United States looking at all tools to respond to Canada's digital services tax

The Office of the United States Trade Representative says it will do what’s necessary to halt Canada's tax on large foreign digital services companies as American business groups demand action. (Graeme Roy / The Canadian Press)

Washington, D. C. — The Office of the United States Trade Representative says it will do what’s necessary to halt Canada's tax on large foreign digital services companies.

Last month Parliament approved the government's plan to add a three per cent levy on foreign tech giants that generate revenue from Canadian users. It means the companies will have to pay taxes on that revenue in Canada.

Many of those companies are based in the United States and American industry is demanding action.

The Computer and Communications Industry Association, which represents many big tech companies including Amazon, Apple and Uber, called on President Joe Biden’s administration to take formal steps under the U.S.-Mexico-Canada Free Trade Agreement.

"With Canada’s DST now law, the time has now come to announce action," said Jonathan McHale, the association's vice president of digital trade, in a news release.

It joined 10 other trade associations in sending a letter to United States Trade Representative Katherine Tai urging a robust response.

An official in Tai's office said Monday they are open to using all available tools.

The digital tax was part of the Liberal election platform during the 2019 campaign. Both the Conservatives and New Democrats also proposed a similar levy.

The Liberal government, however, delayed its implementation in order to give more time to global efforts to establish a broader, multinational taxation plan.

A spokesperson for Finance Minister Chrystia Freeland said Canada's priority and preference has always been a multilateral agreement.

"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," Katherine Cuplinskas said in an email.

"And we are committed to protecting Canada’s national economic interest.”

Other countries have brought in similar tools to tax the profits of large multinational companies in the digital sector. But critics of the Canadian measure wanted Ottawa to put it on hold to allow the Organization for Economic Co-operation and Development additional time to get the global framework in place.

However, that framework has seen significant delays, particularly from the U.S. where moves to sign on to the agreement could remain stalled by the political realm of a divided Congress.

David Cohen, U.S. ambassador to Canada, said discussions between the U.S. treasury department, trade representative and the Canadian finance department are ongoing.

"We continue to discuss our concerns with Canada and hope they can be resolved to avoid having to speculate about what the U.S. reaction might be," Cohen said in an emailed statement.

The U.S. Chamber of Commerce and American Chamber of Commerce said in a news release last month that the Canadian tax is in contravention of the global framework and international tax principles at "this very sensitive time in the Canada-U.S. trade relationship."

The timing is problematic with a looming review of the Canada-United States-Mexico trade pact in 2026, said John Dickerman, who heads the Business Council of Canada’s Washington office. It risks disuniting Canada from an essential economic partner.

"You are kicking at a hornets' nest," Dickerman said.

If Canada puts itself in a position where it is alienating companies and other countries, Dickerman said it becomes a less enticing place to do business.

"It's not a time for us to be working against each other," he said. "It's a time for us to be working together."

This report by The Canadian Press was first published July 2, 2024.