<p>In value-added tax (VAT) systems, taxing digital services provided by foreign firms has emerged as a central policy challenge. This paper examines the effects of a recently introduced VAT reform in several countries, which requires online platforms to collect taxes from foreign suppliers of digital content. We develop a model of two-sided platforms in which foreign and domestic developers enter the domestic market endogenously through network externalities. The VAT reform reduces platform commission fees for domestic developers, while raising the price of the network good, since incentives for platforms to internalize network externalities are weakened. This shift improves the competitive conditions for domestic developers and creates a replacement of foreign developers with domestic entrants. However, the market shrinks, which discourages developers from entering. We then demonstrate that the magnitude of welfare effects crucially depends on how responsive the sellers’ market entry is to network size. When tax reform yields welfare gains, they increase with the tax rate and decrease with the initial share of foreign developers. Finally, we show that digitalization, interpreted as a shift from direct to indirect network externalities, mitigates both welfare loss and the platform’s tax avoidance.</p>