Washington – The Office of the U.S. Trade Representative announced today it was requesting consultations with Canada over its digital services tax (DST) under the U.S.-Mexico-Canada Free Trade Agreement (USMCA), constituting the first step of an official dispute.
This action comes in response to Canada’s Parliament passing the DST in June—a measure that disproportionately applies to U.S. companies—through Bill C-59. A subsequent Order in Council formally enacted the tax, while a follow-up explanatory note confirmed its burdensome and discriminatory nature. Canada’s Parliamentary Budget Office estimated that the first payments under this law, due June 30 next year, could amount to over $3 billion, the vast bulk of which will be owed by U.S. firms.
The Computer & Communications Industry Association joined 10 other trade associations in June in sending a letter urging the Biden Administration to vigorously respond to Canada’s enactment of a DST and has repeatedly called for U.S. action on the DST.
A CCIA Research Center study found that the DST will likely impose direct losses of up to $2.3 billion annually for U.S. companies—and, thereby, significantly undermining the U.S. tax base—and could result in thousands of full-time U.S. job losses. CCIA has previously raised concerns with Canada’s DST, including through comments to Finance Canada and a letter in December 2023.
The following can be attributed to CCIA Vice President of Digital Trade Jonathan McHale:
“We applaud USTR’s decision to initiate action against Canada’s discriminatory tax that primarily targets U.S. digital services providers. This is an overdue but welcome development to protect the fair and non-discriminatory market access promised between these close trading and diplomatic partners through the U.S.-Mexico-Canada Free Trade Agreement. The very design of the DST subjects U.S. digital services firms—in an industry in which the U.S. is a world leader—to unreasonable and burdensome taxation, while sparing the many domestic providers that compete with these services such as those in bricks-and-mortar retailing and broadcasting-based advertising services.
“We expect that under USMCA, the facts and the law will demonstrate that Canada should remove this measure expeditiously. And, absent compliance, we look to USTR to follow through on its pledge to use all tools available to remedy this trade-distortive measure.
“The DST will exact billions from the U.S. tax base, costing U.S. businesses, workers, and taxpayers dearly, and unless challenged will likely be replicated by the many countries actively looking at similar measures. We look forward to this USMCA dispute process reversing Canada’s ill-considered action, and putting U.S-Canada relations on a more productive path. While we strongly support initiation of USMCA-based dispute settlement, we also urge USTR to seek to resolve the dispute well in advance of next year’s tax payment deadline and for the agency to not preclude action pursuant to a Section 301 investigation. A 301 investigation may better address some of the most egregious aspects of Canada’s new measure, such as its retroactivity and applicability to revenue rather than profit.”