Canada moves to tax big tech, against US wishes

The US has repeatedly stated that it does not support the new tax and has threatened to take action against Canada should it push ahead with the levy. It has not specified what action it would take, but the prospect of trade retaliation looms.

Canada has been working on the Digital Services Tax for years with a view to ensuring that big tech companies are paying their fair share, much like many other administrations worldwide. The US was keen for it to hold off and rely instead on a global tax accord brokered under the OECD, but that has been a slow process and to date the US has not signed off on it. As such, Canada decided it couldn't – or wouldn't – wait any longer and moved ahead with its own plan.

Last month the Canadian parliament passed a bill that includes the Digital Services Tax, and it almost immediately received Royal Assent. The bill was enacted on 28 June, the Wall Street Journal reported on Wednesday, citing a government notice.

That means that as of last Friday, Canada will tax technology companies at a rate of 3% on revenue they generate from providing digital services to users in Canada or selling Canadian user data. The legislation is also retroactive, so applies to revenues generated from 2022 onwards.

As the government explains in its backgrounder to the tax – published more than two years ago, incidentally – the tax applies to large businesses, both foreign and domestic, that meet both of two revenue thresholds at group level. The first is an overall annual revenue figure of €750 million (that's C$1.1 billion or US$810 million) or more. The second, turnover of CS20 million (US$14.7 million) in Canadian revenues.

In its 2024 budget, outlined in April, Canada's Department of Finance made much of the concept of tax fairness and ensuring, in its own words, that "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." It noted that it expects the Digital Services Tax to contribute C$5.9 billion to government revenues over a five year period, starting in this financial year, which runs to the end of March 2025.

But tax fairness or otherwise, the US is not happy with Canada for going it alone, rather than waiting for the global taxation plan to come to fruition.

The Office of the United States Trade Representative has been lobbying Canada to abandon its Digital Service Tax for years. And when the bill was passed last month, non-profit organisation the Computer & Communications Industry Association (CCIA) and 10 other trade bodies shared a letter they collectively sent to the Biden administration urging it to take action.

Specifically, the CCIA et al called on the administration to take formal steps under the US-Mexico-Canada Free Trade Agreement (USMCA) to address what they believe are the discriminatory aspects of the law.

"We have consistently raised concerns that Canada's digital services tax, by design, would disproportionately target US companies, endangering thousands of US jobs and undermining the operations of US firms in a key market," said CCIA Vice President of Digital Trade Jonathan McHale, in a statement accompanying the letter.

"The US Treasury has been steadfast in opposing such measures as bad tax policy; and the Office of the US Trade Representative has been clear that they implicate trade obligations, warranting the use of the tools at its disposal to defend US interests," McHale said. "With Canada's DST now law, the time has now come to announce action. Absent a swift and robust response, other countries will follow Canada's lead, and the OECD/G20 Inclusive Framework will be pushed to the precipice."

It's now over to Washington to make the next move.