Canada’s decision to move forward with a digital services tax, despite the concerns and recommendations of the Organisation for Economic Cooperation and Development’s Inclusive Framework on Base Erosion and Profit Shifting (BEPS), is a development that warrants attention, particularly among legal professionals within the global tax environment.
Canada’s divergence from the Inclusive Framework landscape, which comprises 138 members, comes in light of their intention to impose a digital services tax that could be effective from early next year, with correspondingly retrospective implications from the start of 2022. Furthermore, amidst objections from key stakeholders, Canada’s digital services tax stance could likely invite retaliatory trade sanctions from the US, creating potential economic setbacks for Canada.
Those impacts could be particularly pronounced in provinces like Quebec, where segments such as aluminum and paper exports to the US significantly contribute to the local economy. Additionally, with Canadian businesses seeking to bolster their exports to the US in areas like clean energy, the proposed digital services tax could negatively affect these US-Canada trade relationships. In fact, a group of US legislators has already voiced concerns to the US Treasury Secretary and the US Trade Representative over Canada’s move.
In an agreement extension discussion, the Inclusive Framework agreed to extend the current moratorium on new digital services taxes, subject to conditions, such as minimum participation in signing the multilateral convention. Despite Republican opposition, the US is expected to sign this convention, thereby potentially extending the ban on newer digital service taxes beyond 2025. However, Canada, despite being a steering group member of the Inclusive Framework, refused to subscribe to the outcome statement primarily over disagreements on new digital services tax introduction. Details of their proposed legislation, set to be retrospective to January 1, 2022, were later released.
The move, judged by some as akin to poking the bear, has sparked criticisms and warnings from the US Trade Representative’s office, who made it clear that penalties in the form of trade sanctions might be implemented should Canada continue with its plans. This aligns with the USTR’s stance over digital service taxes levied by countries like France during 2019 and 2020.
The rationale for Canada’s decision, according to Finance Minister Chrystia Freeland, lies in fears of Canada being put at a disadvantage relative to countries already imposing digital services taxes. However, there is no apparent indicator that digital taxes in jurisdictions like the UK or France have negatively impacted Canada’s economy
In essence, the potential economic fallout from US trade sanctions could seriously harm the Canadian economy, particularly provinces seeking to foster stronger economic ties with the US. Hence, the decision to proceed with the digital services tax could be viewed as potentially more detrimental than beneficial to Canada.
This article is informed by an op-ed by Jefferson VanderWolk, partner at Squire Patton Boggs. Notably, the views presented by Mr VanderWolk do not necessarily reflect those of his publisher or its owners.