Ottawa, Washington at odds over digital tax plan

The Canadian government has outlined its plans for a digital services tax, which will hit online retailers and social media platforms with a 3% tax on Canadian revenue.

Trouble is, the Liberals’ tax battle with tech titans poses a threat to the carefully laid international plans of their political allies in Washington, according to a Politico report.

The Biden administration is worried that this could change the dynamics in OECD negotiations on a global digital service tax. The OECD is leading talks with more than 130 nations that want a portion of the profits made by US tech companies in their countries to stay within their borders. The US managed to postpone the taxes until at least 2025 but worries that other countries may follow Canada’s lead and move forward unilaterally.

Business groups in Canada and the United States have loudly objected to Canada’s plan, and Washington has threatened to seek redress if Canada proceeds, although it is not clear that the measure would be captured under USMCA, a trade deal between the US, Canada, and Mexico, rules since large Canadian companies would likely also be required to pay.

Treasury Secretary Janet Yellen is reportedly lobbying Canadian Deputy Prime Minister Chrystia Freeland to drop her plans, but Freeland – who played a key role in negotiating the USMCA and has deep connections in Washington – has insisted Canada must proceed. The tax is expected to come into force by January of next year.