By Howard Law, author of Canada vs. California, and MediaPolicy.ca
The controversial federal Digital Services Tax is back in the news after Google raised prices charged to its Canadian advertisers by 2.5 per cent last week.
The August 1 price hike stoked demands from some Canadian commentators that Finance Minister Chrystia Freeland unilaterally withdraw Ottawa’s three per cent DST on a range of digital services offered in Canada by the largest Big Tech companies including Google, Meta, and Uber. One estimate puts the new tax revenue at $1 billion flowing annually into federal coffers.
Freeland’s DST came into effect on July 1, 2024 (and retroactive to January 1, 2022) but the bill is not due until July 2025.
At the same time, Google raised prices in response to other national DSTs in Turkey, Spain, and Italy. Operator of the world’s dominant search engine, Google pulled the same trigger in 2021 in India and France and, before that in 2020, in the United Kingdom and Austria. To get the point across, a well-designed web page on Google’s site allows you toggle between price increases tied to each nation’s DST legislation. There is an “other” tab (for other countries contemplating a DST).
Google Search global market share
In addition to the Canadian Chamber of Commerce calling upon Ottawa to rescind the DST, Ontario Finance Minister Peter Bethlenfalvy made the same request, fearing trade retaliation by the United States.
The debate revives traumatic political memories of the “split run magazine” dispute between Canada and the US in the late 1990s. The United States was successful in getting Ottawa to climb down from a law designed to prevent the US magazine industry from trade dumping into the Canadian magazine market. The US threatened retaliatory trade sanctions against Canadian plastics, wood and steel products manufactured in the electoral ridings of federal ministers.
Why a DST?
Several member nations of the Organisation for Economic Cooperation and Development (OECD) have implemented a national tax on digital services at rates varying from 2 to 7.5 per cent of revenues as a proxy for a higher percentage tax on profits.
Source: Federal budget document, April 2024
The ambit of digital services taxed depends on the national jurisdiction, but most focus on digital advertising and the monetization of customer data.
[Download: Digital Tax Update 2024]
As illustrated below, European OECD nations are further ahead than Canada in introducing a DST:
The 38-nation OECD maintains a strong position against tax avoidance and jurisdiction shopping by global companies. It cast its eye on American Big Tech as early as 2013.
The delicately phrased “tax base erosion and profit shifting” problem is most acute in global digital services which represent significant economic activity in host nations and confer a competitive tax advantage over domestic media companies. In short, it’s another iteration of the GAFAM/FAANG problem.
However, throughout the term of the Trump administration, the US remained unmoved. Readers may recall that Trump threatened tariffs on wine, handbags and cosmetics if France went forward with its proposed digital services tax.
Perhaps because Trump lost the November 2020 election, OECD nations resumed legislating their own digital services taxes, first the United Kingdom (2 per cent) and shortly thereafter France (3 per cent).
In 2021, incoming President Joe Biden’s administration continued the threats of tariff retaliation while engaging in negotiations with OECD nations. In October, Biden unveiled a tentative agreement with OECD nations that included the “Pillar One” substitute for DSTs, a 25 per cent tax levied on a one-quarter share of excess corporate profits (rather than revenues):
For companies with global revenues of more than US $26.4 billion and profitability above 10 percent, 25 percent of profits above 10 percent would be taxed according to a new formula based on where a company’s customers are located.
The Pillar One deal was scheduled to come into effect no later than December 31, 2023. Once the agreement was ratified by national legislatures, nations with existing DSTs would repeal them by the deadline.
As for Canada, the federal Liberals had previously announced in November 2020 their plan to legislate a DST in the spring 2021 federal budget and had followed through in April 2021. The Canadian DST was set be triggered on January 1, 2024 if the Biden deal was not ratified by US Congress.
US Congress “couldn’t name a post office”
The Pillar One deadline passed uneventfully in Washington and, as of August 2024, Biden has yet to get his deal through either house of US Congress.
The Democrats do not have the two-thirds majority in the Senate to ratify the tax convention. Up until January 2022 the Democrats enjoyed only a slim majority in the House of Representatives before Republicans took over in the 2022 mid-terms.
A recent internal Congressional report estimates that under Pillar One, the US loss of corporate taxes collected from Big Tech will exceed one billion dollars annually.
Mike Kelly (PA), the Republican chair of the all-important House Tax Committee, hit his rhetorical stride, declaring in March that the “proposal will not equalize the playing field, this tax burden will fall disproportionately on American companies, which are nearly half of the largest and most profitable in the world.
“Let’s state the facts here. Two-thirds majority is required in the Senate for enactment of Pillar One. In today’s political environment, it is hard to believe that we get that much support on naming a post office, let alone an international tax treaty,” Kelly added.
It appears that Biden’s deal is dead in the water unless Kamala Harris becomes president and the Democrats take full control over both houses of Congress, a partisan triple crown that was last achieved by Republicans in 2017 and by Democrats in 2008.
A more dignified solution?
The elephant in the room is always American trade retaliation.
But ignoring the elephant for the moment, DSTs do enjoy expert support. Writing last year in Forbes magazine, American tax commentator Robert Goulder characterized DSTs as a clunky policy instrument but a no-brainer for tax jurisdictions getting the short end of the stick from Big Tech:
It’s tempting to take the above statistic (13 of 18 firms paid more DST [in Britain] than [corporate] income tax) as evidence that [revenue rather than profit] taxation can indeed function as a safeguard against profit shifting. Would I prefer to get there by means of a more dignified solution? You bet I would, but that’s not on offer. DST is what’s on offer. At this point, a country is foolish not to have one — if for no other reason than it adds leverage for Pillar one.
In a similar vein, Canadian tax expert Allison Christians is quoted in the recent Globe and Mail story on the DST suggesting it is an effective tax tool for Canada, adding:
It’s surprising to me when people rush to bash any tax on a foreign company that comes to Canada, takes out our advertising industry completely, and all the advertising dollars are going to U.S. firms, like Facebook or Google.
Getting back to the elephant, Big Tech’s lobby group describes the Canadian DST as a “contagion” and a bad precedent for the US given that Canada is its biggest trade partner, notwithstanding the British and European DSTs currently in place.
The Canadian DST might find itself making a guest appearance at the bargaining table of any number of bilateral trade disputes or else at the scheduled 2026 review of the Canada-United States-Mexico Trade Agreement (CUSMA). It is not unusual for the trade partners to load up on grievances in anticipation of talks. US Congress already has a wish list that includes the Online Streaming Act Bill C-11 and the Online News Act Bill C-18.
The concern as always is that the US might ignore mandatory trade dispute resolution and instead act unilaterally and preemptively with retaliatory tariffs, especially in the event of a second Trump administration. Trump memorably repudiated the Trans Pacific Partnership trade deal on his third day in office in 2017 and later hit Canada with illegal steel and aluminum tariffs as a bargaining ploy during the 2018 renewal negotiations of CUSMA.
It’s not clear if the Trudeau government can count on Opposition support for the DST, or, if Pierre Poilievre forms the next government, whether he will defend it. The Conservatives campaigned in 2021 in favour of a DST, but the Conservatives also abandoned campaign promises on both the Online Streaming Act and a bill that the Liberal government eventually introduced as the Online News Act.
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