U.S. Trade Representative Katherine Tai speaks during a press briefing at the White House in Washington, U.S., May 14.Elizabeth Frantz/Reuters
Washington is taking preliminary trade action against Canada over its new digital services tax on large multinational companies.
U.S. Trade Representative Katherine Tai announced Friday that her office has requested dispute-settlement consultations with Canada under the United States-Mexico-Canada Agreement (USMCA).
“The United States opposes unilateral digital service taxes that discriminate against U.S. companies,” Ms. Tai said in a statement, adding that her office “is taking action today to address Canada’s discriminatory practices.”
Canada first signalled its plans to bring in a digital services tax (DST) in the fall of 2020. The government held off on acting as it waited to see whether global tax reform negotiations at the Organization for Economic Co-operation and Development would produce a widely accepted deal on the taxation of global tech giants such as Amazon, Facebook and Google, many of which are headquartered in the U.S.
No deal has yet been reached, leading Finance Minister Chrystia Freeland to announce earlier this year that Canada would go ahead with its plan for a digital services tax, retroactive to 2022.
Canada will impose a 3-per-cent tax on revenues from certain digital services, including online targeted advertising, online marketplaces and social-media platforms. It applies to multinational tech companies that earn at least $20-million a year in digital services revenue in Canada and have global revenue that exceeds €750-million ($1.1-billion).
Ottawa expects the tax will raise $2.3-billion in the current fiscal year and $900-million a year thereafter.
Ms. Freeland and Trade Minister Mary Ng issued a statement noting that France, Britain and Italy all have digital services taxes in force while the global talks continue.
The statement said Canadian officials have been in close contact with U.S. counterparts in recent weeks and months with respect to taxation issues, and described the use of the new North American free-trade agreement as an “appropriate forum for further dialogue.”
The two ministers said Canada’s preference has always been a global deal on digital services taxation.
“Canada strongly supports international efforts to end the corporate tax race to the bottom and to ensure that all corporations, including the world’s largest corporations, pay their fair share wherever they do business,” they said.
Google recently responded to Canada’s DST by announcing a new 2.5-per-cent surcharge on advertisements, which the company said will help it cover the costs of complying with the new tax.
In Friday’s statement, the U.S. trade representative’s office said Canada’s DST appears to be inconsistent with Canada’s commitments under the USMCA’s requirements not to treat U.S. businesses less favourably than Canadian businesses.
It goes on to say that the United States will continue to work with the Canadian government to resolve these concerns. If no resolution is reached after 75 days of consultations, the statement said the U.S. may request the establishment of a dispute-settlement panel under the free-trade deal.
Jessica Brandon-Jepp, senior director of fiscal and financial services policy with the Canadian Chamber of Commerce, said Friday’s announcement confirms the business group’s long-standing concern that the DST is damaging to Canada’s most lucrative trading relationship.
“This only stands to hurt Canadians as they struggle to afford the goods and services they need,” she said in a statement. “We reiterate that to protect Canadians, the government needs to continue negotiating with the United States and halt the imposition of a unilateral DST, or at the very least, ensure that regulations do not include inflammatory retroactivity to 2022.”
Business Council of Canada president Goldy Hyder said in a statement that his organization has been warning for more than two years that unilateral action by Canada would trigger a retaliatory response.
“We once again urge the federal government to change its position on the DST and instead focus its efforts on strengthening the Canada-U.S. bilateral relationship,” he said.