Canada facing harsh attacks from U.S. over next year’s digital services tax

TORONTO—Finance Minister Chrystia Freeland and the Trudeau government are under harsh attacks for not following American orders. In this case: Canada’s decision to unilaterally proceed with a three per cent digital services tax on big tech companies in 2024, despite U.S. opposition, unless an international agreement on it is reached this year. Many of these attacks, not surprisingly, have come from the U.S., with the American ambassador to Canada threatening retaliation for our government's action. According to David Cohen, the U.S. “would have no choice” but to punish Canada. Of course it has a choice. More surprisingly, the Canadian plan has also been attacked by our big business lobby. In a Globe and Mail column, Goldy Hyder, president of the Business Council of Canada, accused Freeland of going “rogue” and teaming up with Russia and Belarus to defy the U.S., arguing Canada-U.S. trade will be “adversely affected, if not put in serious jeopardy” with this digital services tax, even contending the 2026 renewal of the Canada-U.S.-Mexico trade agreement could be at risk. Hyder suggests, as well, that this tax could be an issue in the upcoming U.S. presidential election campaign. Google, Meta (Facebook) and Microsoft are members of the business council. American ambassador to Canada David Cohen is threatening retaliation if our government brings in a digital services tax, and said the U.S. 'would have no choice' but to punish Canada. Of course it has a choice, writes David Crane. The Hill Times photograph by Andrew Meade In October 2021, the Organisation for Economic Co-operation and Development (OECD) achieved a preliminary agreement to proceed with a treaty that would enable such a tax, with final details to be ironed out in 2023 so that countries could enact such a tax in 2024. However, the deadline was missed and most countries—almost 140—agreed to push the deadline for an agreement to the end of 2024. However, for good reasons, Canada has not agreed to the extension, in part because it does not include any deadline for an agreement. Canada had paused its own plans in 2021 to proceed with such a tax at the time, and delayed taxing the digital economy revenues of firms including Google, Alphabet, Amazon, Netflix and other big-tech companies who were able to earn major revenues in Canada but avoid paying taxes on them, making them free riders. While Canada worked hard to advance the OECD project, it also made clear early on that if there was still no agreement by the end of 2023, it would proceed with its own digital services tax in 2024. This means legislation would need to pass this fall. There is much money at stake. As a preliminary report from the Parliamentary Budget Office shows, it would now yield just over $1-billion a year. Business Council of Canada President Goldy Hyder, right, and Ukraine Ambassador Yuliia Kovaliv in Ottawa on March 30, 2023. In a Globe and Mail column, Hyder accused the Canadian government of going 'rogue' and teaming up with Russia and Belarus to defy the United States The Hill Times photograph by Sam Garcia But Canada is not the bad guy in the current controversy. The real problem is with the United States, where there is strong criticism of foreign countries taxing U.S. Big Tech. When the OECD first began to address the issue, in 2015, it was derailed by the U.S. which threatened severe trade penalties on any country that tried to tax its Big Tech companies, dismissing such efforts as anti-American. Some nations did initiate such taxes, including Britain, France, Austria, Italy and Spain. Trade penalties were imposed or threatened. And the U.S. withdrew from the negotiations. This was in the Trump years. With the Biden administration, the U.S. resumed participation, temporarily withdrawing the threat of trade penalties against these countries (but not Canada). The OECD—in co-operation with the G20—has progressed on new rules for digital services taxation, but so far it has been unable to achieve a consensus. One of the best analyses on the issues surrounding digital services taxation—'A New Framework for Digital Taxation'—was published last year in the Harvard International Law Journal. Written by University of Michigan law school expert Reuven S. Avi-Yoneh and two colleagues, they argued that the drive to update international tax rules was long overdue and needed serious change. “The existing international tax regime was developed during the 1920s and 1930s for a brick-and-mortar world,” the article says. But now we live in a digital world where existing tax arrangements mean that many countries need new forms of taxation, such as a digital services tax, to access their fair share of taxes from multinational giants. Under existing rules, multinationals are only required to pay taxes on their profits in countries where they have a physical presence. Tech giants such as Google, Facebook (Meta) and Amazon—despite earning big profits in a country—could avoid paying any tax on those profits. The purpose of a digital services tax is to tax these profits by taxing revenue. While the U.S. is not the only problem country, it is a major impediment. Many members of the U.S. Congress—both Republicans and Democrats—oppose digital services taxation, claiming such a tax would be anti-American. Some are seeking a ban worldwide on such taxes with U.S. sanctions against any country—including Canada—which defies its wishes. Since any eventual OECD-brokered deal on digital services taxation would be in treaty form, passage in the U.S. would require a two-thirds majority in its Senate. The chances of such a treaty being approved anytime soon are about zero, the Harvard article states. The issue may not be addressed by the American Senate before 2025, following the 2024 U.S. presidential elections, and even then prospects may not look any better. Without U.S. participation, there will be no agreement since a deal requires 60 per cent approval, and the U.S. represents 46 per cent of the voting power. It is easy, if disingenuous, to make Canada the villain in the current controversy. With an agreement unlikely anytime soon, as Freeland says, delaying the possibility of a digital sales tax until next year puts Canada at a disadvantage since some other nations already have one. It also deprives Canada of billions of dollars in much-needed tax revenues. It is the United States—not Canada—that's the problem. David Crane can be reached at crane@interlog.com. The Hill Times