US requests consultations on Canada’s Digital Services Tax under USMCA

In brief

What happened?

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. 

Why is it relevant?

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.   

Actions to consider:

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.

Canadian government response  

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.  

Dispute settlement process 

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.