Forty-four months ago, the federal Liberals stated their intention to plug leaks in the digital economy that allowed companies to sell online services to Canadians without paying corporate income tax.
But that digital services tax, first bruited in the November, 2020, economic statement, would only be put in place if an international agreement could not be hammered out in talks at the Organization for Economic Co-operation and Development.
Even 3½ years ago, Ottawa was worried about the pace of those discussions, flagging that concern in the economic statement. “The government remains committed to a multilateral solution, but is concerned about the delay in arriving at consensus.”
Agreement was elusive largely because the United States was not particularly keen about other countries taxing large American technology firms. But the issue was a real one: The nature of digital services such as online marketplaces, digital advertising and social media makes it relatively easy for companies to shift revenue to lower-tax jurisdictions. It’s the leak of revenue from such (legal) tax avoidance that digital services taxes are meant to stop.
Negotiating deadlines came and went, leapfrogging over the Jan. 1, 2022, start date for the digital services tax. Still, the Liberals delayed the rollout of a digital services tax, hoping that multilateral negotiations would result in action and avoid the headache of a showdown with the United States.
Talk and wait was the Liberals’ policy, until late last month. Days before the Canada Day long weekend, Ottawa said the tax was in effect, retroactive to 2022, with expected revenue of $2.3-billion in the current fiscal year, and $900-million annually in the next four years. That $2.3-billion will helpfully arrive in the months before the expected 2025 election.
The most obvious trigger was the approach of a June 30 deadline within the OECD for arriving at a multilateral agreement. That deadline was not met, with the United States once again arguing for an extension.
Now, Canada’s digital services tax is in place, and the headaches are already beginning. U.S. business groups were predictably outraged. More worryingly, the U.S. ambassador to Canada, David Cohen, labelled the tax “discriminatory,” noting that the U.S. Trade Representative was open to using “all available tools.” And on Thursday, the Republican members of the House Ways and Means Committee urged the White House to “deliver a quick and decisive response.”
Translation: The U.S. may impose countervailing tariffs on Canadian goods in retaliation. That might mean billions of dollars in tariffs slapped on the dairy or forestry sectors, to name a couple of favourite U.S. targets.
Canada does have logic on its side. Corporate tax shopping is a real issue, and international tax rules are badly in need of modernization to catch up to the realities of the digital economy. Other OECD countries have already introduced digital services taxes.
And Canada’s digital services tax is structured in such a way as to blunt any accusation that U.S. Big Tech firms are being targeted. Other versions set a threshold that pretty much guarantees only the very biggest tech companies will have to pay: €750-million in worldwide digital services revenue. Ottawa’s definition is far less restrictive – €750-million in any kind of revenue, plus a second threshold of $20-million in domestic digital services revenue. (Companies that meet those dual thresholds will have to pay 3 per cent of qualifying revenue above $20-million.)
Logic and solid policy may not matter much in a U.S. election year in which both the Democrats and Republicans are eager to outbid the other on protectionist policies. And the trade talks to renew the United States-Mexico-Canada Agreement are only a couple of years down the road.
Even if a tariff-loving Donald Trump does not win the White House, Canada will face a U.S. Congress that is unlikely to accede to other countries pinching U.S. companies for billions. Britain and France have largely escaped any retribution after implementing digital services taxes – but those countries are not tied to the United States as Canada is, including through a wide-ranging trade agreement that gives this country preferential access to the huge American market.
Given the political environment, it was arrogant, indeed foolhardy, for the Liberals to move unilaterally. Their $2.3-billion windfall could cost Canadian businesses dearly.