig, 2019; Vella, 2019; Kofler, 2021; Bunn et al., 2020). The primary rationale behind implementing the DST is the substantial volume of data services provided by digital multinational corporations (MNCs) and asymmetry in the international data market, which undermines the economic interests of countries with weaker digital economies (Lowry, 2019). Therefore, the DST has certain implications similar to tariffs, but it differs from traditional tariffs on trade in products and services. Another attribute of the DST arises from the ownership and allocation of data, specifically the balance of rights between data ownership and data usage. Unclear rules regarding data ownership and allocation have become significant institutional obstacles in the development of the digital economy. As data processors, digital MNCs possess the right to use data, whereas the originators of data (including internet users) hold the right to data ownership. This creates a binary rights structure known as data tenure (Shen, 2023) that aims to achieve a balanced distribution of data property rights and interests (Tirole, 2023). In the data ownership game, data processors often hold a monopoly position because of their control over cyberspace and capital advantages (Fang, 2018).