Why the digital services tax had to die for the Canada-U.S. trade deal to live
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For nearly five years, Canada has been planning a digital services tax (DST) that would generate billions in revenue by taxing large tech firms on their Canadian digital revenues. Just hours before the first DST payments were due on Monday, however, Prime Minister Mark Carney's government called the whole thing off.
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Carney's move late Sunday was a capitulation to the White House — and he had little choice after President Donald Trump abruptly cancelled trade negotiations on Friday over the DST, calling it 'a direct and blatant attack on our country.'
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Faced with 25 per cent tariffs on most Canadian exports to the U.S. and 50 per cent tariffs on its steel and aluminum, Canada needed to keep the trade talks alive. So Carney did what had to be done, stating that the move 'will support a resumption of negotiations toward the July 21, 2025, timeline set out at this month's G7 Leaders' Summit in Kananaskis.'
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The Liberals first introduced the DST in 2020 — a 3 per cent tax on big tech companies with Canadian digital revenues above $20 million per year — as a stopgap, with the real goal of pushing for a multilateral, OECD-led overhaul of the international tax system to curb multinational tax avoidance.
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Several countries, including France, the United Kingdom, Italy, and Spain, had begun implementing DSTs in 2019 and 2020, raising alarm bells for large U.S. tech firms and advocacy groups.
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The Computer & Communications Industry Association (CCIA), a U.S.-based trade association representing technology and communications companies, was one that pushed back, calling the DSTs discriminatory. The taxes 'hit U.S. companies but are designed to exempt local companies, putting U.S. firms at a competitive disadvantage in the market,' said Jonathan McHale, VP of digital trade at CCIA.
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President Joe Biden supported an OECD approach to reforming the international tax system – and its moratorium halting the rollout of unilateral DSTs, adopted by the OECD/G20 Inclusive Framework in late 2021. Canada waited in hopes of there being an international tax reform, but by July 11, 2023, when the OECD agreed to another year-long extension on the moratorium, Prime Minister Justin Trudeau's government decided it had waited long enough. It pushed ahead unilaterally to pass the Digital Services Tax Act last summer, despite warnings from U.S. diplomats and risk experts that it could spark a trade war.
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