U.S. government officials are taking steps towards a potential legal challenge against Canada’s digital services tax on big tech companies which operate under the North American free trade deal.
US Trade Representative Katherine Tai has requested dispute settlement consultations with Canada under the United States-Mexico-Canada Agreement, which came into effect in 2020, replacing the North American Free Trade Agreement.
“The United States opposes unilateral digital service taxes that discriminate against US companies,” said Tai in a statement Friday, which her office referred to as “Canada’s discriminatory policies.”
If the two nations are unable to resolve the dispute through negotiations in the next 75 days, the US may request a dispute settlement panel under the USMCA.
On Friday, the Canadian government released a statement in response to the Americans, claiming Canada is “hopeful that a solution towards international tax fairness can be reached in due course.”
“The use of the new NAFTA is an appropriate forum to allow for further dialogue. These consultations are a reflection of the unique and collaborative economic partnership between Canada and the United States and we look forward to demonstrating how Canada is meeting its trade obligations,” Ministers Freeland and Ng wrote.
The U.S. has taken issue with Canada’s 3% levy on digital services revenue from companies that make over $20 million in a calendar year.
The digital services tax is a levy placed on tech companies that provide a digital service to Canadians, granted they earn at least $1.1 billion in annual global revenues and at least $20 million annually in Canada.
These include tech companies Meta, which operates Facebook and Instagram, as well as Google, Amazon, Uber, Lyft, Airbnb, Netflix, and Spotify.
Prime Minister Justin Trudeau’s government implemented its digital services tax in June, despite years of repeated warnings that the US would retaliate against such a move.
The first year of its implementation will cover taxable revenues earned since Jan. 1, 2022.
The cost of this tax is likely to fall on Canadians, however, argues the federal director of the Canadian Taxpayers Federation, who told True North earlier this month that other countries which have imposed similar taxes only increased the cost of living, hitting consumers directly.
“Trudeau should be doing everything he can to make life more affordable, but this digital services tax will mean higher prices for ordinary Canadians,” said Terrazzano. “The feds need to stop dreaming up new taxes and new ways to make life more expensive.”
Finance Minister Chrystia Freeland previously said that the government would not impose the tax if the Organization for Economic Co-operation and Development implemented a global tax treaty, however, the US has yet to ratify it.
According to Tai, the US has pursued consultations on the matter and will continue to support the Treasury Department in OECD-led negotiations to arrive at a “comprehensive solution.”
However, under USMCA, Canada is not permitted to treat U.S. companies less favourably than domestic ones, a commitment that Tai argues has been violated by the Liberals’ digital services tax.
The United States Chamber of Commerce told the Trudeau government ahead of its implementation that the tax violated USMCA rules, as it views the tax as a tariff.
“Now that Canada is poised to pass this legislation, in the face of broad U.S. opposition, it is clear that a more robust response is called for—a response reliant on the trade tools you recently endorsed,” said the chamber of commerce in a July statement.