Italy’s Digital Tax Gambit—Will US Trade Retaliation Follow? #ItalyFinance

Italy is considering a move that could reignite trade tensions with one of its most crucial trade allies—the United States. In its upcoming 2025 budget, Italian policymakers are considering an expansion of their digital services tax (DST), which has already drawn the ire of Washington.

The targets of the DST would be digital giants like Google, Meta and Amazon—overwhelmingly American corporations. Italy’s DST, first introduced in 2019, levies a 3% tax on revenue from digital transactions for companies with global sales exceeding €750 million, and €5.5 million generated in Italy.

The tax currently raises nearly €400 million annually, but with rising debt, Italian offices believe there is more meat on the digital services bone—either through raising the rate or expanding the base by decreasing the revenue thresholds.

Washington has consistently opposed unilateral digital taxes wherever they are found, seeing them as unfairly targeting chiefly American companies. The U.S. had previously threatened to impose tariffs on European states considering similar DST policies, including Italy. An agreement staved off that threat, but Italy’s DST ambitions could bring that issue back to the fore.

For Italy, U.S. tariffs could be a significant blow—key sectors of the economy, from manufacturing to agriculture, would be vulnerable. Historically, the United States has been a top destination for Italian exports,chiefly in the pharmaceutical and automative industries.

As Italy is trying to manage its economy in the context of inflation and a growing public debt, the economic fallout from tariffs could be disastrous and extends beyond economies. Strained diplomatic relations with the U.S. could weaken Italy’s voice on global tax reform talks and diminish its influence in international negotiations more broadly.

Italy’s predicament speaks to a larger failure of international tax reform—DSTs were supposed to be stopgap measures until broader agreements could be reached on reallocating tax rights for multinational corporations. Despite years of talks, the agreement under the OECD’s Pillar One, has stalled. Italy is left in a position where it can no longer wait for an international consensus, and may find itself needing to act unilaterally.

At the same time, in pursuing a more expansive DST, Italy may be delaying the reforms further. Italy’s budget deficit is projected to reach 3.3% in 2025, and the government is aggressively seeking new revenue streams to close that gap. Expanding the DST may appear like a pragmatic policy solution in the short term, but the economic strain of additional US tariffs could quickly outweigh the benefits.

Italy must adopt a careful, diplomatic approach—engaging with the US to negotiate alternatives or partnering with the EU in a multilateral DST. The Italian state must tread cautiously and weigh the potential rewards of a stronger digital tax against the long term stability of that revenue stream. The delicate balance between fiscal need and international diplomacy will be the determining factor in whether Italy’s revenue woes can be addressed without a costly transatlantic dispute.