U.S. escalates efforts to halt Ottawa's digital services tax

The federal government says it's in close contact with its American partners as the Biden administration escalates efforts to halt Canada's tax on large foreign digital services companies.

The Office of the United States Trade Representative has requested dispute settlement consultations with Ottawa under the Canada-U.S.-Mexico trade agreement.

"The United States opposes unilateral digital service taxes that discriminate against U.S. companies," said U.S. Trade Representative Katherine Tai in a news release Friday.

Americans have been critical of the three per cent levy on foreign tech giants that generate revenue from Canadian users. It means the companies will have to pay taxes on that revenue in Canada.

Tai called the tax discriminatory and said it is inconsistent with Canada's commitments not to treat U.S. businesses less favourably than Canadian ones.

The U.S. trade representative reiterated those concerns during a meeting with Canada's International Trade Minister Mary Ng in Washington earlier this week.

Ng and Finance Minister Chrystia Freeland remained steadfast behind the tax in a joint statement Friday. It said consultations will show "how Canada is meeting its trade obligations."

"Canada strongly supports international efforts to end the corporate tax race to the bottom and to ensure that all corporations, including the world's largest corporations, pay their fair share wherever they do business," the statement said.

A Canadian government representative speaking on background said Ottawa was not worried or surprised by the move to bring the issue under the trade agreement.

If the two countries are unable to resolve America's concerns within 75 days, the U.S. may request a dispute settlement panel to examine the issue.

The digital tax was part of the Liberal election platform during the 2019 campaign. Both the Conservatives and New Democrats proposed similar levies.

The Liberal government, however, delayed its implementation in order to give more time to global efforts to establish a broader, multinational taxation plan.

But following significant delays to that process at the Organization for Economic Co-operation and Development, Canada went ahead with its own tax.

Other countries have similar tools

Other countries have brought in similar tools to tax the profits of large multinational companies in the digital sector.

The Canadian ministers said Friday the preference has always been a multilateral agreement.

"We have been clear that Canada's provisional tax would be rescinded upon the entry into force of an acceptable multilateral measure," the joint statement said.

The digital services tax has drawn opposition from trade associations and business groups on both sides of the international border.

The Canadian Chamber of Commerce said it had been warning Ottawa about how the tax could damage trading relationships and increase costs in Canada.

Earlier this month, Google announced it will implement a 2.5 per cent surcharge for ads displayed in Canada starting in October. Groups representing Canadian advertisers have warned other companies could follow the tech giant's lead.

The Computer and Communications Industry Association, which represents companies such as Amazon, Apple and Uber, applauded Friday's action against the Canadian tax.

"We expect that under [the trade agreement], the facts and the law will demonstrate that Canada should remove this measure expeditiously," said Jonathan McHale, the association's vice-president of digital trade, in a news release.

The Information Technology Industry Council, a policy organization whose members include global tech companies, urged the Biden administration "to keep in mind all tools at its disposal" as consultations progress.

"While it is unfortunate Canada ignored repeated requests from stakeholders to forgo its controversial measure, industry greatly appreciates the Biden Administration taking this step to stand up for U.S. companies and workers," Megan Funkhouser, the council's senior director of tax and trade policy, said in a news release.