The U.S. has requested dispute settlement consultations under the U.S.-Mexico-Canada Agreement regarding Canada’s digital service tax.
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 unilaterally implemented a DST of its own. According to USTR, this measure imposes a three percent tax on revenues relating to online marketplaces, online targeted advertising, social media platforms, and user data. It applies to companies or groups with annual global revenues of €750 million or more and Canadian digital services revenue of more than CA$20 million. The DST is retroactive to Jan. 1, 2022, and companies will start paying it on June 30, 2025.
Despite calls from some lawmakers last year for the U.S. to respond to this development immediately “using available trade tools,” which ostensibly could include import tariff increases, USTR instead has elected to pursue the matter through the USMCA dispute settlement process for now. USTR notes that if the two sides are unable to resolve U.S. concerns within 75 days, the U.S. may request the establishment of a dispute settlement panel. If such a panel was to rule in favor of the U.S. and Canada was to fail to respond accordingly, the U.S. could be authorized to impose retaliatory measures such as increased tariffs on imports of Canadian goods.
For more information on this issue, please contact Nicole Bivens Collinson at (202) 730-4956 or via email.
Copyright © 2024 Sandler, Travis & Rosenberg, P.A.; WorldTrade Interactive, Inc. All rights reserved.