One of U.S. President Donald Trump’s freshly signed executive orders puts the Liberal government’s digital services tax into the sights of America’s Commerce, Treasury and Trade departments, threatening to further irritate the trade relationship between the two countries.
The America First Trade Policy, signed into force by Trump Monday evening, seeks to ensure America’s trading relationships bring maximum benefit to “American workers, manufacturers, farmers, ranchers, entrepreneurs and businesses.”
It directs his secretaries of the Treasury and Commerce departments as well as the United States Trade Representative (USTR) to investigate whether foreign countries are subjecting U.S. “citizens or corporations to discriminatory or extraterritorial taxes.”
Last June, the Liberal government enacted the digital services tax (DST) promising that it would bring in billions in revenues by hitting foreign-based digital giants, with income of at least $1.1 billion, with a three per cent tax on revenues in Canada that are over $20 million.
The tax is retroactive to Jan. 1, 2022.
Business groups on both sides of the border oppose the DST, as did the Biden administration, which requested dispute settlement consultations with Canada under the Canada-United States-Mexico-Agreement (CUSMA) back in August.
When that consultation period ended in November, the Biden administration did not take the dispute to the next step by requesting the establishment of a dispute resolution panel under CUSMA. There is no time limit on when the U.S. could pursue that step.
Trump could call for a panel to be struck, but trade experts say the process is lengthy and the new U.S. administration is unlikely to be willing to wait up to a year for a ruling.
Trump’s power to impose 50% tariffs
Jesse Goldman, a partner at the Canadian law firm Osler, Hoskin & Harcourt, who specializes in competition, trade and foreign investment, told CBC News the DST is one of the “principal frictions” in the trading relationship between the U.S. and Canada.
“I think it’s a virtual certainty that something will be done by way of unilateral U.S. action against Canada’s digital services tax until such time as it’s either withdrawn or Canada and the U.S. reach some other type of agreement,” he said.
Under Section 338 of the Tariff Act of 1930, Trump has the power to unilaterally impose tariffs of up to 50 per cent on imports if they are deemed to discriminate against the U.S. He could also ban a country’s imports altogether.
Goldman says while an outright ban is highly unlikely, if Canada doesn’t drop the DST, Trump’s reaction is likely to come in the form of tariffs that are enacted through the presidential proclamation that Section 338 allows.
Canada, U.S. business groups urge action
The Canadian Chamber Of Commerce, which has long opposed the DST, told CBC News that Canada should use Trump’s executive order as motivation to act “very strongly and conclusively” to scrap the tax.
“With this memorandum there’s no room for wondering any more, I think his position is very clear,” the chamber’s Jessica Brandon-Jepp said.
“Canada’s [digital services tax] is a severe trade risk that will both hurt our relationship with our largest trading partner, while at the same time increasing costs for Canadians and making it harder to start or grow a business in Canada,” she added.
When legislation enabling the tax passed Parliament in June, the U.S. Chamber of Commerce said it would undermine digital exports, harm innovation and contravene Canada’s international trade obligations.
“At this very sensitive time in the Canada-U.S. trade relationship, we urge the Government of Canada to reconsider this unilateral and discriminatory new levy,” the U.S. chamber said in a statement at the time.
Reporters question Finance Minister Chrystia Freeland about the risk of U.S. retaliation after Ottawa moved to implement a digital services tax.
Goldy Hyder, president and CEO of the Business Council of Canada, told CBC News this week that Trump’s executive order demonstrates that the DST is putting CUSMA at risk.
“There is a strong bipartisan consensus among Republicans and Democrats that Canada’s DST discriminates against U.S. companies and violates our commitments under CUSMA,” Hyder said in an email.
“The value of any revenue collected by the tax is not worth the cost of imperilling our economic partnership with the United States,” he added.
The Computer and Communications Industry Association, which represents Apple, Meta, Amazon, Uber, eBay and Google among other digital giants, said the tax violates the fundamental nature of free trade.
“There’s an expectation that your home government is the one who taxes you, not the entity where the service is necessarily delivered, so it really undermines this fundamental aspect of how trade works,” the association’s vice-president for digital trade Jonathan McHale told CBC News.
“We don’t ask for a share of the profits on softwood lumber, maple syrup, hockey sticks,” he said. “It’s very unusual to extend the reach of taxing authorities to this cross-border space.”
Trudeau won’t rule out negotiating DST
The Canadian Centre for Policy Alternatives (CCPA) supports the DST and has argued that tech giants facing the tax are largely unregulated and experience an already low tax burden.
“Its completely fair that we should be requiring these companies to pay some some tax on the goods and services that they supply in Canada,” said Stuart Trew, the CCPA’s director of its trade and investment research project.
He said that a fear over the prospect of U.S. tariffs on Canadian imports is motivating business on both sides of the border to increase their opposition to the tax.
“It’s one of many areas where we are facing a barrage of economic coercion from Trump to score quick wins or to force Canada into some kind of stepping back and it’s a bit of a wake-up call that we are not dealing with a friendly state anymore,” Trew said.
Prime Minister Justin Trudeau, speaking from Montebello, Que., a day after President Donald Trump’s inauguration, was asked how Canada can manage its relationship with the U.S. in the face of unpredictability from the president around tariffs and trade.
Asked on Tuesday if he was willing to negotiate the DST with the Trump administration, Prime Minister Justin Trudeau did not rule it out.
“Obviously I do not intend to negotiate in public,” he said speaking at the Liberal cabinet retreat in Montebello, Que. “We will always be there to work in a constructive manner with our U.S. partners while at the same time defending Canadian interests, Canadian values, Canadian sovereignty, Canadian culture,” Trudeau said.
“We know that it’s important to defend our own interests while at the same time seeking to work well with our U.S. partners,” he added.
The Liberal government first proposed the tax in its 2019 election platform. It later agreed to delay implementing the measure until the end of 2023 in the hopes it could reach a deal with other OECD countries on how multinational digital companies should be taxed.
The federal government sees the DST as a way to bring the tax code up to date and capture revenues earned in Canada by firms located abroad.
It argues multinational digital companies such as Meta, Alphabet, Facebook and Amazon are not based in many of the countries where they conduct business, allowing them to avoid paying certain taxes.
The Parliamentary Budget Office estimated last year that the tax would bring in more than $7 billion over five years. The 2024 budget forecast revenues at $5.9 billion over five years, starting in 2024-25.
The Computer and Communications Industry Association estimates that U.S. companies could pay as much as $1 billion a year in tax if the measure remains on the books.