Canada Delays Implementing Digital Services Tax Amid US Opposition

The icons of mobile apps are seen on the screen of a smart phone in a file photo. (Sajjad Hussain/AFP via Getty Images)

The Liberal government’s budget update is not proposing a date for the implementation of its Digital Services Tax (DST), which the U.S. opposes and was originally set to come into force in 2024.

Ottawa, in its Fall Economic Statement released Nov. 21, said “forthcoming legislation“ would allow it ”to determine the entry-into-force date of the new Digital Services Tax, as Canada continues conversations with its international partners.”

The DST is a three percent levy aimed at foreign companies—many of which are based in the U.S.—that receive revenue from Canadian subscribers and contributors.

In its fall economic statement, Ottawa said the country had worked “diligently and constructively” to negotiate the treaty that would ensure “the largest and most profitable global corporations, including large digital corporations, pay their fair share of tax in the jurisdictions where their users and customers are located.”

The implementation of the DST would raise $7.2 billion in the next five years, according to the Parliamentary Budget Officer.

The federal government agreed in October 2021 to pause the implementation of the tax until the end of 2023 to give more time for negotiations to conclude. But it later said it would not go along with the two-year deferral period, arguing that by not implementing its DST for another year, Canada would be put at a disadvantage in comparison to countries that have been collecting revenue under their pre-existing DSTs.

In the fall economic statement, it was noted that seven other countries—Austria, France, India, Italy, Spain, Turkey, and the United Kingdom—have continued to apply their own DSTs.

United States Had Warned of ‘Big Fight’

The United States took issue with Canada’s refusal to delay the DST, as it had aimed to establish a unified approach for a minimum tax level that would prevent multinational companies from exploiting tax rules through aggressive tax-planning strategies.

U.S. Ambassador to Canada David Cohen warned at a luncheon speech hosted by the Canadian Club of Ottawa on Oct. 31 that there would be “contention” unless the dispute was resolved, adding, “There’s a place where we’re either going to have to have an agreement, or we’re going to have a big fight.”

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Mr. Cohen said that while the U.S. was understanding of Canada’s position, it wanted more time for the OECD framework to kick in, arguing that a “country-by-country” approach where America was disproportionally impacted would not be fair.

In September, members of the U.S. House Committee on Ways and Means, which oversees matters of international trade, also wrote a letter to Treasury Secretary Janet Yellen and U.S. Trade Representative Katherine Tai where they said there would be “significant consequences” if Canada proceeded with the tax.

Prospects of a potential trade war between Canada and the U.S. were also raised after two U.S. senators on the Senate Committee on Finance wrote a letter calling for retaliation if Canada moved forward with the tax plan, which they said would harm the nearly eight million U.S. workers employed in the digital economy.

“We must not allow foreign governments to target U.S. companies and the Americans they employ,” wrote Sens. Ron Wyden and Michael Crapo.

Following a meeting in Washington D.C. in late October, Finance Minister Chrystia Freeland said she'd had “good conversations” about the DST with American officials.

“I remain cautiously optimistic that we'll be able to reach an understanding with our American partners,” she told reporters on Oct. 31.

The Department of Finance did not respond to the Epoch Times’ request for comment by publication time.