Ottawa Moves Ahead With Digital Services Tax Despite US Opposition

The logos for streaming services Netflix, Hulu, Disney Plus and Sling TV are seen on a remote control in a file photo. (Jenny Kane/AP Photo)

Ottawa is moving forward with its plan for a Digital Services Tax (DST), a policy that the United States has repeatedly voiced its objections to.

“We’ve talked about how important it was to make sure that web giants and large multinationals who work on the internet—like Apple, Amazon, and others—pay their fair share of taxes for the work they do and the operations they have here in Canada,” Prime Minister Justin Trudeau told reporters on Nov. 29.

The prime minister said Ottawa had agreed to pause the implementation of the tax while the Organization for Economic Cooperation and Development (OECD) countries and the United States worked on a global regime to ensure the tax was fair everywhere, which was supposed to be finished by the end of 2023.

“Unfortunately, that has not progressed, and therefore we’re keeping with our commitment to make sure that the largest multinationals on the internet pay their fair share of taxes in Canada. We’re going to move forward with the Digital Services Tax,” Mr. Trudeau said, adding that Canada was “not looking to fight with the United States.”

The DST is a 3 percent levy aimed at foreign companies—many of which are based in the United States—that receive revenue from Canadian subscribers and contributors. According to the Parliamentary Budget Officer, the implementation of the DST would raise $7.2 billion in the next five years.

On Nov. 28, Ottawa introduced a ways-and-means motion that sets out a number of changes to competition laws and sets up the government to introduce its DST. The motion contains no date for when the tax will come into effect.

The 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.

The Liberal government’s recent budget update did not propose a date for the implementation of the DST, which was originally set to come into force in 2024. The Nov. 21 fall economic statement 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.”

When asked on Nov. 28 about the timing of the DST, Finance Minister Chrystia Freeland told reporters that Ottawa’s position “is unchanged.” She added that the government’s position had always been that it had preferences for a multilateral agreement.

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“There is a real fairness issue here because other countries, our partners and allies like the U.K., like France, currently have a DST in place,” Ms. Freeland said.

US Opposed to Canada’s DST Deadline

The United States has repeatedly voiced its opposition to Canada’s refusal to delay the DST, as it wants 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 in October hosted by the Canadian Club of Ottawa that there would be “contention” unless the dispute is resolved.

“There’s a place where we’re either going to have to have an agreement, or we’re going to have a big fight,” he said.

Mr. Cohen said that while America was understanding of Canada’s position, a “country-by-country” approach to the DST would disproportionally target the United States, and it wanted more time for the OECD framework to kick in.

On Nov. 29, Mr. Cohen told The Globe and Mail that the United States is “disappointed that Canada has decided to move ahead with its proposed Digital Services Tax,” and added they would continue to engage with Canada “to find a productive way forward.”

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

Prospects of a potential trade war between Canada and the United States 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 argued would harm the nearly eight million U.S. workers employed in the digital economy.