Two senior U.S. lawmakers are demanding that the Biden administration respond immediately if Canada goes ahead with a plan to implement a new digital services tax as of Jan. 1.

DSTs are taxes on revenues generated from providing digital services to, or aimed at, users in the subject jurisdiction. Several years ago the Office of the U.S. Trade Representative conducted Section 301 investigations into DSTs proposed or implemented by a number of trading partners and found that DSTs in six countries would discriminate against U.S. companies, be inconsistent with prevailing principles of international taxation, and burden or restrict U.S. commerce. In response USTR proposed additional tariffs of up to 25 percent on $880 million worth of goods imported from these countries, but it subsequently terminated that action to give the Organization for Economic Cooperation and Development time to negotiate a multilateral agreement on international taxation, including DSTs.

However, as those talks have dragged on, Canada has said it plans to unilaterally implement a DST of its own beginning Jan. 1, 2024. U.S. trade officials have previously said they “strongly oppose” this plan, which they said “would create the possibility of significant retroactive tax liabilities with immediate consequences for U.S. companies,” and warned that if Canada adopts a DST the U.S. “would examine all options, including under our trade agreements and domestic statutes.”

However, Senate Finance Committee Chair Ron Wyden, D-Ore., and Ranking Member Mike Crapo, R-Idaho, told USTR Katherine Tai in an Oct. 10 letter that “Canada’s political leadership has not been dissuaded” by this warning. As a result, they said, Tai “must now make clear that [USTR] will immediately respond using available trade tools upon Canada’s enactment of any DST.” They did not specify what such a response might look like, though import tariff increases would seem to be an option given USTR’s previous actions.

In calling for a rapid response the two senators asserted that USTR does not need “extensive new analysis” before pursuing such a course of action, arguing that the agency “has exhaustively examined nearly identical measures” in its prior Section 301 investigations and that Canada’s DST is similar in that it “uses specific criteria, including global revenue thresholds, to target U.S. companies, and it targets the precise services where U.S. companies are leaders.” It is also retroactive to 2022, which USTR determined in an investigation of France’s DST “is unusual and inconsistent with prevailing tax principles and renders the tax particularly burdensome for covered U.S. companies.”

For more information on this issue, please contact Nicole Bivens Collinson (at (202) 730-4956 or via email) or Kristen Smith (at (202) 730-4965 or via email).

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