The U.S. has requested dispute settlement consultations with Canada under the United States-Mexico-Canada Agreement (USMCA) concerning Canada’s digital services tax (DST), which was enacted last June.
Katherine Tai, U.S. Trade Representative (USTR), cited concerns that the new tax policy was unilateral and discriminatory against U.S. companies in the USTR’s news release.
If the U.S. and Canada could not reach an agreement via the consultations within a 75-day period, the U.S. could call for the creation of a USMCA dispute settlement panel to resolve the disagreement pursuant to the USMCA rules, the news release noted.
“As we pursue these consultations, we will continue to support the Department of the Treasury in the OECD/G20 global tax negotiations to bring a comprehensive solution to the challenge of DSTs,” said Tai in the news release.
The USTR claimed in its news release that Canada’s Digital Services Tax Act, outlined in Bill C-59, contradicted Canada’s obligations under the USMCA’s cross-border trade in services and investment chapters, which prohibited Canada from extending less favourable treatment toward U.S. businesses compared with their Canadian counterparts.
The USTR has previously expressed its concerns about Canada’s plans to implement the DST in June 2021, February 2022, and September 2023.
“The Canadian Chamber has been warning for months of the damaging impact of Canada’s digital services tax on Canadians and our trading relationships,” said Jessica Brandon-Jepp, senior director of fiscal and financial services policy of the Canadian Chamber of Commerce, in a statement.
“Today’s announcement by the USTR confirms our longstanding concern that the digital services tax is damaging our most lucrative trading partnership at a critical time as we look ahead to a review of CUSMA,” Brandon-Jepp added.
Canada’s DST imposes a three-percent percent levy on revenues from digital services such as online marketplaces, online targeted advertising, social media platforms, and user data.
The tax applies to companies or groups with global revenues of at least €750 million and Canadian digital services revenue exceeding $20 million. The DST will retroact to Jan. 1, 2022 and will be paid by companies beginning June 30, 2025. Canada expects to collect approximately $875 million annually through levying the DST.
“We reiterate that to protect Canadians, the government needs to continue negotiating with the United States and halt the imposition of a unilateral DST, or at the very least, ensure that regulations do not include inflammatory retroactivity to 2022,” Brandon-Jepp said in the statement by the Canadian Chamber of Commerce.