Canada's contentious digital services tax battle could escalate this week as a deadline looms for the Biden administration to decide whether to proceed with a settlement amid threats of retaliation from the incoming Donald Trump administration.
On August 30, United States Trade Representative (USTR) Katherine Tai filed a formal complaint under the Canada-United States-Mexico Agreement (CUSMA) arguing that Canada's three percent tariff done in the summer unfairly discriminates against American corporations.
The measure started a 75-day consultation period that's all for this week. But with President Joe Biden's administration now in limbo, it's unclear whether Tai will escalate the dispute by asking an arbitration panel to decide whether the Canadian tax actually violates CUSMA.
USTR's other option is to let the appeal slide for now, leaving it up to the incoming Trump administration to move forward — which could be very dangerous for Canada.
“The first Trump administration … was very clear on digital services taxes. They believed that the digital services tax was a clear indication that the country was directly targeting the US and targeting US companies. It would be an 'us and against us. ' situation,” said John Dickerman , Washington-based vice-president of policy at the Business Council of Canada.
“I think there will be very little room for negotiation in DST.”
When Tai began the CUSMA dispute with Canada, the USTR statement also made it clear that it would continue to support US Treasury Secretary Janet Yellen's participation in negotiations between OECD countries and the G20 to reach a multilateral agreement on corporate taxation. of global technology.
Those countries have been pursuing such an agreement to prevent digital companies from competing against each other and arranging to reduce or avoid taxes.
Dickerman, however, said that under Trump, these negotiations could be ignored. “Multinational solutions are not as attractive as bilateral solutions would be,” he said.
Business groups have previously sounded the alarm
DST Canada serves firms that generate more than $20 million in annual revenue from Canadian sales of online advertising, social media and streaming services or data storage. It will not work for small beginners. It is triggered when the technology giant's annual revenue exceeds the established international threshold of more than 750 million euros ($1.1 billion Cdn).
The risk of direct tariff retaliation from the US is one of the biggest reasons groups like the Canadian Chamber of Commerce have had. fought Canada's DST implementation from the start.
Before the results of last week's election were known, Ontario Premier Doug Ford called for the tax to be suspended, based on what he said he was hearing about how “angry” Americans were about it.
If the American people had elected more Democrats to Congress last week, there might have been more patience, even support, for participating in the multilateral program Yellen and Treasury Secretary Chrystia Freeland were trying to hammer out.
Voices from many people who want some of these companies to be downsized or dissolved – or at least pay their fair share of taxes to fund social services – were getting attention before the election. That may explain why the Biden administration hasn't spent as much money protecting America's high-tech trade interests, which has angered many hawkish voices in Congress.
The incoming Trump administration, however, is heavily involved with tech moguls like Elon Musk.
“Most of the key digital executives reached out to Trump in the election,” noted New York-based trade attorney Mark Warner. He said he doesn't think this reflects well on Canadian taxes after the inauguration.
“The digital stuff is easier for people to understand because it looks like, 'Wait a minute, it's just companies [Canada is] big American companies,” added Warner.
“No matter how it makes sense and how it's explained, it's easy to frame the issue that way… 'You say you're our best friend. You're after our big companies. What is this?' “
Despite previous threats of retaliation from the US, Freeland's office noted how France, the United Kingdom and Italy collect taxes on digital services.
Finance Minister Chrystia Freeland is defending a controversial new tax on foreign tech giants like Netflix, Google and Amazon. He says it will generate billions in revenue, but experts say consumers will end up paying more.
“Right now, in Canada, some of the biggest companies in the world are not paying their fair share, despite doing business and making a lot of profit in Canada. That's not fair and it puts Canada at a disadvantage, comparatively,” said Freeland spokeswoman Katherine Cuplinskas. CBC News.
“Our preference has always been for a multilateral solution,” he said, noting that Canada has already made “significant concessions” to try to broker an international agreement, including delaying the implementation of its own tariffs.
“We look forward to working again with President Trump and his administration on important issues on both sides of the border.”
While the Trudeau government hoped its DST would bring in more than $7 billion during its first five years, it may have to acknowledge the problem to avoid punitive measures once Trump is in power.
That may disappoint progressives like the New Democrats who have argued for years that big companies need to pay their share — but fears of major economic damage may now have to focus in Ottawa.
Former Trump national security adviser Robert C. O'Brien you just wrote that “partners who want to force the US economically must be reminded that our global leadership in technology, including the digital services market, is a US national security issue”
Even if the Biden administration uses the weeks they have left to move this dispute through the CUSMA settlement process, it is not clear that Canada will be able to defend its tariffs against claims that they are harassing American companies.
“Canada can have a safe harbor under it [CUSMA] outside of culture,” said Elizabeth Trujillo of the University of Houston's law center. She said that while she wondered if the language that Canada fought for in that agreement – to protect its right to sponsor and support its arts and communications industries – could be used in this case, “it's debatable whether it's really cultural.”
As the World Trade Organization also struggles to oversee the ever-growing digital economy, Trujillo said it will be a problem when CUSMA comes up for mandatory review, if not a full renegotiation, in 2026.
“It is now very tense in these issues,” he said.
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