The Globe and Mail runs my opinion piece on Canada’s digital services tax today. I open by noting that the Canadian government’s efforts to regulate big tech companies sometimes feels like a series of high-stakes poker matches in which the government foolishly bets that readily apparent risks can be ignored. That approach has proven costly: the plan to regulate internet streaming services is now mired in multiple legal challenges in court, while news links on Facebook and Instagram have been blocked in Canada for nearly a year in response to the Online News Act.
The latest high-risk strategy involves the implementation of a digital services tax, which could lead to billions in tariff retaliation targeting some of Canada’s most important economic sectors.
The DST debate dates back many years as a growing number of countries became increasingly frustrated over the perception that big tech companies such as Google or Amazon were not paying their fair share of taxes. The companies were subject to the same revenue tax obligations as anyone else but, with sizable research and development investments that are tax-deductible and significant revenues drawn from intangibles such as data and intellectual property, tax minimization strategies were particularly effective in reducing their tax obligations.
While welcoming the R&D spending, countries began to pursue a new surtax specifically targeted at digital-related revenues, including those earned from online marketplaces, digital advertising and social-media services. The resulting DSTs are essentially taxes on revenue that is already subject to tax. But they fell outside existing tax treaties that seek to limit double taxation, meaning that the increased payments would certainly hit the bottom line of the tech companies. Or the DSTs could lead to reduced tax earnings for the tech companies’ home country, most notably the United States, because less revenue from abroad flows back home.
The U.S. responded to the emergence of DSTs by threatening to impose tariffs as a retaliatory measure. For example, after France announced plans to implement a DST, the U.S. said it would establish billions in new tariffs on French products. The jousting over digital taxes ultimately led to a new international agreement at the OECD designed to establish common standards related to the taxation model. That agreement, which covers nearly 140 countries representing 90 per cent of global GDP, has not yet been implemented amid doubts that the U.S. will take the steps needed for it to take effect.
As they waited, Finance Minister Chrystia Freeland and the Canadian government became increasingly impatient with the delayed implementation of the deal. Tax revenues were not at risk given plans to retroactively apply the OECD’s DST; however, the prospect of billions in new money ultimately proved too tempting to wait. The government quietly used the Canada Day long weekend to announce that the DST was operational in Canada with affected companies obliged to remit taxes for revenues dating back to 2022.
The announcement sparked an immediate outcry from both the business community and the U.S. government. Businesses fear the DST costs will ultimately be passed along by the tech companies, making digital advertising more expensive and rendering Canadian businesses less competitive online. But the bigger concern stems from the prospect of U.S. tariff retaliation. The U.S. Trade Representative, which leads the U.S. government on trade matters, has said it is open to using “all available tools that could result in meaningful progress toward addressing discriminatory digital-services taxes.”
Much like the bet that Meta was bluffing when it said it would block news links in response to legislation that amounted to a link tax, the Canadian government is once again gambling that the U.S. government threat is just a bluff. Yet the risk here is far greater since tariff retaliation could run into the billions of dollars and focus on high-priority sectors such as dairy, steel or lumber. It is possible that the U.S. government will limit its opposition to sabre rattling, but with a presidential election only months away, currying favour in battleground states by levying tariffs on Canadian products in support of the Wisconsin dairy industry or the Pennsylvania steel sector hardly seems unlikely.
Few would dispute that tech companies should pay their fair share. Indeed, general tax revenues are preferable to the cross-industry subsidy model that the government has relied upon to support the Canadian cultural and news lobbies. But timing also matters. Canada could have waited for the international agreement to coalesce even as the retroactive DST revenues continued to accumulate. By striking now for its pot of gold, it runs the risk of creating significant harm to the Canadian economy and solidifying the growing global perspective of a government hostile toward the tech sector.
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“Few would dispute that tech companies should pay their fair share”. I would agree, with the caveat that the concept of a “fair share” is highly subjective. What one person considers to be a their “fair share” is likely different from what others consider to be that person’s “fair share”.
The entire taxation system needs to be looked at; look at the number of boutique tax credits whose sole purpose is the garner votes for the party that brought them in from the special interest group that advocated for the credit. For sure there are some that needed, but those ones should be available to all, without means testing. Then you add on the call to implement wealth taxes (as opposed to income taxes). This one has all kinds of issues, such as how do you calculate the wealth (maximum paper value over the year or value on a specific date)? Theoretically retirement savings is taxable under this, but what about pension plans?
At the end of the day the tax regime is being used by the governing parties as a tool for domestic politics in addition to a means to fund the operation of the country. The digital services tax is yet another example of this.
Marketplaces like Etsy have not wasted any time in charging Canadian sellers a new “Regulatory Operating Fee” with little explanation to sellers what it’s for. An additional fee of 1.15% per transaction starting Aug 15th. Our country’s competitiveness in the world continues to decline. Canadian sellers already struggle with incorrect sales tax fees and higher postage rates compared to US sellers.
Sales taxes are often more equitable than other forms of taxation on international firms because of the widespread practice of tax evasion, including international transfer pricing.
The essence of Michael Geist’s latest harangue seems to be that, since the United States is dragging its feet in implementing the digital services tax agreement negotiated among the OECD countries in October 2021, Canada should sit helplessly by and wait for the US to honour its commitments. As the country with the longest border with another country (the US) and the US’s largest trading partner, Canada is right to take a singular initiative to encourage implementation of the OECD agreement – by putting in place its own tax regime as announced in the federal government’s April 16, 2024 budget. Once the OECD agreement comes into effect, Canada will withdraw its tax and adhere to the agreement.
While I agree that sales taxes are generally more equitable, I can’t agree with your para 2. My read is that his concern is more that the US is very likely to impose retaliatory tariffs on Canada as a result of the unilateral imposition of the DST. Its not like retaliatory tariffs would be a new thing from the US and given the fact that this is an election year the chances of it occurring is a near certainty. In fact, said tariffs are likely to be in excess of the tax income that the government would see from the DST. As an aside, the US has been waiting for Canada to honour its commitment made in 2014 of 2% of GDP on military spending since the commitment was initially made. So, should the US walk away from the commitment to defend Canada?
My take on why they decided to go ahead is that the decision was made as a result of 2 factors. The first is that it makes it look like the government is trying to do something about the big businesses not paying their “fair share” (which, as I indicated above, is a very subjective concept) and secondly in order to reduce the budget deficits that would otherwise have been had due to all of the new spending in the April 2024 budget. In short, political factors.
I won’t be too surprised if the DST is challenged in court, either, for the simple reason that the impacted people and businesses’ liability starts in 2022 but the Act implementing the DST received Royal Assent on 20 Jun 2024 according to LEGISInfo, the Parliament of Canada website which tracks bills.
It don’t think US retaliatory tariffs are likely. In any case, they would not be implemented before the new US administration is firmly in place, that is, for at least a year. By that time, the OECD agreement may be in place, or on the horizon…
2020: Scientists tweet and blog the facts about COVID treatments in response to the 45th POTUS’ claims regarding the same.
45th POTUS: “Fake news.”
2023: Canadian copyright maximalist lobby groups make demonstrably flase claims about copyright and the laws created to (over)protect it.
45th POTUS: “…”
Just sayin’.
(This comment was supposed to be on the post ‘Countering Copyright Misinformation’, but comments there have been blocked, so I can’t comment there.)
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