The U.S. President Joe Biden’s visit to Ottawa this week has begun to place the spotlight on the mounting tensions over digital policy. For months, Canadian officials have not only been dismissive of the issue, but – as this week’s fishing expedition into Google and Facebook demonstrates – have not shied away from making the issue front and centre. I have been posting about trade-related risks with Canadian digital policy for months, noting that the risks are real and could result in billions in retaliatory tariffs that hits some of Canada’s most sensitive sectors. Indeed, this issue has been raised at every major meeting between senior trade officials for the past year. Is retaliation likely to happen? Certainly not immediately, but the longer the issues fester, the greater the impediment to advancing Canadian trade priorities. As Scottie Greenwood notes, “these are top-of-mind issues. They are not a small obscure issue.”
So what are the issues? I see at least four: digital services tax, Bill C-11, Bill C-18, and the undemocratic fishing expedition launched by the Standing Committee on Canadian Heritage that exclusively targets U.S. critics of Bill C-18 and not the Canadian organizations who stand to benefit and may have engaged in questionable practices. It should be noted that these issues raise a combination of potential direct trade action for violations of the Canada-U.S.-Mexico Trade Agreement (CUSMA) and policies that may not violate a trade agreement, but could still spark U.S. retaliation.
At the very top of the list is likely Canada’s plans to implement a digital services tax next year (this is distinct from digital sales taxes, which is already in place). I’ve covered this issue on many blog posts and Law Bytes podcast episodes (here and here). The issue dates back to the 2019 election campaign with a campaign promise to institute a digital services tax primarily designed to target large U.S. technology companies that generate significant revenues in Canada from online advertising and user data. The policy has been adopted in several other countries, repeatedly sparking a response from the U.S. that threatens to retaliate with tariffs on sensitive sectors of the economy. For example, after France announced plans for a similar tax, the U.S. threatened to levy billions in tariffs on French products. In 2021, the OECD reached an agreement on addressing the longstanding concern regarding multinational companies, particularly tech companies, paying their fair share of taxes on revenues earned from online advertising, online marketplaces, and user data. The agreement included a provision in which all parties agreed to remove digital services taxes and not introduce any new measures.
Nevertheless, Canada has said that it will move ahead with a DST next year if by that time the OECD agreement has not taken effect. The Canadian plan would apply a three per cent tax on revenues from four sources: online marketplace services revenues, online advertising services revenues, social media services revenues, and user data revenues. Canadians can expect to hear more about this issue in next week’s budget. Note that this is not a CUSMA issue. Rather, it is straightforward tax dispute with significant dollars at stake. The U.S. has pushed back against similar plans elsewhere and can be expected to do the same here.
The Bill C-11 trade concerns arise from several potential violations of CUSMA, discussed in this post. The takeaway is that there are several provisions in the bill that – depending on CRTC implementation – could result in discriminatory treatment against U.S. companies. The basic starting point for the trade deal is national treatment and non-discrimination for U.S. and Canadian entities. Given the prospect of Cancon rules that could result in greater benefits for Canadian firms while requiring U.S. entities to still pay into the system or that U.S. streamers could face content requirements not applied to Canadian services, there is a risk of a trade challenge. Canada could respond by acknowledging that its rules violate the non-discrimination rules but that CUSMA has a carve out for the cultural sector. In other words, Canada is permitted to violate the agreement with Bill C-11. The problem with that approach is that the agreement still gives the U.S. the right to retaliate against the violation, meaning Canada can breach the national treatment provisions but would still be on the hook for paying an equivalent in retaliatory tariffs.
Bill C-18 also raises the possibility of a trade challenge. Late last year, the Heritage committee expanded the rules associated with eligible news businesses in the bill, bringing hundreds of broadcasters into scope merely based on holding a CRTC licence. These broadcasters may not even be required to produce news, yet have nevertheless been deemed as eligible news businesses under the law. The trade risk associated with this approach is that only Canadians can hold one of these CRTC licences. In other words, Bill C-18 now deems hundreds of Canadian broadcasters eligible under the law but excludes their U.S. counterparts, many of whom may be border broadcasters with Canadian audiences. The change not only undermined the premise of the bill that is ostensibly about facilitating access to news, but may have also opened the door to a trade challenge.
Finally, there is the fishing expedition into Google and Meta as retribution for opposing Bill C-18. There is ample reason to believe that some Canadian media organizations have engaged in questionable lobbying tactics with a blurring of editorial and business that have led to non-disclosed conflicts. Yet the committee seems uninterested in those issues. Instead, it is targeting the two U.S. companies with demands that could still cover the private communications of Canadians. As Greenwood noted earlier this week, “This feels like a gratuitous shakedown targeted at the U.S. If the roles were reversed and the U.S. legislature was targeting Canadian companies, there would be an outrage in Canada.” That sounds about right and helps explain why digital policies could crash the party at this week’s U.S. Presidential visit.