Mexican digital services tax: viable pillar one alternative or destined for failure?

The digital economy has grown exponentially in Mexico, especially after the COVID pandemic. According to information published by the Mexican National Institute of Statistics and Geography, the country’s digital economy in 2023 represented approximately MXN 2 trillion, or 6.4% of GDP and was still expected to grow at a rapid pace.

Mexico has implemented certain measures to levy revenue from the digital economy, such as:

• The implementation of VAT on any kind of digital services provided within the country;

• The obligation for digital platforms operating in the collaborative economy to withhold income and VAT on operations carried out by their users; and

• The obligation for some intermediaries of goods and services (such as ride apps) to consider the individuals using their platforms as workers with several labour benefits set forth in Mexican labour laws.

However, even as these measures have granted the Mexican government the power to tap into the digital economy as a source of revenue, they have fallen short of actually taxing the profits and value obtained by multinational groups from the Mexican market.

There are several ways in which Mexico can do this. One option is to implement the rules proposed by the OECD/G20 Inclusive Framework’s pillar one of the BEPS project, which several other countries have expressed a willingness to adopt. Another option would be to follow a more straightforward approach and implement a digital services tax (DST).

Both options present their challenges, and this article will discuss if the DST can become a viable alternative in Mexico.

In 2021, over 136 jurisdictions joined together to discuss a way to ensure that multinational groups fairly contribute to the economies from which they derive profits and value. After much deliberation, this group, which became known as the OECD/G20 Inclusive Framework, produced the BEPS 2.0 Project, which proposed a two-pillar solution to close the gaps resulting from tax evasion through a 15% global minimum tax and the reallocation to market jurisdictions of excess profits obtained by multinational groups.

To address the challenges arising from taxing the digital economy, pillar one establishes rules that consider the nexus of operations carried out by multinational groups to allocate profits (and therefore taxes) in different countries.

For these purposes, pillar one proposes, among other things, the reallocation of excess profits obtained by the largest multinational groups (those earning an adjusted revenue greater than €20 billion and a pre-tax profit margin greater than 10%) to market jurisdictions from which they obtain revenue of over €1 million (or €250,000 in the case of small jurisdictions). These reallocated profits would be referred to as amount A.

Amount A of pillar one aims to ensure that large multinationals contribute to market jurisdictions in a supplementary way to what is established in regular international taxation rules, especially in cases where income obtained by some types of entities may not be taxed by virtue of its being treated as business profits. This would be done through a complex formula that only considers 25% of the profit obtained above a 10% profitability threshold (with some exceptions included in a marketing and distribution profit safe harbour) and then allocates the resulting amounts proportionally to market jurisdictions.

The OECD has drafted and published The Multilateral Convention to Implement Amount A of Pillar One, containing the rules. However, this document is not yet open for signature, as some of its contents continue to be reviewed by members of the OECD and Inclusive Framework.

While some have praised the OECD and Inclusive Framework’s two-pillar solution as a revolutionary approach to international tax, others remain sceptical about some of what they believe are overly complicated proposals. The 200-plus-page convention contains complex calculations that tax authorities and taxpayers around the globe would need to continually carry out to ensure compliance with these new rules, generating very high compliance costs while not promising to contribute significant amounts to market jurisdictions.

According to an OECD press release on pillar one published in 2023, around $200 billion in profits globally would be allocated to market jurisdictions, generating $17–32 billion in additional global tax revenue. These are the countries in which multinationals obtain profits and value but that are unable to effectively tax digital economy activities under the current rules that regulate international taxation.

Even though $17–32 billion is certainly a large number, it would be divided between those among the more than 140 jurisdictions that constitute the OECD/G20 Inclusive Framework that choose to accept the proposed rules. The largest amounts would go to the largest economies, while smaller jurisdictions are estimated to receive only relatively minor amounts or nothing at all if they do not meet the minimum presence threshold.

In addition, the adoption of pillar one’s amount A includes a political compromise between involved jurisdictions, in which any DSTs that are in place would be repealed in order to avoid potential double taxation. However, due to the US’s opposition to the BEPS 2.0 Project and the extremely complicated mechanisms that regulate amount A, countries are increasingly choosing to rely on DSTs as a more straightforward tool to tax the digital economy over the solutions proposed by pillar one.

Taxing cross-border transactions arising from the digital economy has proven to be difficult under existing international tax rules.

The OECD’s Model Tax Convention on Income and on Capital establishes, under articles 7 and 21 (Business Profits and Other Income, respectively), that items of income obtained by a resident of a contracting state shall only be taxable under that state unless expressly dealt with in an applicable treaty. Considering that Article 14 (Personal Independent Services) was repealed, and that no provision in the convention expressly concerns the taxation of the digital economy, countries have found it difficult to tax the provision of digital services through the use of the OECD’s proposed model.

The UN has made its own effort to address these challenges. In 2021, it modified its Model Double Taxation Convention between Developed and Developing Countries, creating a new article dedicated to the taxation of automated digital services (Article 12B).

