Arctic Council Ministerial Dinner by Ulkoministeriö CC BY-NC-ND 2.0 https://flic.kr/p/S3CQxV

Arctic Council Ministerial Dinner by Ulkoministeriö CC BY-NC-ND 2.0 https://flic.kr/p/S3CQxV

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Canadian Government Quietly Backs Down on its Implementation Plans for a Digital Services Tax

The federal government has quietly backed down from its plans to implement a new digital services tax as of January 2024 that the Parliamentary Budget Officer estimated would generate billions in revenue. It did not make the headlines or receive much promotion, but after months of insisting that a digital services tax would take effect in Canada in January 2024, the government has now removed that implementation deadline in the Fall Economic Statement. The battle over the proposed tax had sparked increasing anger between Canada and the U.S., with dozens of U.S. Senators and Representatives signing letters urging the government to delay its plans. The Canadian plan remains to establish a retroactive three percent tax that will hit a wide range of businesses, but given fears moving ahead now would jeopardize a global agreement that is designed to address the digital services tax issue, Canada has seemingly faced the obvious reality and backed down.

For months, Finance Minister Chrystia Freeland insisted that the deadline would not be changed. For example, in the summer she stated:

Canada’s priority and preference has always been a multilateral approach. We continue to strongly support the two-pillar plan agreed to in 2021 and we have been actively working with our international partners to bring it into effect. As confirmed in Budget 2023, we are moving ahead with legislation to implement the Pillar Two global minimum tax in Canada, starting at the end of 2023. Two years ago, we agreed to pause the implementation of our own Digital Services Tax (DST), in order to give time and space for negotiations on Pillar One. But we were clear that Canada would need to move forward with our own DST as of January 1, 2024, if the treaty to implement Pillar One has not come into force.

Earlier this month, Freeland said she was “cautiously optimistic” that an understanding could be reached with the U.S., but appears that the optimism came from a decision to simply remove the January 1, 2024 start date, replaced with the following in the FES:

in order to protect Canada’s national economic interest, the government intends to move ahead with its longstanding plan for legislation to enact a Digital Services Tax in Canada and ensure that businesses pay their fair share of taxes and that Canada is not at a disadvantage relative to other countries. Forthcoming legislation would allow the government to determine the entry-into-force date of the new Digital Services Tax, as Canada continues conversations with its international partners.

While the government plans to move ahead with legislation to facilitate a digital services tax, the “entry-into-force” date has been removed and left for a later decision. This buys time for a potential international agreement on implementing a global approach to the issue and should relieve some of the external pressure.

As I’ve previously written, a digital services tax is preferable to the cross-industry subsidy model found in Bills C-11 and C-18. However, moving ahead now would have created significant risks, including the prospect of billions in retaliatory tariffs. Led by Bill C-18 and the digital services tax, the government talked tough for months about regulating big tech. But with the FES providing a massive bailout to compensate for the harm caused by the Online News Act and the decision to hold off on implementing the DST, it would appear that the tough talk has been replaced by much-needed realism on what amounted to deeply flawed policies and a weak political hand.

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