Liberals to proceed with digital services tax on tech giants

Going ahead with a unilateral tax could risk further worsening the trade relationship between Canada and the United States

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The Liberal government intends to proceed with plans to implement a digital services tax targeting tech giants, potentially within the coming weeks.

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A spokesperson for Finance Minister Chrystia Freeland confirmed the government will “move ahead with legislation finalizing the enactment of a Digital Services Tax.” A government source said the release of draft legislation or some type of consultation is a probable next step, and will likely come before the end of the year.

The Liberals promised the tax in the 2021 budget, saying it would bring in $3.4 billion over five years. It’s aimed at large companies that operate online marketplaces, social media platforms and earn revenue from online advertising — the likes of Amazon, Google and Facebook, as well as Uber and Airbnb.

But then in October, the Organization for Economic Co-operation and Development reached a deal on a multilateral tax approach for a global minimum corporate tax rate of 15 per cent. The largest and most profitable global companies will have to pay some taxes in countries where they operate, even if they’re not physically present in the country.

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As part of the agreement, countries agreed to delay any moves to implement a unilateral tax for two years.

Canada said it would postpone its tax, which will only go into effect if the multilateral OECD tax isn’t in place by 2024. While the tax wouldn’t be payable until 2024, it would be retroactive to 2022, leaving the Big Tech companies with a tax bill of more than $1 billion.

“Canada’s priority and preference has always been a multilateral agreement,” Freeland’s spokesperson, Adrienne Vaupshas, said. But the government is going ahead with the legislation for a unilateral DST to “ensure Canadians’ interests are protected.”

“It is our sincere hope that the timely implementation of the new international system will make this unnecessary,” she said.

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“I think the U.S. would view this as a step backwards,” said Maryscott Greenwood, CEO of the Canadian American Business Council. “I also think it comes at a fairly precarious time in the bilateral relationship.”

She said it’s also unclear why Canada would go out of its way “to signal that you don’t have confidence in your OECD partners.”

The government source said the U.S. is aware of Canada’s intentions to go ahead with the tax as a backstop measure. But the source added the multilateral deal remains the government’s priority, noting estimates that the OECD taxes would bring in around $4.5 billion a year in revenue for Canada, compared with about $700 million a year for the Canadian tax.

Going ahead with a unilateral tax could risk further worsening the trade relationship between Canada and the United States, which has seen the two countries recently clash over issues including American tax credits for electric vehicles and softwood lumber.

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The U.S. opposes unilateral digital service taxes and said in the spring it would consider implementing tariffs on six countries that have adopted such digital service taxes. Following the OECD agreement, the U.S. announced it had reached an agreement with Austria, France, Italy, Spain and the United Kingdom, in which those countries’ existing digital service taxes would be rolled back when the OECD tax comes into effect.

“We will also continue to oppose the implementation of unilateral digital services taxes by other trading partners,” the office of the United States Trade Representative said in the October statement.

Greenwood said it would be “useful to take USTR at its word that the strong preference is a multilateral approach.” She added that Canada wasn’t on the target list for U.S. tariffs before. “Why volunteer to become a target now?” she asked.

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Harry Chana, partner and international tax practice leader at accounting firm BDO Canada, noted that many of the companies digital taxes target are U.S.-based multinationals.

“You don’t have as many multinationals outside the U.S. that are in a similar situation. And that’s why the U.S. is … the biggest voice on this, because they’re the most impacted,” he said.

Christopher Sands, director of the Wilson Center Canada Institute, said the USMCA trade agreement prohibits measures taxing cross-border digital services if it’s a measure designed to distort trade.

Former U.S. trade representative Robert Lighthizer “put that language in because he didn’t want Canada to go ahead with a unilateral digital services tax,” Sands said.

Sands also noted the U.S.-Canada trade relationship is in a difficult spot at the moment.

He predicted that Canada going forward with its DST plans won’t result in a “huge clash” with the U.S. But “we’ll have a lot of conversations about this before it can get implemented in Canada, and it’ll be a lot of pressure on Canada … to not act unilaterally and wait.”

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