September 2024
The Office of the United States Trade Representative (USTR) on August 30 issued a press release announcing that the United States has requested dispute settlement consultations with Canada under the United States-Mexico-Canada Agreement (USMCA) concerning Canada’s recently enacted Digital Services Tax (DST), outlined in Bill C-59. This DST targets revenues from online marketplaces, targeted advertising, social media platforms, and user data.
In the consultation request, the USTR asserts that Canada’s DST discriminates against US companies, thereby violating commitments under the USMCA's Cross-Border Trade in Services and Investment chapters. This development could have significant implications for US companies operating in Canada, impacting trade relations and business models within the digital services sector. Specifically, the USTR has in the past imposed retaliatory tariffs on select products imported from other countries who have implemented DSTs like Canada's.
Affected companies should monitor developments closely to remain informed about the consultation process and its potential outcomes. Modeling the outcomes of how the DST may affect business operations and tax liabilities in Canada, and how potential retaliatory tariffs could impact imports from Canada, is recommended. Additionally, preparations should be made to ensure compliance with DST requirements should the tax remain in force. Further, companies should consider engagement with trade associations and legal counsel to address potential challenges ahead of any definitive outcomes.
Canada’s DST, enacted through Bill C-59 and effective from June 28, 2024, imposes a 3% tax on revenues from online marketplaces, online targeted advertising, social media platforms, and user data. This tax applies to companies with annual global revenues of €750 million or more and Canadian digital services revenue exceeding CA$20 million. Notably, the DST is retroactive to January 1, 2022, with initial payments due on June 30, 2025. For more background on Canada’s DST legislation, please refer to our previous Tax Insight .
The USTR contends that Canada’s DST unfairly targets US companies, providing preferential treatment to Canadian businesses. This is perceived as a breach of USMCA provisions, which mandate equal treatment for US and Canadian services, service suppliers, investors, and investments in similar circumstances. The release claims that Canada’s DST appears to be inconsistent with the country’s commitments under the Cross-Border Trade in Services (Chapter 15.3) and Investment (Chapter 14.4) chapters of the USMCA to treat US and Canadian businesses similarly. The consultation request states that “Canada appears to have targeted its DST on U.S. companies providing Canadian digital services and to be discriminating against U.S. companies and in favor of Canadian companies providing those services.”
Observation: The USTR's action against Canada’s DST could be the beginning of rekindling of efforts to challenge similar taxes in other countries, highlighting the potential for increased trade tensions. The United States has imposed retaliatory measures on countries enacting DSTs in the past. Therefore, the impact of the DSTs and possible retaliatory measures could extend to imports into the United States of Canada-origin products.
In rapid response, Canada’s Department of Finance issued a statement on August 30, reiterating its preference for a multilateral agreement under the OECD/G20 framework to address digital services taxation. Canada highlighted the lack of progress on a global solution and the competitive disadvantage it faces without a DST as reasons for proceeding with its national measure. Canada also emphasized that the USMCA provides a suitable forum for further dialogue, asserting compliance with its trade obligations.
Observation: The Canadian government is aware of the potential financial impact of the DST, having estimated that the first payments under the law, due in June 2025, could amount to over CAD $3 billion, with the bulk of this amount likely to fall on US companies.
Should the consultations fail to resolve the issue within 75 days, the United States may request the formation of a dispute settlement panel under Chapter 31 of the USMCA, which could lead to a binding decision. If the panel rules in favor of the US position, and Canada does not comply with the ruling, the United States could impose retaliatory measures, such as increased tariffs on Canadian imports, which would mirror responsive measures taken by the United States in similar situations.
Observation: This approach underscores the strategic use of existing trade agreements to resolve conflicts, as opposed to initiating a Section 301 investigation.
The USTR’s filing of the trade case against Canada for its DST could be just the beginning, as various other foreign jurisdictions previously have introduced or adopted similar DSTs that the USTR subsequently determined to be unreasonable, discriminatory, and burdensome to US multinational enterprises (see PwC’s Tax Insight dated July 19, 2024 for more details).
Observation: Several other DST frameworks implemented by various foreign jurisdictions, and corresponding retaliatory tariffs imposed by the United States, are currently under a suspension agreement that technically lapsed on June 30,2024. However, those cases are not subject to the USMCA dispute resolution framework since the United States does not have preferential trade agreements with the implementing countries. Companies should continue to watch this space for further developments in this area.
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