Canada’s digital services tax set for a reckoning with U.S.

The fight over Canada’s controversial digital services tax is set to escalate this week as the deadline looms for the Biden administration to decide whether to proceed with dispute arbitration. The United States Trade Representative (USTR) Katherine Tai filed an official complaint under the Canada–United States–Mexico Agreement (CUSMA) arguing that Canada’s three per cent tax unfairly discriminates against American corporations.

The 75-day consultation period initiated by Tai ends this week, leaving the decision on whether to escalate the dispute to an arbitration panel uncertain. With President Joe Biden’s administration in a lame duck position, there is a possibility that the incoming Trump administration may take a more aggressive stance on the issue.

John Dickerman, the Washington-based policy vice-president for the Business Council of Canada, believes that the Trump administration will have little room for negotiation on the digital services tax (DST). He predicts a ‘with us or against us’ scenario, with potential retaliation from the U.S. looming.

The USTR’s other option is to let the complaint slide for now, leaving it for the incoming administration to address. However, this may carry even more risk for Canada, especially considering Trump’s previous stance on digital services taxes.

Canada’s DST targets firms with more than $20 million in annual revenue from Canadian sales of online advertising, social media, streaming services, or data storage. The tax does not apply to small start-ups and is triggered when a tech giant’s revenue exceeds a set international threshold.

The risk of direct tariff retaliation from the U.S. has been a concern for business groups like the Canadian Chamber of Commerce. Ontario Premier Doug Ford has even called for the tax to be paused due to the potential backlash from Americans.

Despite threats of retaliation, Finance Minister Chrystia Freeland defends the tax, citing the need for big tech companies to pay their fair share in Canada. She emphasizes the importance of a multilateral solution but acknowledges that Canada may have to make concessions to avoid punitive measures under a Trump administration.

The Trudeau government had hoped to generate over $7 billion from the DST in its first five years. However, the looming threat of retaliation may force them to reconsider their approach to avoid greater economic harm.

As the Biden administration’s time winds down, the fate of Canada’s DST remains uncertain. The cultural exception under CUSMA may offer some protection, but the issue is likely to resurface during the agreement’s mandatory review in 2026.

In the ever-expanding digital economy, the dispute over Canada’s DST highlights the challenges faced by international trade agreements. The outcome of this dispute will have far-reaching implications for the future of taxation in the digital services sector.