Ottawa Enacts Digital Services Tax Amid US Concerns

Canada's digital services tax will require foreign tech giants to pay three percent of revenues on their operations in Canada. (jannoon028/Freepik)

The Canadian government’s digital services tax (DST) that will require foreign tech giants to pay three percent of revenues on their operations in Canada has come into force.

It’s a move that industry leaders in the United States are fighting against, with United States Trade Representative Katherine Tai saying they will use every available tool to do so.

The DST came into effect on July 4 following an order in council by Finance Minister Chrystia Freeland and despite ongoing negotiations for a multilateral DST that would include Canada and the U.S.

“Canada’s preference is and always has been a multilateral solution on the DST, a multilateral agreement around Pillar One,” Ms. Freeland said, referring to a plan by the Organization for Economic Co-operation and Development to tax multinational corporations’ based on their activities rather than their location.

“Canada also has been and continues to be engaged in bilateral conversations with the United States about a win-win outcome for our two countries, which are so closely connected,” said the minister in response to a reporter’s questions at an unrelated news conference in Milton, Ontario, on July 4.

Representatives of the U.S. tech industry have been reaching out to politicians, including President Joe Biden, to take action against the DST.

The Canadian Chamber of Commerce has opposed the DST.

“The imposition of a retroactive discriminatory digital services tax by the federal government will not only make life more expensive for Canadian families, businesses and workers, but it will significantly harm our relationship with the United States,” vice president and deputy leader of government relations Robin Guy said in a July 4 statement. “The government should reverse its unilateral decision that is out of step with our allies, and instead, work with our trading partners on an international solution that would better serve Canadians.”

An Oct. 2023 report from the Parliamentary Budget Officer (PBO) estimated the levy would bring in $7.2 billion over five years.

However, the PBO said the DST presented some “uncertainty.”

“The limited information in financial statements means the estimation of in-scope revenues subject to DST involves a high degree of uncertainty,” the report said. “It is also expected that businesses in the targeted sectors will adjust their services and prices in response to the new law.”

The PBO said its calculations did not include the costs that Ottawa would incur in tracking transactions in Canada as the cost recovery mechanism is yet to be established.

International DST Talks

The DST was a 2019 election promise by the Liberals, who held off putting it into effect while multilateral talks were going on. Both the Conservatives and New Democrats also proposed a similar levy.

Ms. Freeland said Canada had made a sacrifice by putting the DST on hold.

“We committed to doing that until the end of 2023 because there was an international commitment to get Pillar One done, but that didn’t happen,” she said during the news conference. “We didn’t get Pillar One done by the end of June, either, and it simply not reasonable, not fair for Canada to indefinitely put our own measures on hold.”

The finance minister said Canada had been “very clear” with the U.S. about what the government would do if no multilateral deal was made.

“A number of other G7 countries, a number of other partners of Canada, the UK, France, Italy to name just a few, currently have a DST in place and are not subject to U.S. trade retaliation,” she added. “As finance minister and deputy prime minister, I just can’t accept Canada indefinitely being in an inferior position to other countries who are partners and allies.”

Minister Freeland noted these countries were collecting revenue from international tech giants, revenue that Canada could benefit from.

“I think we are all agreed as Canadians we have such a crying need for investment in so many things in our country. Whether it is housing, or making life more affordable, or investing in productivity and growth,” she said. “We also know that we need to make those investments in a fiscally responsible way, because we want interest rates to keep on coming down.”

The Canadian Press contributed to this article.