Sabre-rattling: Digital services taxation and the Sabre Global case

The first court proceedings on the UK’s digital services tax, Sabre Global v. British Airways, give a taste of what may be to come in this evolving area: cross-border disputes, conflicts of laws, compliance complexities, and attempts to shift the tax burden economically.

DSTs and the digital economy

At a time of significant volatility in international taxation, digital services taxes (DSTs) stand out as uniquely changeable and controversial. Categorisation of taxes as DSTs in the first place can be complicated, due to significantly unharmonized tax bases, but at least 20 different levies on revenues from online business and the “digital economy”, introduced from 2020 onwards, are in force across Europe, Asia-Pacific and South America.

Numerous other jurisdictions also have DST proposals at varying degrees of readiness while, remarkably for a new type of tax, there are already two ex-DSTs: Canada and India both repealed their levies in the wake of the trade tensions that erupted in 2025. 

The OECD’s Pillar One proposal was intended to result in the general replacement of domestic DSTs by a new market jurisdiction taxing right agreed at the international level but Pillar One is now on (seemingly indefinite) hold. The OECD expects talks to resume during the second half of 2026, but any further progress on Pillar One will require political will and an international consensus that currently both appear non-existent.

So DSTs currently seem here to stay, at least in the medium term, and their prominence may only increase given the dramatic development of the digital economy caused in recent years by the increasing commercialization of generative AI. The existing DSTs were designed for a pre-AI age and could see enlargements of their tax bases; new DSTs may be crafted to target AI specifically (Kenya’s proposal is the first example of this).

UK DST

The UK’s DST has been in force since April 2020 and is an expressly interim measure, pending adoption of a comprehensive global solution to the taxation of the digital economy. UK DST generally applies as a distinct tax charge (it is not corporation tax) at a rate of 2% to certain revenues derived from UK users by large groups operating specific digital business models (social media services, internet search engines and online marketplaces, as well as associated advertising).

In an increasingly common threshold-based approach to tax design, groups are in-scope of UK DST only if at least £25 million of worldwide group revenues from in-scope activities that exceed £500 million are attributable to UK users. Exemptions from DST apply to financial and payment services providers, there is a safe harbour for low-margin businesses, and relief is available against other DSTs. In-scope groups are required to register for UK DST with the tax authority HMRC within 90 days after the end of the group’s first DST accounting period and file DST returns within 12 months (with payment of DST liabilities due in-period, after 9 months and 1 day).

Unsurprisingly for a tax involving conceptual novelties (especially user participation) and which makes UK taxpayers of entities with no other connection to the UK, compliance issues centred on legal interpretation have been a feature of UK DST administration to date. HMRC guidance has played an outsized role in scoping the taxpayer population and establishing liability.

Despite these challenges, however, UK DST is now raising very significant revenue – £944 million in the most recent 2025-2026 tax year (an increase of 250% from DST tax receipts in 2020-2021). The recent HM Treasury report on UK DST attributed this to UK users’ expanding consumption of in-scope digital services and to a growth in the market for online advertising since the introduction of the charge.

As of 2025, 51 groups were liable to UK DST, of which 32 were headquartered in the US and – in a sign of the ongoing growth of non-US tech – 19 in the rest of the world (including one in the UK). The 2% rate of the UK DST has remained unchanged since its introduction but various mainstream political parties have proposed increased rates to as high as 10%.

Although the absolute number of liable taxpayers remains low, the implications of UK DST are considerably broader. Large businesses have gone through, and are required to refresh, costly scoping exercises to determine the application of exemptions including on the basis of classification of services. Frozen revenue thresholds mean that more taxpayers will enter its scope over time. And as the HM Treasury report on UK DST notes, pricing strategies of in-scope taxpayers continue to evolve towards passing DST costs on to customers in a variety of ways, making UK DST a potential indirect cost of doing business online.

Sabre v. British Airways

In light of the unlimited territorial scope of UK DST it is somehow fitting that the first published court proceedings involving the tax should take place in distant Fort Worth, Texas. Sabre Global Inc. v. British Airways PLC was a commercial dispute which commenced in Q4 2025 and concerned Sabre Global Inc. (Sabre)’s liability to UK DST in respect of its provision of reservations platform services to British Airways (BA) in exchange for sales-based usage fees payable by BA. 

