For years, the United States has warned of consequences should Canada implement the Digital Services Tax. Action appears certain.
The Digital Services Tax continues to be a friction point in Canada’s trade relationship with the United States. The new tax would charge American companies an additional 3% for revenue generated in Canada. The United States has long contended that this is discriminatory against American businesses and all but said that trade sanctions against Canada is certain should the tax be implemented.
None of these warnings are anything new. In fact, the US has warned Canada for years that they would respond should Canada implement these measures. They warned again and again and again and again and again that should Canada move ahead with the Digital Services Tax, the Canadian economy is going to get hit with trade sanctions.
The warnings themselves aren’t even a partisan issue. Both Republican and Democrat senators have pressured the USTR (United States Trade Representative) to take action against Canada.
The Canadian government, for their part, have either tried to ignore this issue by burying its head in the sand, hoping it all just goes away on its own. They also have tried to respond by just blankly saying that the Digital Services Tax is in line with all of Canada’s international trade obligations, though never really went into specifics about that.
Regardless, the pressure from the United States did seemingly have an impact on this. Last year, the Digital Services Tax was expected to be implemented on January 1st, but the government backed off of that timeline and delayed its implementation. You almost get the impression that the Canadian government hopes to implement the tax when the heat is off and the US is no longer paying attention – as if no one would notice an additional 3% tax expected to pull in $7.2 billion. That tactic, however, doesn’t seem to be working.
At the moment, the Digital Services Tax has passed third reading at the senate. The only step left is having this receive royal assent. Because the government is off for the Summer break, that process has been delayed until at least September 16, so that leaves this Summer to pressure the Canadian government not to go full crazy and implement it – even though it seems that little is stopping this from becoming law at this point.
Canadian business leaders have long begged the Canadian government to not go through with this. With trade retaliation in kind that will likely mean $7.2 billion in sanctions against Canada forthcoming, it’s unclear who is going to become collateral damage in all of this. Trade sanctions could hit anyone, depending on what strategy the US government deems appropriate. So, it is quite understandable that the Canadian Chamber of Commerce is begging Trudeau to not go through with this. The begging from the business sector was echoed by the Retail Council of Canada who also doesn’t want to become collateral damage in all of this for some strange reason.
With trade war seeming on the verge of happening between Canada and the United States, it doesn’t really come as a surprise that the US government has all but said that Canada is going to get hit with trade sanctions. Recently, the USTR has said that it is open to using all available tools to put a stop to the Digital Services Tax. From the Globe and Mail:
The Office of the United States Trade Representative says it will do what’s necessary to halt Canada’s tax on large foreign digital services companies.
The Computer and Communications Industry Association, which represents many big tech companies including Amazon, Apple and Uber, called on President Joe Biden’s administration to take formal steps under the U.S.-Mexico-Canada Free Trade Agreement.
“With Canada’s DST now law, the time has now come to announce action,” said Jonathan McHale, the association’s vice president of digital trade, in a news release.
It joined 10 other trade associations in sending a letter to United States Trade Representative Katherine Tai urging a robust response.
An official in Tai’s office said Monday they are open to using all available tools.
The U.S. Chamber of Commerce and American Chamber of Commerce said in a news release last month that the Canadian tax is in contravention of that global framework and international tax principles.
“At this very sensitive time in the Canada–U.S. trade relationship, we urge the Government of Canada to reconsider this unilateral and discriminatory new levy, refrain from designating its implementation, and re-join the … multilateral process in recognition of the importance of a common approach to the North American marketplace.”
Ultimately, it’s only a matter of time before the warnings result in action. The Canadian government has been rather belligerent on this one thanks in part to ignoring all the warnings and moving ahead with this anyway. The warnings from the business community in Canada have largely fallen on deaf ears. As a result, Canadian businesses now find themselves looking at each other and speculating on who will ultimately get burned by all of this. At this point, that is anyone’s guess.
While the Digital Services Tax likely isn’t going to hit until after Parliament resumes, everyone is bracing for economic impact. This with Trudeau’s foot pressed firmly on the gas pedal.
