Why it matters: International tax issues are invariably complex, and that is exponentially true in the digital age, when taxes are now being applied to intangible assets such as intellectual property, data, and user participation. These new concepts have led to trade disputes worldwide, including, now, with one of the US’ closest allies. The outcome of this dispute could have far-reaching implications for both the tech industry and US-Canada trade relations.

A controversial tax enacted by Canada has sparked a significant trade dispute with the United States. For US tech companies like Apple, Google, Microsoft, Amazon, and Meta, which operate in Canada, the stakes are enormous, as it has the potential to cost them billions of dollars and no small amount of red tape.

The Canadian government enacted the Digital Services Tax (DST) on June 28, 2024, retroactively applied to revenue from January 1, 2022. However, even though the law has been passed, the first payments under the DST are not due until June 30, 2025.

The DST aims to levy a 3% tax on revenue generated by large foreign tech companies from Canadian users. To qualify, companies must have global annual earnings exceeding $1.1 billion, with at least $20 million in revenue from Canadian users. This tax is expected to generate over $7 billion in revenue for Canada over five years.

The US government strongly opposes this tax, arguing that it discriminates against American tech companies and violates international trade agreements. US Trade Representative Katherine Tai has initiated trade dispute settlement consultations with Canada, stating that the US “opposes unilateral digital service taxes that discriminate against US companies.”

If an agreement isn’t reached within 75 days, the US may request a dispute settlement panel under the US-Mexico-Canada Agreement (USMCA). This could lead to retaliatory US tariffs on Canadian imports.

Canadian Deputy Prime Minister and Finance Minister Chrystia Freeland maintains that the tax, or at least the revenue it will generate, is necessary to modernize the tax system and ensure fair contributions from large corporations. Freeland points out that other G7 countries, like the UK and France, have implemented similar taxes without facing US retaliation.

Freeland has admittedly made overtures to the US, although they have not led to a practical resolution. She noted that Canada has engaged in bilateral conversations with the US and remains confident that a “win-win” outcome can be reached. However, she did not specify what such a deal would entail. Freeland has also previously said that Canada would not enact the tax if a global tax treaty through the Organization for Economic Co-operation and Development is implemented. But this treaty has yet to be ratified by the US.

Meanwhile, critics, including the US Chamber of Commerce and the Canadian Chamber of Commerce, warn that the tax could increase prices for digital services in Canada and harm trade relationships. In the bigger picture, the outcome of this dispute could influence how other countries approach digital taxation, potentially leading to a proliferation of similar taxes worldwide if Canada’s DST is upheld.