It looks like the US is moving forward with challenging Canada’s likely illegal Digital Services Tax – a long warned consequence.
It was a long time coming. The United States had sent warnings and letters to the Canadian government warning them of the consequences should they unilaterally move ahead with their Digital Services Tax. The business community also chimed in, begging the government not to go through with this Digital Services Tax. Those warnings, like everything else when it comes to this government and digital policy, went completely ignored. Giving the finger to the business community, experts, observers, and even the United States as a whole, the Canadian government implemented the Digital Services Tax.
The move left everyone exasperated as to why the Canadian government would go full crazy and do something like this. Both the Canadian Chamber of Commerce and the Retail Council of Canada, along with everyone else, threw their hands up in the air at the situation and basically said, “We’re fucked.” If anyone out there thought that even though the Canadian government ignored the pleas for sanity from creators and independent news organizations, maybe they would listen to the business community at least, well, you were wrong. The business communities calls for basic levels of sanity did ultimately get ignored along with everyone else.
The US government, of course, was watching the situation unfold, likely asking what the heck was wrong with Canada these days. In the lead up to the implementation, the US said that they would use all available tools to fight the Digital Services Tax. When the Digital Services Tax was implemented, US lawmakers urged quick and decisive action to challenge the Digital Services Tax. Google, for their part, announced that they would be passing on the costs to consumers.
It didn’t take long for signs of a trade war to start brewing. If you had hope that because this was a delicate time economically for both countries that the US wouldn’t really go through with this, you were likely left disappointed. Earlier this month, the US announced that they would be greatly increasing duties on softwood lumber coming from Canada to the US. It was a major sign that the US, even today, isn’t shy about sanctioning Canada one way or another.
In all likelihood, there is a contingent of people out there that think I’m reading too much into this. After all, softwood lumber and the Digital Services Tax are two totally different things. There’s a very good chance that the US would treat the Digital Services Tax. Well, if you are one of those people, boy is today a bad day for you. The United States has begun to move forward with challenging the Digital Services Tax. Indeed, it turns out that thinking that raising softwood lumber tariffs was, indeed, a correct interpretation. In a press release on the USTR website, the US government is requesting a dispute settlement consultation:
WASHINGTON – United States Trade Representative Katherine Tai today announced that the United States has requested dispute settlement consultations with Canada under the United States-Mexico-Canada Agreement (USMCA) regarding Canada’s recently enacted digital service tax (DST).
“The United States opposes unilateral digital service taxes that discriminate against U.S. companies. USTR is taking action today to address Canada’s discriminatory policies,” said Ambassador Katherine Tai. “As we pursue these consultations, we will continue to support the Department of the Treasury in the OECD/G20 global tax negotiations to bring a comprehensive solution to the challenge of DSTs.”
These consultations concern Canada’s Digital Services Tax Act, which is set out in Bill C-59, which was enacted on June 20, 2024. Canada’s DST appears to be inconsistent with Canada’s commitments under the Cross-Border Trade in Services and Investment chapters of the USMCA not to treat U.S. businesses less favorably than Canadian businesses.
Through these consultations, the United States will continue to work with the Government of Canada to resolve our concerns. If the United States and Canada are not able to resolve the United States’ concerns through consultations within 75 days, under USMCA rules the United States may request the establishment of a USMCA dispute settlement panel to examine the matter.
This is basically the next step forward in challenging Canada’s Digital Service Tax. So, that seems to put the dispute panel at November 13, later this year if there is no resolution. No doubt there’s a contingent of Canadian’s out there right now who are reacting to the news like this:
At this point in time, it’s likely that the small number of supporters of the Digital Services Tax will cling to the theory that this sort of thing is allowed because of Canada’s cultural exemption. That, however, is no solitude given the poison pill provisions that permit the US to respond in kind with separate tariffs against Canada. The Canadian government, for their part, really has no defence against any kind of challenge here. The Canadian government will likely fight and it is a fight they will likely lose.
At any rate, the clock is ticking on when the consequences of the Digital Services Tax will hit. While it was informally ticking before now, that has now become a formal ticking. For Canadian’s, all they can do at this point is brace for economic impact.
