Controversy Surrounds Canada’s Digital Services Tax Implementation

Although the federal government made a decision to pause the implementation of Canada’s Digital Service in October 2021

Canada enacted the Digital Service Tax Act on June 20, 2024. The focus was to ensure that a fair share of tax is paid by the digital companies without the overlooking of a timely implementation of an international multilateral system. 

Although the federal government made a decision to pause the implementation of Canada’s Digital Service in October 2021. In order to allow some time for negotiations on Pillar One to conclude, the announcement was already made in 2020 until the end of 2023. 

Canada’s adoption of the Digital Services Tax Act was strongly opposed by the US Chamber of Commerce and the American Chamber of Commerce in Canada (AmCham Canada). It was noted that “the Government of Canada is forging ahead with a retroactive and discriminatory digital services tax in contravention of both prevailing international tax principles and the OECD/G20 Inclusive Framework process that it has long claimed to support.”

This objection was ignored by the Canadian Prime Minister Justin Trudeau’s government who authorised the implementation in the first place. The digital-service tax on bigger international technology companies was in action despite the warnings of trade retaliation from the US. A move that could lead to Congress and the Biden administration taking trade retaliatory measures.

A notice as posted online by the government indicating the commencement of the act as of June 28. It will apply for calendar year 2024, with that first year covering taxable revenues earned since Jan. 1, 2022.

The companies that provide services to Canadian users or sell their data and are also radioactive to the sales which date back to 2022 will undergo a 3% levy to its revenue. 

Members of Congress, US officials and Katherine Tai who leads the Trade Representative have sent warnings multiple times. Repercussions of enacting the digital services tax would lead to triggering trade retaliations from Washington. 

The members of the House of Representatives’ Ways and Means Committee sent a letter to Tai in September 2023 talking about the act. The letter mentioned that Canada’s digital-services tax  “would seriously harm American companies and workers,” and guaranteed to work with the White House on trade restrictions that focus on canada.

According to the US Chamber of Commerce, the digital tax introduced by Canada would contravene with Ottawa’s obligation under both the World Trade Organization and the US-Mexico-Canada trade deal.  

Canada estimated that the digital-service tax will earn approximately 2.3 billion Canadian dollars ($1.7 billion) in revenue for the current fiscal year, which ends on March 31, 2025. This was mentioned in the 2024 budget plan and it nearly amounts to C$6 billion over a half decade.  

Finance Minister Chrystia Freeland said that ensuring digital businesses that monetize the data and content of Canadian users pay their fair share was emphasized.

The tax accord that was agreed to in the fall of 2021 is the main focus of the dispute with the US. It represents the changes to where, how and how much tax the multinational companies around the world pay. That deal, which the Biden administration supports but has yet to be implemented, calls on countries to refrain from imposing new digital taxes.

Canada further plans to impose additional levies along with digital tax on big technology companies in the US.  Last month, the regulator broadcast in Canada announced their intentions to drive the international streaming firms to contribute more. In order to support the local broadcast, newscast, domestic content, and audio content production, Netflix, Disney+ and amazon Prime Video are compelled to contribute more than 5% of their Canadian sales. 

A Washington-based lobbying group for audio streamers like Spotify, Apple and Amazon, Digital Media Association expressed their concerns. They described the levy “a Discriminatory tax” for the members of the streamers and warned that the Canadian subscribers would have to bear higher prices.