US challenges Canadian digital services tax under new NAFTA

Photo: Sean Kilpatrick The Canadian Press “We look forward to the opportunity to demonstrate how Canada is meeting its trade obligations,” Minister Chrystia Freeland's office said Friday.

U.S. Trade Representative Katherine Tai is launching a dispute settlement process with Canada to challenge its new digital services tax.

Canada's Finance Minister Chrystia Freeland's office confirmed Friday that it is being targeted by the trade action, brought under the Canada-United States-Mexico Agreement (CUSMA), the new version of NAFTA. The U.S. government is first consulting in hopes of reaching an agreement with the Canadian government.

“We look forward to the opportunity to demonstrate how Canada is meeting its trade obligations,” Freeland's office said Friday.

Three years after announcing its intention to impose a 3% tax on services offered on the Internet, such as online advertising, the Canadian government made it official in June. Chrystia Freeland, who is also Deputy Prime Minister of Canada, had then specified that she hoped to avoid reprisals from the United States, saying she was working closely with U.S. Treasury Secretary Janet Yellen on this matter.

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The announced consultations will not begin for another 30 days and will last for a total of 45 days. Its findings are unlikely to be announced before the U.S. presidential election, which is scheduled for November 5.

The Canadian Chamber of Commerce responded to the announcement by calling on Ottawa to pause its digital services tax again. In a statement, a spokesperson wrote that the U.S. response “confirms our long-standing concerns that the digital services tax is damaging our most lucrative partnership at a critical time when we need to reassess CUSMA.”

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The case could even lead the United States to undertake sanctions against Canada, fears the Business Council of Canada.

International divisions

The Trudeau government had hoped not to end up imposing a tax on digital services, but rather to find a compromise with the member countries of the Organisation for Economic Co-operation and Development (OECD) and the G20 for international tax reform. However, these discussions are at a standstill.

Several other developed countries impose such a tax on web giants, including France, the United Kingdom and Italy. In total, 138 OECD countries that were negotiating international tax reform, such as a minimum tax of 15% on multinational corporations, have nevertheless asked to refrain from creating new taxes on digital services last year. The United States has repeatedly and very explicitly warned Canada against such a measure.

A study by the Office of the Parliamentary Budget Officer has already estimated that the digital services tax could bring in up to $1 billion per year for the federal government.

“Canada strongly supports international efforts to end the global tax race to the bottom and ensure that all companies, including the world’s largest corporations, pay their fair share wherever they do business. Canada’s strong and essential social safety net depends on a strong domestic tax base that depends on people doing business in Canada and paying their fair share of taxes,” reads a joint statement from Finance Minister Chrystia Freeland and Minister of Export Promotion, International Trade and Economic Development Mary Ng.

While the United States disapproves of Canada’s new digital services tax, his government has welcomed the Trudeau government’s decision to impose 100 per cent tariffs on new Chinese electric vehicles.