Ottawa is warned unilateral digital services tax on tech giants could trigger U.S. retaliation

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Canada is being urged to shelve any intention of unilaterally imposing a digital services tax on tech giants, with one of the country’s biggest business groups warning it could trigger U.S. government retaliation as a presidential election approaches.

The call for Ottawa to hold off came from both sides of the border on Friday as the U.S. Chamber of Commerce also weighed in, asking the federal government to publicly commit to a pause.

Business Council of Canada president Goldy Hyder cautioned Deputy Prime Minister Chrystia Freeland in a letter that such a move could also put a damper on a North American Leaders’ Summit Canada is on track to host this fall or in early 2024.

The federal government announced this week that it could not consent to delay further a digital services tax targeting tech giants in the absence of a clear timeline for a global multinationals taxation deal to come into effect.

U.S. trade official expresses concerns about Canada’s proposed digital services tax

Ms. Freeland, who is also Finance Minister, said Tuesday that unless international talks set firm dates for an agreement to collect a greater share of the wealth generated by the world’s richest companies, Canada will proceed with what amounts to a Plan B: a new digital services tax (DST) that was outlined two years ago.

That new tax would impose a 3-per-cent levy on Canadian revenue from digital services exceeding $20-million that is earned by companies with at least $1.1-billion in global revenue. This would include revenue from search engines, social-media platforms and online marketplaces.

Canada found itself isolated Tuesday in Organization of Economic Co-operation and Development (OECD) talks in Paris, unwilling to endorse a deal negotiated by the United States that would see countries that had planned to enact their own digital services tax put it off for at least another year.

Watson McLeish, senior vice-president of tax policy at the U.S. Chamber of Commerce, urged the Canadian government “to make clear that they will not unilaterally act to impose a DST,” arguing to proceed would breach Canada’s trade obligations under more than one trade agreement.

Ottawa’s plan was to enact its own digital services tax in January, 2024, unless global negotiations to enact a multilateral tax deal yielded reforms of corporate taxation worldwide.

“Several senior U.S. officials have made clear that if Canada is to impose its DST unilaterally, outside of a multinational framework agreement, they will seek dispute settlement under the Canada-U.S.-Mexico Agreement (CUSMA),” Mr. Hyder wrote in the July 13 letter to Ms. Freeland.

“U. S. Trade Representative Katherine Tai raised the DST with International Trade Minister Mary Ng on the margins of the third meeting of the CUSMA Free Trade Commission in Cancun last week,” he noted.

Mr. Hyder also noted taking on tech giants, many of which are American, could be poorly received in the United States because the presidential election is set for 2024 and American politics will become increasingly heated that year.

“The timing would also coincide with the beginning of the U.S. election cycle, a period in which cross-border irritants such as the DST can become dangerously politicized by officials seeking election.”

He also noted that a review of the United States-Mexico-Canada Agreement (USMCA), called CUSMA by Canada, is set for 2026. The mandated review was baked into the agreement, which means all parties must agree to extend the deal by 2026. Failure to do so will create uncertainty because of annual reviews for the final 10 years or until all parties agree to extend the deal for another 16-year term.

“To ignore the repeated appeals from senior officials in both the Biden Administration and Congress – Democrats and Republicans alike – is to risk retaliation and undermine the review of CUSMA in 2026,” Mr. Hyder warned.

In 2021, Canada and many other countries froze plans to enact a digital services tax while negotiations continued on a multilateral international tax deal. Such a deal would overhaul rules governing how governments tax multinationals that are widely considered to be outdated as digital giants such as Apple or Amazon can book profits in low-tax countries.

The first part of the two-pillar deal – known as Pillar One – aims to reallocate taxing rights on about US$200-billion in profits from the biggest and most profitable multinationals to the countries where their sales occur.

The second pillar calls on governments to put an end to tax competition between countries to attract investment by setting a global minimum corporate tax rate of 15 per cent starting next year.

Ms. Freeland said Tuesday the lack of set dates for a treaty implementing Pillar One puts Canada at a disadvantage to countries that have already implemented a digital services tax. These include Britain and France.

“Many countries participating in negotiations in Paris agreed to a further one-year standstill on the imposition of any new domestic DSTs, despite there being no deadline stipulating when Pillar One will come into force,” she said Tuesday.

Mr. Hyder noted the DST could apply retroactively and therefore even if Canada waited it could still collect the revenue it seeks.

“The only course of action that exposes Canada to costly risks, as we have warned, is forging ahead” with a January deadline, he said. “That is the scenario which Canada must avoid. Canada should not impose a unilateral DST on either foreign or domestic companies before the OECD process has been allowed to run its course. All other OECD countries agree.”

Katherine Cuplinskas, press secretary to Ms. Freeland, said Canada would prefer to work with other countries on corporate tax reform but has been consistent in saying it will act by itself if necessary.

“The Canadian government has been clear for several years that it would move forward with its own Digital Services Tax if a global agreement is not reached. And we are committed to protecting Canada’s national economic interest,” she said in a statement.

“Canada’s priority and preference has always been a multilateral agreement. Canada strongly supports international efforts to end the corporate tax race to the bottom and to ensure that all corporations, including the world’s largest corporations, pay their fair share.”

With a report from Reuters