Canada is finally following through on its commitment to tax large foreign digital corporations. At least, it is planning to do so at some point after January 2024.
The federal government’s proposed digital services tax (DST) on online giants like Meta, Amazon, and Google is heightening trade tensions with the U.S., but that should not stop Canada from standing up to some of America’s biggest tax-avoiding corporations.
Multinationals have long benefited from outdated global tax rules that allow them to shift their profits to lower tax countries. An estimated $1 trillion in corporate profits are shifted offshore each year. Online-based corporations in particular have generated billions in revenue while avoiding taxes in the countries where their customers live, including Canada.
To address this problem, Canada would apply a new three per cent tax—the DST—to revenues of large corporations with global revenue over €750 million and annual revenue from Canadian users of more than $20 million. The tax is expected to generate $1 billion annually, according to costing by the Parliamentary Budget Officer.
Canada is long overdue for something like the DST. The Liberals first promised to tax foreign tech giants in the 2019 federal election, and it was a popular policy. Some version of a DST was included in every party’s platform. Politicians acknowledged the tax was needed to recover revenue from profitable foreign corporations and level the playing field for domestic businesses.
Voters also supported taxing online multinationals. An Environics survey found 77 per cent of respondents agreed that companies like Google and Amazon should be subject to Canadian taxes for business carried out in Canada.
Despite political and public appetite, the federal government moved slowly while other countries enacted their own DSTs. By 2022, nearly a dozen European governments had already started taxing online multinationals.
But Canada delayed its DST in the hope that a global consensus on digital taxation could be reached through the OECD, which has been leading international tax reforms to address the digital economy and multinational tax avoidance. Several other countries who had introduced digital services taxes put them on pause to work on a multilateral alternative and to avoid U.S. trade retaliation.
Is the tax worth a trade war?
DST critics are leaping on the possibility that Canada could trigger a trade war with the U.S., home to the largest tech multinationals like Apple and Amazon, to warn the government off course. These fears are not without reason but they are overblown.
The U.S. would have no recourse to dispute the digital tax under the revamped NAFTA—the Canada-U.S.-Mexico Agreement (CUSMA)—or any other trade treaty to which both Canada and the U.S. are a party.
CUSMA’s digital trade chapter concedes significant policy space in the e-commerce sector. The agreement conclusively forbids any of the three countries from applying customs duties on goods transmitted electronically—a restriction on government revenue options that many countries consider unfair.
CUSMA also forbids Canada or Mexico from requiring that commercial data be stored on local servers—even where that data may include sensitive personal information—or from accessing companies’ source codes or algorithms in order to determine whether those products may be made available in the domestic market.
However, nothing in the agreement stops a country “from imposing internal taxes, fees, or other charges on a digital product transmitted electronically,” as long as it is “in a manner consistent with this Agreement.” Rules against discriminating between Canadian and U.S. digital products are of no use to the U.S., since the Canadian tax applies equally to all companies earning revenues beyond the proposed threshold.
The U.S. is far more likely to initiate a so-called Section 301 investigation under the Trade Act of 1974, as amended, to determine if Canada’s tax harms U.S. interests, in which case the country can retaliate with tariffs or other restrictions on Canadian business with or in the U.S.
Under that law, the U.S. Trade Representative has a duty to investigate whether “an act, policy, or practice of a foreign country…is unjustifiable and burdens or restricts United States commerce.” Section 301 investigations are a powerful tool frequently used by the U.S. to pile economic and political pressure on countries to toe the U.S. line.
Since 2019, the USTR has initiated investigations of digital services taxes in France, India, Turkey, Austria, Spain, the United Kingdom, Brazil, the Czech Republic, the European Union, Indonesia, and Italy. Many of these investigations resulted in findings of harm and the imposition of retaliatory tariffs.
In June 2021, for example, the USTR determined that the Italian DST would collect up to $140 million USD per year from U.S.-based tech firms and sought to impose commensurate duties across 60 or so goods exported from Italy to the U.S. including anchovies, caviar, perfume, and an assortment of men’s and women’s handbags, suits, ties and footwear. These measures were terminated in October 2021 following agreement among 130 countries on a G20/OECD two-pillar solution to addressing taxation of digital products.
This summer, while most other tax treaty member countries agreed to pause their national DSTs for another year and await a multilateral treaty through the OECD, Finance Minister Chrystia Freeland said Canada could not postpone its DST any longer. We should anticipate the U.S. will threaten and possibly, later, impose retaliatory tariffs, but this is no reason not to move a fair taxation measure forward.
Canada is wise to press ahead with unilateral action after years of lost revenue, waiting for a global agreement that is not guaranteed to come. While some critics have accused Canada of undermining the OECD process, Minister Freeland indicated Canada would support a multilateral deal if one can be reached.
Canada’s unilateralism is just as likely to spur those talks forward as it is to blow them up, as some have claimed. In any event, until those talks succeed or conclusively fail, Canada’s digital tax is better than nothing and it is better late than never.
Reining in power and restoring fairness
The latest DST debate comes at an important time when Canadians are witnessing online multinationals’ growing power. This summer, Meta blocked Canadian news from its site in response to federal legislation requiring social media companies to compensate news publishers for posting their content.
Governments right now are grappling with climate and affordability crises that require significant investments, while losing billions in revenue to large profitable corporations steered by some of the richest people on earth. (The companies opposing Canada’s DST happen to be monster consumers of energy and water, an undertaxed burden on the planet that is predicted to grow with the rollout of artificial intelligence products.)
Despite a decade of efforts, the OECD has made little progress to hold multinationals accountable, help governments adequately fund public services, and address inequality. Tax justice organizations have questioned the organization’s ability to make meaningful tax reforms and called instead for an UN-led tax convention.
Canada’s DST won’t fix weaknesses in a global tax system that has unfairly favoured the most powerful and profitable corporations in the world. But it will raise needed revenue and send a message that it’s time for digital titans to pay their fair share.
