Three trade ministers representing Canada, Mexico, and the United States recently convened in Phoenix, Arizona for the fourth meeting of the Canada-United States-Mexico Agreement (CUSMA) Free Trade Commission (FTC). The government officials applauded the CUSMA for driving trilateral cooperation and strengthening North American competitiveness in the almost four years since its entry into force.
Beneath the accolades, however, is a major trade irritant: Canada’s digital services tax (DST) proposal. The Draft Digital Services Tax Act, which was included in the 2023 Fall Economic Statement Implementation Act (C-59), would impose a gross revenue-based tax on certain digital services provided by globally engaged companies. And while lawmakers in Canada, Mexico, and the United States intended to strengthen economic cooperation and resilience in North America through the CUSMA, the Canadian DST proposal would both conflict with the letter and undermine the spirit of the agreement. To ensure Canada can meet – and fully benefit from – its commitments under the landmark agreement, 91pro视频 urges the government to withdraw its DST measure.
The CUSMA sets out clear national treatment commitments to ensure that goods and services from the U.S. and Mexico will encounter the same treatment in the Canadian market as do Canadian goods and services. Canada’s DST, however, would target companies that are predominantly headquartered in one of Canada’s most important trading partners with a tax measure that is inconsistent with prevailing international tax and trade principles. It would do so through narrowly identifying in-scope activities and only applying the tax to companies that meet in-country and global revenue thresholds. This means that in-scope companies would face a gross-revenue tax while engaging in the same activities as competitors that may be present in Canada though without the same global engagement.
The gross revenue structure of the DST proposal presents challenges for in-scope companies as it does not take into consideration other taxes paid or the expenses to run the business, but it is also worth noting the potential downstream effects on companies that use in-scope services such as digital advertising or digital marketplaces to manage operations, expand their businesses, and so on. A tax on gross revenue means that the burden of the tax primarily falls on in-country consumers through higher prices for affected services, which may reduce access to or availability of these services for Canadian consumers and limit opportunities for growth and innovation.
Now, the language in C-59 does not set an effective date for the DST. As recently as February 29, however, a Finance Canada official during a House of Commons meeting in imposing the DST as far back as January 1, 2022. Where does this leave potentially in-scope companies? They must begin diverting resources to designing and testing new compliance systems, initiating tracking, and setting aside potential payments, and doing so across several years of activity, even if an effective date has not been identified and Finance Canada has not promulgated regulations to specify how companies should comply. The retroactive application would also have serious challenges for companies’ financial reporting.
Given the many issues at stake, the U.S. government has been clear in its opposition to the Canadian DST proposal. In fact, the Canadian government modeled the proposal off measures already determined by the Office of the U.S. Trade Representative (USTR) to discriminate against U.S. companies. Since the measure’s proposal, U.S. Trade Representative Ambassador Katherine Tai has consistently raised U.S. concerns about the Canadian proposal, most recently in a meeting with Canadian Minister of Export Promotion, International Trade and Economic Development Mary Ng on the sidelines of the CUSMA FTC. Recent hearings with the U.S. Senate Finance Committee and the U.S. House Ways and Means Committee on the 2024 Trade Policy Agenda have demonstrated again the bipartisan, bicameral opposition to DSTs. In response to questioning by Senate Finance Ranking Member Mike Crapo in April, Ambassador Tai affirmed that “we are prepared to use the tools that we have” when it comes to Canada’s pursuit of a DST.
CUSMA includes many first-of-its-kind provisions that recognize the 21st century economy and bolster the global competitiveness of the North American region. To reap the benefits of the CUSMA’s high standard, high ambition outcomes, however, governments must abide by their commitments. That is why 91pro视频 continues to call on the Canadian government to withdraw the proposed DST and pursue tax policy that reflects Canada’s international commitments, aligns with international tax and trade policy norms, and promotes innovation.