US Requesting Formal USMCA Consultations Over Canada's DST

The U.S. has asked Canada for formal consultations on the 3% digital services tax on revenues of large social media platforms, e-commerce platforms and other companies that target advertising or collect data from Canadian customers.

The Canadian DST, passed in June, is retroactive to Jan. 1, 2022, and payments are due June 30, 2025.

"The United States opposes unilateral digital service taxes that discriminate against U.S. companies," U.S. Trade Representative Katherine Tai said in a statement announcing the beginning of a USMCA dispute process. "As we pursue these consultations, we will continue to support the Department of the Treasury in the OECD/G20 global tax negotiations to bring a comprehensive solution to the challenge of DSTs."

The U.S. asserts that the DST doesn't appear to be consistent with the Cross-Border Trade in Services and Investment Chapter in USMCA. If the two countries cannot resolve the U.S.'s concerns within 75 days, the U.S. can call for a dispute panel.

The tax is expected to collect about $875 million annually, according to USTR.

Canada's finance minister and trade minister issued a joint statement Aug. 30, after USTR's announcement, saying that Canada prefers a multilateral solution, and the country strongly supports the Organization for Economic Cooperation and Development's tax plans, which cover both a global minimum corporate tax rate and extraterritorial tax collection, which is supposed to supersede countries' DSTs.

"Unfortunately, despite best efforts, repeated deadlines to reach an international agreement have come and gone. We have been clear that Canada’s provisional tax would be rescinded upon the entry into force of an acceptable multilateral measure," Minister Chrystia Freeland and Minister Mary Ng said. “Today, many of our closest partners -- including France, the United Kingdom, and Italy -- have digital services taxes in force. Canada has been at a disadvantage relative to these countries which have continued collecting revenue under their pre-existing digital services taxes."

They said they would use the consultations to demonstrate how Canada is meeting its obligations under USMCA.

House Ways and Means Committee ranking member Richard Neal, D-Mass., praised the move, saying Canada's DST violates USMCA agreements. “For many, many years, the United States and Canada have enjoyed a productive, mutually beneficial trading relationship, and I expect this dispute will be resolved through the consultations initiated by USTR. Should it not, however, the Biden Administration must be prepared to move forward with any number of the many accountability tools at our disposal," he said in a statement.

Senate Finance Committee President Ron Wyden, D-Ore., also said he appreciated the first step toward a formal dispute, saying the DST is "an obviously discriminatory tax that targets American innovators, putting good jobs at risk."

National Foreign Trade Council Vice President Tiffany Smith issued a statement that said: “Today’s action is a critical first step in pushing back against the proliferation of discriminatory digital policies and other similar taxes that are unfairly targeting U.S. companies." She said Canada's move undermines the OECD tax work.