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Canada's Deputy Prime Minister and Minister of Finance Chrystia Freeland takes part in a press conference in Ottawa, Canada, on Jan. 29, 2024.
Canada’s threatened tax on tech giants risks trade war
Canadian Finance Minister Chrystia Freeland plans to unveil the federal budget on April 16, a release that will be keenly watched north and south of the border. Big Tech companies, in particular, will be looking for clues about when Canada will implement its long-promised digital services tax.
Justin Trudeau’s cash-strapped Liberal government hopes to raise up to $2.5 billion over five years by imposing a 3% tax on companies like Alphabet, Meta, Uber, Amazon, and Airbnb. First promised in the 2021 budget, the Trudeau government said it would implement the tax on Jan. 1, 2024, retroactive to 2022.
Aside from raising much-needed funds, targeting tech giants has the additional benefit for Trudeau of being popular politically. His government has already whacked Alphabet and Meta with its Online News Act, forcing them to share revenues with Canadian news publishers (Meta responded by removing news links from Facebook in Canada), and its Online Harms bill, which compels social media platforms to regulate harmful content or face punitive fines.
Freeland says the digital tax is a “matter of fairness,” given that tech giants have been booking their profits in low-tax jurisdictions.
A move by OECD countries to implement a global minimum corporate tax rate of 15% has gained traction, but US opposition persuaded a majority to vote for a year-long delay last summer. Freeland said she preferred a multilateral approach but that Canada is prepared to move forward alone.
US trade representative Katherine Tai has warned that the Biden administration considers the tax discriminatory and will retaliate with tariffs.
A letter from Senate Finance Committee chair Ron Wyden (D-Ore.) and Ranking Member Mike Crapo (R-Idaho) in October said that any retaliatory steps would have bipartisan support.
Those threats seem to have registered with Freeland. In her fall economic statement, she removed the Jan. 1 deadline, while introducing legislation that would allow the federal government to implement the tax later. The budget may indicate whether Canada still plans to go it alone and risk Washington’s wrath, or wait for a new multilateral effort.
Canada's Deputy Prime Minister and Minister of Finance Chrystia Freeland.
Will Trudeau’s digital services tax lead to trade dispute?
After all, US Ambassador David Cohen warned in July that if Canada introduces such a tax, his country would have “no choice but to take retaliatory measures in the trade context, potentially in the digital trade context.” Canadian Finance Minister Chrystia Freeland, no stranger to trade disputes with her American friends, appears determined to proceed.
"It's really a matter of fairness," she said. "There are other countries, our partners, who are today collecting DST. That DST is helping make essential investments in their countries, and it's just not fair for Canadians to be deprived of that revenue."
The Canadian argument is that tech companies collecting billions of dollars of revenue in Canada — like Netflix and Amazon — are able to shelter their profits in low-tax jurisdictions and are not contributing meaningfully to the economy. The Americans, unpersuaded by these arguments, don’t want to see Canada break from an OECD consensus, which is to wait until there is an international tax agreement. Business groups in both countries have asked Canada to hold off to avoid the uncertainty and disruption of a trade dispute.
The new legislation introducing the tax did not include a date, which means the government could implement it when it sees fit. Freeland may be hoping that it gives her leverage in trying to convince her American counterparts to accept the tax without imposing countervailing duties.
Canada's Deputy Prime Minister and Minister of Finance Chrystia Freeland speaks to journalists on Parliament Hill.
Expect a ‘big fight’ over digital service tax
The US ambassador has once again warned Canada that it should expect consequences if it proceeds with a plan to impose a digital service tax on the tech giants. David Cohen, in response to an audience question at a Canadian Club luncheon in Ottawa, signaled that it could get nasty.
“That will be an area of contention unless it is resolved," he said. “There’s a place where we’re either going to have to have agreement, or we’re going to have a big fight.”
Finance Minister Chrystia Freeland surprised observers, and her friends in the United States, when Canada refused to agree with other countries to delay adopting such a tax at a meeting of the OECD this summer, complaining that it had waited long enough.
The tax would impose a 3% levy on big tech firms — many of them American — that earn revenue from Canadian customers without paying tax in the country. It is scheduled to kick in on Jan. 1.
On Wednesday, Freeland said that after a recent trip to Washington, she was “cautiously optimistic” that she would reach a deal with the Americans and avoid a showdown.
Neither side would benefit from a high-profile dispute over the matter, so a face-saving compromise would be welcomed by both countries’ business communities, which have warned Freeland against forging ahead in the face of opposition from Washington and Silicon Valley. If a showdown has been averted, Freeland may reveal as much in her department’s Fall Economic Statement, due for release later this month.