Come June 30, U.S. digital services providers will be on the hook for a multi-billion dollar payment in Canada that will continue to dog them annually. Worse, these taxes will not apply to the vast majority of their Canadian competitors. If not stopped, this fateful step will help entrench similar discriminatory practices elsewhere and is likely to spawn imitators far and wide, as governments look to U.S. firms as a convenient piggy bank.
The policy in question is Canada’s digital services tax (DST), which imposes a 3% tax on companies for specific services where U.S. businesses hold particular strength, including online marketplace services; online advertising; and social media services. All of these are sectors where U.S. companies are very competitive relative to Canadian and other non-U.S. companies. Further ensuring the tax predominantly hits U.S. firms, the DST established monetary thresholds whereby the tax only applies to entities that earn annual revenues of €750 million globally and C$20 million in “Canadian digital services revenue,” ensuring that highly successful U.S. firms are almost exclusively captured.
These thresholds—both in carefully-crafted definitions of targeted entities and the sizes selected—work to impose the payment burden on U.S. companies while sparing strong Canadian businesses in traditional retail and brick-and-mortar sales; broadcasters; traditional advertisers; and travel and tourism services.
The numbers: CCIA analysis has found that Canada’s DST would disproportionately harm U.S. businesses, costing them up to $2.3 billion annually (references to dollars are U.S. dollars, unless otherwise stated). This would decrease revenues from exports, reduce the U.S. tax base, and offer domestic and foreign rivals preferential access to the market, boosting their prospects for growth. Meanwhile, we estimate that up to 3,140 American workers could lose their jobs as a result of the tax going into effect.
Even more egregiously, the DST requires companies to pay taxes on revenues retroactively to January 1, 2022, an obligation that contradicts broadly accepted international tax principles. Canada’s own Parliamentary Budget Office (PBO) estimated that the DST would impose about $900 million in annual levies in its early years. The 2022 and 2023 calendar years both entirely preceded the enactment of the Canadian DST, and U.S. companies are likely to bear the overwhelming majority of the cost. In effect, the Canadian PBO has estimated the retroactive payment costs to U.S. companies at up to nearly $2 billion, and on June 30, 2025, the total bill for U.S. companies would be up to nearly $3 billion to cover the 2022, 2023, and 2024 calendar years.
However, taking into account total U.S. digitally-deliverable exports to Canada, the bill could be even higher. Consider that the UK government itself reported that they collected 30% more in revenue from their DST in the first year than they had initially projected.
However, this cash grab carries more importance than just this one market. Canada’s DST is just the latest in a recent trend of DST contagion where countries implement these schemes targeting U.S. companies while minimizing financial or regulatory burdens on non-U.S. competitors. Foreign officials have often been explicit in their intention to get U.S. technology companies to pay these taxes and have subsequently designed the regimes to have a disproportionate impact on them, through the use of arbitrary thresholds and the exclusion of competing services supplied non-digitally.
Permitting the Canadian iteration of the DST to go through and extract such large sums from U.S. companies would set a dangerous precedent for other trading partners that have imposed these discriminatory regimes, particularly given the strong trade commitments in place between the United States and Canada through the U.S.-Mexico-Canada Free Trade Agreement (USMCA).
Take the United Kingdom, with which the United States recently announced progress in a trade agreement, dubbed the Economic Prosperity Deal. The UK has had a DST in force since 2022, costing U.S. firms more than an estimated $2 billion in total. The government has said it expects to bring in £3 billion cumulatively through this tax by 2025 (approximately $3.8 billion), and while the government has not identified which companies were impacted, it has acknowledged that 90% of the tax was paid by large digital services companies likely headquartered in the U.S. USTR has highlighted the DST as a priority for the United States in its efforts to seal a final agreement with the UK over the coming months, and stated the tax is “discriminatory, unjustified, and should be removed promptly.” However, this policy has not yet been dropped. The UK may well look to the case of Canada as it digs in and seeks a trade for removal of this tax that it deems adequate.
Meanwhile, other major markets already have DSTs in place, such as:
- France: The government originally estimated the tax would bring in €500 million in its first year of collection, in 2019 ($519 million with the current exchange rate). And the government is set to extract an estimated €774 million ($874 million) in the 2025 fiscal year. In total, France has collected an estimated $3.8 billion from the DST since it was implemented.
- Spain: This tax is estimated to cost suppliers, predominantly American, €968 million ($1.1 billion) annually.
- Italy: Since its introduction, the DST has brought in roughly $2 billion in revenue.
- Austria: For just the 2023 fiscal year, Austria reportedly extracted €103 million ($116.3 million) from companies, the vast majority of which would have come from U.S. firms. Since the tax was imposed, Austria has taken roughly $500 million.
- Türkiye: This DST is estimated to cost suppliers, predominantly American, $400 million annually. The country has brought in roughly $1.5 billion since its DST (at 7.5%, the world’s highest) was adopted.
While these countries look on to see how the United States handles Canada and the UK and may adjust their willingness to part with their own regimes accordingly, other jurisdictions that have not yet imposed their own DSTs but are considering adoption of similar regimes will similarly be encouraged if Canada’s DST goes into effect unchallenged. As recently as this week, Germany announced its intentions of adopting a new 10% levy on digital firms, though the details of that proposal have not yet been released.
Opposition to these taxes and acknowledgement of their discriminatory nature is an area with strong bipartisan support. Under President Trump’s first term, USTR found that the DSTs of Austria, France, the UK, Türkiye, Spain, Italy, and India (which recently removed its DST as part of its negotiations with the United States) represented a discriminatory and unreasonable measure that burdens U.S. firms in 2021. The Biden Administration began the process of challenging Canada’s DST under USMCA, noting that the “measure appears to breach Canada’s commitments under the USMCA, including under Chapter 15 (Cross-Border Trade in Services) and Chapter 14 (Investment).” Republicans and Democrats in Congress have expressed their concerns over Canada’s DST in recent years as well. And just last week, legislators took action, when the House of Representatives passed major legislation, the reconciliation bill, that included a mechanism to impose retaliatory taxes against companies from countries that continue to impose DSTs.
There is an urgent need to stem the spread of this policy. Canada represents a crucial test case for whether the raid on U.S. companies—and the U.S. tax base—continues, or if more cooperative frameworks emerge as a more reasonable alternative.
