Big Tech Canada

Canada could face U.S. tariff ‘retaliation’ over proposed tax on digital services

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The U.S. is proposing tariffs of up to 25%, which would collect duties equivalent to what affected countries collect from American companies through their digital taxes
Author of the article: Anja Karadeglija
Publishing date:Apr 05, 2021  •

The federal government is set to provide more details on a new corporate tax for digital services in its April 19 budget.
The federal government is set to provide more details on a new corporate tax for digital services in its April 19 budget. PHOTO BY REUTERS

A tax on tech giants’ digital services the Liberal government has promised to include in the upcoming budget has the potential to evoke retaliatory tariffs from the United States.

On March 31, the U.S. Trade Representative said in a series of documents it is considering implementing tariffs on six countries that have adopted such digital service taxes: Austria, India, Italy, Spain, Turkey and the U.K.Using weed at a younger age could mean faster development of substance use disorders


“From a Canadian perspective that puts Canada, if it does move ahead, in the sights of the U.S. and facing the very real possibility of tariff retaliation,” Michael Geist, professor and Canada research chair in internet and e-commerce law at the University of Ottawa, said in an interview.

The USTR is currently accepting comments on the proposed tariffs and will hold virtual hearings in May. It is proposing tariffs of up to 25 per cent, which would collect duties equivalent to what affected countries collect from American companies through their digital taxes.

Canada is set to provide more details on a new corporate tax for digital services in the federal budget on April 19. The government’s fall economic statement said the tax would take effect on Jan. 1, 2022, and bring in $3.4 billion over five years. That’s in addition to extending sales taxes to foreign digital services, such as Netflix, a move that takes effect on July 1. That measure is expected to bring in $1.2 billion over five years, the government said in the fall.

Exactly what Canada’s unilateral tax will look like is unclear, but during the last federal election the Liberals campaigned on implementing a three-per-cent corporate tax on the revenues of “multinational tech giants.” The party said at the time the tax would apply to revenues generated through online ads and user data, for digital companies that have Canadian revenues of at least $40 million a year and global revenues of at least $1 billion.

The government decided to go ahead with the unilateral tax because the process of coming to a consensus on a common approach at the Organisation for Economic Co-operation and Development was taking too long.

“Because global digital giants operate at the international level, a multinational approach will ensure these corporations pay taxes wherever they do business. With delays having occurred in arriving at an international consensus, however, the Government of Canada committed in the Fall Economic Statement to implementing a tax on large multinational digital corporations, until an acceptable common approach is agreed upon and comes into effect,” Katherine Cuplinskas, a spokesperson for Finance Minister Chrystia Freeland said in a statement.

But the situation at the OECD appears to have changed since the economic statement was released. Talks had stalled while former U.S. president Donald Trump was in office, when the U.S. position was that some companies should be able to opt out of a tax. The new Biden administration has now dropped its demand for safe harbour provisions, and German Finance Minister Olaf Scholz said in late January the OECD is now “highly likely” to reach a deal by its mid-2021 deadline.

What that means for Canada’s promised unilateral tax is unclear. Freeland’s office didn’t answer whether the government will abandon its plans for the tax given the changed circumstances at the OECD, declining to comment on “what may or may not be under consideration for the upcoming 2021 budget.”

Geist said going ahead with the tax under those circumstances, given that international consensus now seems more likely and there is the risk of “significant tariff retaliation,” makes it a “pretty high risk approach from a policy perspective.”

Harry Chana, partner and international tax practice leader at accounting firm BDO Canada, said the COVID-19 pandemic delayed the OECD process. Out of concern that they’re missing out on tax revenues, many countries have begun “coming up with their own unilateral tax measures,” he said.

Even if the OECD does reach consensus soon, it’s going to take time to implement the new multilateral taxes in Canada, he pointed out. “Whatever the OECD finally recommends, there’s going to be a lot of change that’s required to Canadian domestic tax legislation,” and that process may take several years, especially if a new government is elected, Chana said.

The tech giants that could be affected are in favour of the OECD process as opposed to a unilateral approach, and two of those companies confirmed to the National Post that they have been making that point to the government in recent months.

The federal lobby registry shows that in January and February, the most recent records available, a number of international companies that offer digital services met or communicated with Finance Canada under lobby registrations that include taxation and finance as topics of discussion. Google, Shopify, Expedia and eBay reached out to the finance minister’s office, while both Google and Amazon met with officials at Finance Canada’s tax policy branch and Shopify also met with Finance Canada deputy minister Michael Sabia.

The companies wouldn’t divulge the specific content of those meetings, but Google, Amazon, Expedia, and Facebook all said in emailed statements that they’re in favour of the OECD multinational process. “Amazon opposes unilateral digital services taxes,” an Amazon spokesperson wrote in a statement, while Facebook said unilateral approaches “have potential to create significant uncertainty for both foreign and domestically based multinational companies.” Google spokesperson Lauren Skelly said the company strongly supports “the movement toward a new comprehensive international framework through the OECD for how multinational companies are taxed. We remain in active conversations with government around this and other matters pertaining to our business.”

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