Michael Geist holds the Canada Research Chair in Internet and E-commerce Law at the University of Ottawa, faculty of law.
The Canadian government’s efforts to regulate big tech companies sometimes feels like a series of high-stakes poker matches in which the government foolishly bets that readily apparent risks can be ignored. That approach has proven costly: the plan to regulate internet streaming services is now mired in multiple legal challenges in court, while news links on Facebook and Instagram have been blocked in Canada for nearly a year in response to the Online News Act.
The latest high-risk strategy involves the implementation of a digital services tax, which could lead to billions in tariff retaliation targeting some of Canada’s most important economic sectors.
The DST debate dates back many years as a growing number of countries became increasingly frustrated over the perception that big tech companies such as Google GOOGL-Q or Amazon AMZN-Q were not paying their fair share of taxes. The companies were subject to the same revenue tax obligations as anyone else but, with sizable research and development investments that are tax-deductible and significant revenues drawn from intangibles such as data and intellectual property, tax minimization strategies were particularly effective in reducing their tax obligations.
While welcoming the R&D spending, countries began to pursue a new surtax specifically targeted at digital-related revenues, including those earned from online marketplaces, digital advertising and social-media services. The resulting DSTs are essentially taxes on revenue that is already subject to tax. But they fell outside existing tax treaties that seek to limit double taxation, meaning that the increased payments would certainly hit the bottom line of the tech companies. Or the DSTs could lead to reduced tax earnings for the tech companies’ home country, most notably the United States, because less revenue from abroad flows back home.
The U.S. responded to the emergence of DSTs by threatening to impose tariffs as a retaliatory measure. For example, after France announced plans to implement a DST, the U.S. said it would establish billions in new tariffs on French products. The jousting over digital taxes ultimately led to a new international agreement at the OECD designed to establish common standards related to the taxation model. That agreement, which covers nearly 140 countries representing 90 per cent of global GDP, has not yet been implemented amid doubts that the U.S. will take the steps needed for it to take effect.
As they waited, Finance Minister Chrystia Freeland and the Canadian government became increasingly impatient with the delayed implementation of the deal. Tax revenues were not at risk given plans to retroactively apply the OECD’s DST; however, the prospect of billions in new money ultimately proved too tempting to wait. The government quietly used the Canada Day long weekend to announce that the DST was operational in Canada with affected companies obliged to remit taxes for revenues dating back to 2022.
The announcement sparked an immediate outcry from both the business community and the U.S. government. Businesses fear the DST costs will ultimately be passed along by the tech companies, making digital advertising more expensive and rendering Canadian businesses less competitive online. But the bigger concern stems from the prospect of U.S. tariff retaliation. The U.S. Trade Representative, which leads the U.S. government on trade matters, has said it is open to using “all available tools that could result in meaningful progress toward addressing discriminatory digital-services taxes.”
Much like the bet that Meta META-Q was bluffing when it said it would block news links in response to legislation that amounted to a link tax, the Canadian government is once again gambling that the U.S. government threat is just a bluff. Yet the risk here is far greater since tariff retaliation could run into the billions of dollars and focus on high-priority sectors such as dairy, steel or lumber. It is possible that the U.S. government will limit its opposition to sabre rattling, but with a presidential election only months away, currying favour in battleground states by levying tariffs on Canadian products in support of the Wisconsin dairy industry or the Pennsylvania steel sector hardly seems unlikely.
Few would dispute that tech companies should pay their fair share. Indeed, general tax revenues are preferable to the cross-industry subsidy model that the government has relied upon to support the Canadian cultural and news lobbies. But timing also matters. Canada could have waited for the international agreement to coalesce even as the retroactive DST revenues continued to accumulate. By striking now for its pot of gold, it runs the risk of creating significant harm to the Canadian economy and solidifying the growing global perspective of a government hostile toward the tech sector.