Liberal government introduces controversial digital services tax, raising trade concerns

The federal government has introduced a controversial digital services tax that will raise billions of dollars while threatening Canada’s trade relations by taxing the revenue that international companies earn in Canada.

The Liberal government proposed the tax in its 2019 election manifesto. It later agreed to delay the measure’s introduction until the end of 2023 in the hope of striking a deal with other OECD countries on how to tax multinational digital companies.

Negotiations for an international agreement dragged on after that date and the federal government issued a order of management on June 28 to introduce the Digital Services Tax (DST), which received royal assent on June 20.

WATCH: Freeland defends controversial digital services tax

Freeland defends the introduction of the controversial digital services tax

Reporters question Finance Minister Chrystia Freeland about the risk of US retaliation as Ottawa moves to introduce a digital services tax.

Deputy Prime Minister and Finance Minister Chrystia Freeland told reporters in Milton, Ontario, on Thursday that “Canada’s preference is always for a multilateral solution.”

“It’s just not fair, it’s not reasonable, it’s not fair, for Canada to put our own measures on hold indefinitely,” she said. “A number of other countries now have DSTs, and they’ve had DSTs for a number of years without reprisals.” [from the U.S.].”

According to Freeland, Canada can also do this if allies such as the United Kingdom, Spain, Italy and France can introduce daylight saving time without the US penalizing them.

“We have worked hard and will continue to work hard to reach a multilateral solution,” she said. “I am confident that a win-win situation … for Canada and the U.S. is absolutely possible.”

Digital companies with global annual revenues of at least $1.1 billion will see annual revenues of more than $20 million taxed in Canada at a three per cent rate. The first year of the tax will cover revenues earned since January 1, 2022.

The Parliamentary Budget Office last year estimated the tax would raise more than $7 billion over five years. The 2024 budget forecast revenues of $5.9 billion over five years, starting in 2024-25.

Digital multinationals such as Meta, Alphabet, Facebook and Amazon are not established in all countries where they do business. This allows them to avoid certain taxes.

The federal government sees the digital services tax as a way to update its tax code and leverage the revenues of foreign-based companies in Canada.

“Canada supports international efforts to end the race to the bottom on corporate taxes and ensure that all companies, including the world’s largest corporations, pay their fair share,” Freeland spokesperson Katherine Cuplinskas told CBC News.

Tax is ‘discriminatory,’ says US envoy

The Liberal government’s decision to introduce the tax before an international agreement is reached with other OECD countries has raised concerns about possible negative consequences.

U.S. Ambassador to Canada David Cohen issued a press statement Thursday calling the tax “discriminatory.”

“[The United States Trade Representative] has expressed its concerns about the Canadian Digital Services Tax and is assessing and open to using all available tools that could lead to meaningful progress in addressing unilateral, discriminatory [digital services taxes]” Cohen said in the statement.

An Amazon spokesperson told CBC News on Thursday that the company was disappointed with the decision, calling it “a discriminatory tax that is harmful to Canadian consumers.”

As soon as the legislation allowing the tax went into effect, the American Chamber of Commerce and the American Chamber of Commerce in Canada issued a statement strongly opposing the measure, saying it would raise prices for everyone.

They argue that a digital services tax would disproportionately hit U.S. companies, undermine digital exports to Canada, and violate Canada’s obligations under the U.S.-Canada-Mexico Free Trade Agreement and the World Trade Organization.

“At this very sensitive time in the Canada-U.S. trade relationship, we urge the Canadian government to reconsider this unilateral and discriminatory new tariff,” the statement said.

Ontario Government Opposition

The Canadian Chamber of Commerce told CBC News on Thursday that “a discriminatory retroactive tax on digital services” would damage Canada’s relationship with the U.S. and increase the cost of living in Canada.

“The government should reverse its unilateral decision, which is not in line with the plans of our allies, and instead work with our trading partners on an international solution that is better for Canadians,” Robin Guy, the chamber’s vice-president of government relations, told CBC News.

On June 28, Ontario Finance Minister Peter Bethlenfalvy wrote a letter to Freeland asking for a delay in the tax’s implementation.

“Canada, like the rest of the world, is taking steps to address the tax fairness challenges arising from the digital transformation of the global economy,” Bethlenfalvy wrote.

“However, we must do this carefully and not in a way that imposes unnecessary taxes on people and businesses, or risks isolating Canada from the US market.”

Bethlenfalvy’s office told CBC News on Thursday it was “disappointed” by the decision to impose the tax before an international agreement could be reached.

Last month, the U.S. Computer and Communications Industry Association, which represents major tech companies including Amazon, Apple and Uber, wrote a letter to U.S. President Joe Biden asking his administration to initiate formal dispute resolution proceedings under the United States-Mexico-Canada Agreement (USMCA).

The group said the measure is necessary because a digital services tax could cost American companies up to $2.3 billion a year and lead to the loss of thousands of full-time jobs in the US.

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