The UN recognises that entities are carrying out significant activities in other countries without necessarily maintaining digital presence, and that permanent establishment rules are insufficient to effectively tackle these new types of activities. Therefore, the UN has proposed that under its model convention, source states be allowed to tax income from digital services paid on a gross basis by applying a modest rate negotiated bilaterally between contracting states.

Even though the UN’s proposed solution appears to be effective, complications arise when considering that to implement this new measure, jurisdictions would have to individually negotiate and modify all their existing treaties. Many of those were designed and drafted under the OECD’s model, which, as mentioned, does not include measures to tax the provision of digital services. A Multilateral Instrument-type treaty that modifies all existing treaties would carry its own complications; among which would be that each country would be able to decide whether to include this new provision in its existing treaties.

If unable to successfully negotiate the inclusion of a similar provision to the UN’s Article 12B, jurisdictions would remain unable to levy taxes on these activities through international treaties.

Due to the above, countries have opted for the implementation of DSTs that are levied typically on gross revenue obtained from the granting of online services and products to users located in their jurisdiction. This is a new type of levy that would not be covered by existing international treaties, leaving jurisdictions with the leeway to design and implement these measures without having to carry out complicated and time-consuming negotiations with other countries.

The simplicity of these taxes has made them popular, with some countries, especially in Europe, choosing them over the inclusion of pillar one’s amount A rules or the UN’s Article 12B measure.

In France, for example, a 5% DST was implemented in 2020, encompassing a broad range of digital services, including any digital interface services, as long as they are obtained by entities with revenues of over €750 million and revenues arising in France of over €25 million.

Spain implemented a DST of 3% in 2020 on entities with revenues of over €750 million and revenues arising in Spain of over €3 million. This tax applies to the provision of some digital services, such as online exchanges, collective economy services (that facilitate intermediation between users), the selling of data collected from users, marketplaces, and advertising.

In 2020, the UK imposed a 2% DST on large entities that obtain more than £25 million from users in their territory. This tax included the carrying out of any online advertising activities, social media services, search engines, and online marketplaces. This tax was estimated to levy an additional £465 million in tax year 2023–24 and around £515 million in tax year 2024–25, according to HMRC, the UK tax authority.

Other countries that have so far implemented a type of DST are Canada, the Czech Republic, India, and Portugal, among others, with more jurisdictions considering this measure, such as Austria, Israel, New Zealand, and Norway.

The implementation of DSTs has some important advantages. It is an efficient and straightforward method of taxing the digital economy, and their existence in principle would not depend on the agreement of other countries. However, countries that have implemented DSTs face considerable challenges, both internal and external.

In France, for example, taxpayers have challenged the constitutionality of the tax by arguing that it violates the principle of equality before the law, in the sense that it levies taxes on income derived from specific activities only due to the fact that they are carried out online, and does not apply to those activities if they are carried out in a traditional manner. Therefore, the same activity would be taxed differently based only on the manner in which it is carried out. While only binding in France, the decision eventually issued by the French Constitutional Council will certainly influence the way these types of taxes are viewed around the globe.

The principal external challenge on DSTs comes from the pressure exerted by the US government on jurisdictions to repeal their DSTs. Since the US is the country in which most of the largest technology multinationals are headquartered, it has an interest in ensuring that profits obtained from these entities are taxed only in the US and not in other jurisdictions.

Due to the above, the US government has threatened to retaliate against jurisdictions that have implemented DSTs. Against France, for example, the US announced its intention to implement tariffs against French wines, including champagne and other sparkling wines. Despite these threats (and a lack of action from the US government), France has refused to repeal its DST and has announced its intention to keep working closely with the US to reach a solution to these disputes.

However, the US continues to put pressure not only on the French government directly but on the whole EU. Even after securing a trade deal that involved the EU acquiescing to a 15% tariff cap on goods, President Donald Trump recently announced its intention to impose additional tariffs due to the existence of DSTs in the trade bloc. While any retaliatory measures have not been enacted yet, the threat of tariffs has put pressure on DSTs in Europe and the ongoing trade discussions.

US threats against DSTs have been successful in other cases. On June 29 2025, the Canadian government announced that it would be rescinding its DST, after the US government threatened to impose additional tariffs on Canadian goods. Likewise, India announced in March 2025 that it would be repealing its DST on digital advertisements after negotiations with the US government.

Considering Mexico’s close economic and political ties with the US, it is likely that any attempt to implement a DST by the Mexican government would generate a reaction by the US. Both countries have been engaged in tense trade talks in the past few months and with the review of the US–Mexico–Canada Agreement looming on the horizon, the US is in a position to exert considerable pressure if Mexico decides to implement such a tax.

While DSTs promise to be a simple and effective tool to tax the Mexican digital economy, it remains to be seen whether they can survive the challenges arising from an increasingly deglobalised world. Due to the US also opposing BEPS pillar one, any measure that taxes the provision of digital services is sure to be challenged in one way or another.