U.S. Trade Representative Katherine Tai is launching a dispute settlement process with Canada to challenge its new digital services tax.
The office of Canada’s Finance Minister, Chrystia Freeland, confirmed Friday that it is the subject of the trade action, brought under the Canada-United States-Mexico Agreement (CUSMA), the new version of NAFTA. The U.S. government is first holding consultations in the hopes of reaching an agreement with the Canadian government.
“We look forward to the opportunity to demonstrate how Canada is meeting its trade obligations,” Freeland’s office said Friday.
Three years after announcing its intention to impose a 3% tax on services offered on the Internet, such as online advertising, the Canadian government made its entry into force official in June. Chrystia Freeland, who is also Canada’s deputy prime minister, had specified at the time that she hoped to avoid retaliation from the United States, saying she was working closely with U.S. Treasury Secretary Janet Yellen on this matter.
The announced consultations will not begin for another 30 days, and will last for a total of 45 days. Its conclusions are unlikely to be announced before the US presidential election, which is scheduled for November 5.
The Canadian Chamber of Commerce responded to the announcement by calling on Ottawa to once again pause its digital services tax. In a statement, a spokesperson wrote that the U.S. response “confirms [ses] long-standing concerns that the digital services tax is damaging our most lucrative partnership, at a pivotal time when we need to re-evaluate CUSMA.”
The case could even lead the United States to impose sanctions against Canada, fears the Business Council of Canada.
International Divisions
The Trudeau government had hoped not to end up imposing a tax on digital services, but rather to find a compromise with member countries of the Organisation for Economic Co-operation and Development (OECD) and the G20 for international tax reform. However, these discussions have stalled.
Several other developed countries impose such a tax on web giants, including France, the United Kingdom and Italy. However, 138 OECD countries that were negotiating international tax reform, such as a minimum tax of 15% on multinational companies, asked to refrain from creating new taxes on digital services last year. The United States has repeatedly and very explicitly warned Canada against such a measure.
A study by the Office of the Parliamentary Budget Officer has already estimated that the digital services tax could bring in up to $1 billion a year for the federal government.
“Canada strongly supports international efforts to end the global race to the bottom on taxes and ensure that all companies, including the world’s largest corporations, pay their fair share wherever they do business. Canada’s strong and essential social safety net relies on a strong domestic tax base, which depends on people doing business in Canada and paying their fair share of taxes,” reads a joint statement from Finance Minister Chrystia Freeland and Export Promotion, International Trade and Economic Development Minister Mary Ng.
Even as the United States disapproves of Canada’s new digital services tax, its government has welcomed the Trudeau government’s decision to impose 100% tariffs on new Chinese electric vehicles.