As Canadian Government Expresses Confidence, US Reiterates Warning Over Digital Services Tax

Canada is continuing to be in denial, but the US is issuing another warning to Canada over the Digital Services Tax.

The drum beat of a potential trade war between Canada and the US is continuing to grow louder. This is all related to Canada’s war on the open internet including the Digital Services Tax (DST). The DST would slap non-Canadian companies with an additional tax. Supposedly, it’s about taxing so-called “Big Tech”, but as you are no doubt aware, those “Big Tech” companies come from the US. From an international trade standpoint, it essentially means that Canada is putting an extra tax on largely, if not, exclusively, American companies.

To the surprise of no one, this has sparked backlash from the US which, unsurprisingly, challenged these Canadian policies as being discriminatory against US business. The backlash targets not only Canada’s Digital Services Tax, but also the Online Streaming Act and the Online News Act as well. The fact that the US is unhappy about all of this has to be one of the worst kept secrets in the world of digital rights news and technology news. The US has warned Canada not once, not twice, not three times, but at least four times. US Senators has also formally sent the United States Trade Representative (USTR) a formal letter asking the governmental organization to take all necessary steps to respond to all of this.

While the Digital Services Tax, the Online Streaming Act, and Online News Act are all part and parcel of the US grievances towards Canada, the focus has been narrowed to the Digital Services Tax in recent weeks. It is understandable because the Online Streaming Act won’t really take hold until what would likely be 2025. The Digital News Act is pretty much on the verge of failing given that Meta has already dropped news links and Google is widely expected to follow suit (unless you are an Online News Act supporter in denial of course). That leaves the Digital Services Tax.

As we noted last month, the Digital Services Tax is expected to come into effect on January 1st (and retroactively charge taxes all the way back to 2022) which really isn’t that far away in the grand scheme of things. The Parliamentary Budget Officer suggested that an estimated $7.2 billion is expected to be extracted out of foreign online businesses – primarily American businesses. So, in response, the American government has been saying quite clearly that they will hit back by sanctioning Canada in kind. So, if Canada really does take away $7.2 billion, then Canada will get hit with tariffs to equal effect.

While the American’s have been quite loud and clear, the Canadian government has been trying to keep talk about starting a trade war at a minimum. Most of the time, they have remained silent on the issue, seemingly hoping that this will go away on its own. After multiple years of that strategy, it is clear that this hasn’t worked. When they do speak about the issue, the Canadian government generally gives a blanket statement such as how this all aligns with Canada’s trade obligations or that they haven’t heard anything from the US about this (in which case, I’d recommend a hearing aid at that point).

A pair of reports that came out recently suggests that this trend is continuing. According to Reuters, Canada’s Finance Minister, Chrystia Freeland, suggested that she is confident that Canada can work out something with the US:

Canadian Finance Minister Chrystia Freeland said on Tuesday she was cautiously optimistic about settling a dispute with the United States about Ottawa’s planned digital services tax (DST) on large technology companies.

The digital services plan aims to address the challenge of taxing digital giants like Alphabet (GOOGL.O) and (AMZN.O) that can book their profits in low-tax countries.

Almost right on cue, an American trade envoy apparently re-iterated their warnings, saying that a big trade fight is on the horizon. From the Financial Post:

A “big fight” between Canada and the United States could be looming over the federal Liberal government’s plan to impose what Washington’s envoy to Ottawa described Oct. 31 as a “discriminatory” tax on digital services.

David Cohen, whose nearly two years as U.S. ambassador have been marked by friendly but frank and sometimes blunt talk about cross-border concerns, issued the warning after a luncheon speech hosted by the Canadian Club of Ottawa.

“That will be an area of contention unless it is resolved,” Cohen told his audience when the subject of Canada’s digital services tax (DST) came up during the question-and-answer session.

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

So, really not mincing words about any of this here. Unless there are some sort of last minute talks to avert this, we may be seeing a massive trade war kick off in the new year between Canada and the US. It’s probably the last thing both economies need right about now considering how shaky things continue to be, economically.

The way the Digital Services Tax was sold really only sounds good in a vacuum. Large tech companies are earning huge profits while operating in Canada, so maybe they need to “pay their fair share”. Who could argue against that, right? Well, when you look into the details of the situation, everything looks very different. As it turns out, the large corporations targeted with the Digital Services Tax actually do pay taxes. In a report from earlier this year in the Globe and Mail, for instance, Amazon paid quite a bit in taxes: Inc. AMZN-Qhas revealed the total direct taxes the global tech giant incurred in Canada for the first time, saying Thursday that it spent $431-million in payroll and corporate taxes in 2021.

The company has historically disclosed its tax payments for just a handful of countries, generally sticking with the disclosure rules of a given jurisdiction. Canada does not traditionally require such public disclosures. But Amazon’s tax strategies have long attracted attention, as it has often sought out tax and cost incentives from jurisdictions when it looked for places to plant roots.

When you operate a business in Canada, yes, you do pay taxes. Corporate taxes are an excellent example of this. If the Canadian government determines that what is paid isn’t enough, they are free to raise those taxes. Tax incentives and tax breaks that effectively reduce this is an entirely different debate (and something certainly worth discussing and debating), but there is such thing as corporate taxes that foreign businesses operating in Canada pay. In that lens, it’s even less of a mystery why American lawmakers are viewing this as discriminatory. It’s a whole new tax designed for specific US businesses which is kind of contrary to things like CUSMA/USMCA.

Ultimately, it sounds like things really haven’t progressed at all. Judging by the comments of the US envoy, there either hasn’t been any discussion at all to address any of this or there have been discussions, but they haven’t really gone very far. There’s only two months left to sort this out. Otherwise, the gears will start moving to see this bubbling trade tension finally boil over.

Drew Wilson on Twitter: @icecube85 and Facebook.

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