Sabre’s case in front of the US District Court for the Northern District of Texas was that BA was contractually liable to reimburse Sabre for its UK DST liability under the Participating Carrier Distribution and Services Agreement (the “Agreement”) in force between the parties (and unamended) since 1991. A schedule to the Agreement containing some standard-form terms and conditions included a tax “indemnity” whose lineaments will be immediately familiar to anyone who works on US-law commercial documents:

In addition to any other charges set forth in this Agreement, Participating Carrier [BA] shall pay to [Sabre] all license fee, sales, use, excise, personal property, or other taxes and any and all domestic and foreign duties, import and export fees and licenses, howsoever designated, now or hereafter imposed by any federal, state or local taxing authority or any foreign government or agency thereof, arising in connection with this Agreement … except taxes payable or based on [Sabre]’s net income.

Following months of negotiations between the parties, Sabre originally applied for a declaratory judgment in October 2025 to the effect that the $453,863 of UK DST it had paid in October 2024 – in reliance on an example in the HMRC DST Manual – was a “Tax” subject to reimbursement by BA under the Agreement. Sabre’s application noted that it incurred the UK DST solely because of BA’s use of Sabre’s reservation services.

BA’s motion to dismiss Sabre’s application, filed in December 2025, proceeded on four grounds, broadly: 

1. Jurisdictional: The primary question, of whether the UK DST was imposed by any foreign government and arose in connection with the Agreement, was a question of UK tax law which had not been resolved in a UK court. Despite the contract’s governing law, the US was not (yet) the correct forum.
2. Contractual: Any UK DST could not arise in connection with the Agreement, given that online marketplaces (the putative basis for the tax liability) did not exist when it was executed in 1991.
3. Evidential: Sabre had provided no proof establishing its liability to pay UK DST in 2024 (or that any DST was actually paid). Sabre had also not paid DST in any other jurisdiction and had not paid UK DST in any prior year.
4. Procedural: The application to declare that UK DST was a Tax was an irrelevance as that defined term was not used in the tax indemnity.

The first ground proved determinative in the court’s decision in May 2026 to stay the proceedings pending a determination by a UK forum of the “threshold issue” of whether the DST constitutes a Tax within the meaning of the parties’ agreement (or, put differently, whether DST was within scope of the contractual indemnity).

The court held that “[t]his dispute turns on an unresolved question of UK tax law … The United Kingdom has the stronger interest in interpreting and applying its own tax laws … Proceeding otherwise would create a substantial risk of inconsistent rulings and duplicative proceedings concerning the scope and application of the DST. A determination from a United Kingdom forum will materially inform, and may substantively narrow, the issues remaining before this court”.

The other grounds were not expressly addressed but the decision does seem to side-step, or at least elide, the procedural objection (4. above).

Comments 

The further evolution and proliferation of global DSTs seems a near-certainty and affected taxpayers already need to manage divergent regimes. UK DST is an outlier among the European DSTs in taking a platform-based approach as opposed to an approach based on classes of activity (advertising, intermediation, data transmission).

The fact pattern in Sabre, of online marketplace revenues from a single UK-based user exceeding the £25 million threshold and thereby bringing the operator within scope, is part of the design of the tax and HMRC’s guidance: marketplaces may operate on a business-to-business basis and do not presuppose multiple UK users. It may nonetheless make some parties to substantial contracts with UK counterparties sit up and take note and could act as a disincentive to certain cross-border activities. 

Volatility in the international tax landscape has also made taxpayers and their advisers look again at tax risk allocation in a range of ordinary-course commercial and other contracts. Especially when presented as non-negotiable standard terms (the UK Loan Market Association standard documents offer an example here), tax “indemnities” may be given by contracting parties without specific analysis of their potential scope and without always ensuring that the carve-outs are adequate and ensure an appropriate and commercial allocation of the real risks.

This is especially pronounced for long-term contractual arrangements that may have been put in place during wholly-different economic eras. Taxpayers who have not already carried out sanity-checks of their contractual flows during the 2025 “tariff war” may want to start that exercise now. Engaging contractual indemnities (by falling outside the usual net income taxes carve-out) may prove to be an unintended consequence of the of DST as a gross revenues levy.

Sabre v. British Airways may yet, despite its small scale and ultimately inconclusive outcome, prove to be a bellwether case in an area of real significance. The material unresolved uncertainties regarding the design of UK DST – which include its classification from a tax treaty perspective and its creditability / deductibility under foreign tax relief regimes as well its compatibility with the UK’s international trade law obligations – have always made it a strong candidate for court proceedings. Sabre is unlikely to be the last and, if the suggestion in the US court’s stay order is acted on, could yet prove to be the first case before the UK courts and tribunals.

Subscribe to Ropes & Gray Viewpoints by topic here.