Industry News
USTR Issues Familiar Warning to Canada's DST Draft Legislation
TweetMar. 1, 2022
Just when you thought you heard the last about Digital Services Taxes (DSTs) and threats from the US government of Section 301 actions, our neighbor to the North stoked the flickering flame. At the end of last year, Canada released the draft legislation for its own version of a digital services tax. In a familiar series of events, the Office of the U.S. Trade Representative (USTR) recently released comment on the Canadian legislation, requesting that Canada retreat from its plans to impose its version of a DST and threatening action under Section 301.
As a reminder, DSTs are mechanisms by which a country can tax multinational enterprises (MNEs) that realize economic benefit from people within that country despite the MNE not having the traditional nexus required before a country can impose a tax. Generally, an MNE has to have a fixed place of business or other permanent establishment in a country before the MNE can be taxed in that jurisdiction. DSTs operate under the theory that those companies, despite the absence of local brick and mortar, are experiencing real economic gains from a country’s customers and thus should pay taxes. The digital taxes are assessed on a company’s gross revenue as opposed to net profits and they do not come into play unless a company meets a high revenue threshold.
In 2021, the USTR carried out a series of 301 investigations into the DSTs of ten jurisdictions, contending that the DSTs discriminate against U.S. digital companies, are inconsistent with principles of international taxation, and burden U.S. companies. At the conclusion of the investigations, USTR announced its finding that the DSTs were in fact discriminatory, inconsistent with int’l taxation law, and burdensome, and recommended retaliatory tariffs under Section 301 on certain goods from offending countries. However, no action was taken. Instead, USTR Tai suspended the imposition of tariffs in hopes that a resolution could be reached through negotiations on international taxation in the global arena. Ultimately, the USTR terminated the majority of DST investigations after it came to a political agreement with the countries that any DST liabilities that accrued in the absence of a comprehensive solution would be credited to the system that is implemented at the multilateral level. Such temporary resolution and agreement came in November 2021, making Canada’s December 2021 proposal somewhat surprising.
In its comment addressing Canada’s DST proposal, the USTR urges the country to refrain from unilaterally enacting any tax while negotiations at the OECD continue. The U.S. has been clear on its position regarding how it will respond to a country’s unilateral measures to combat the current problems in the international tax system and multinational enterprises. Given that Canada is advancing such proposals in full awareness of the U.S. position and the prior recommendations of Section 301 retaliatory duties on other countries’ DST measures, it is unlikely it plans to retreat from the legislative efforts due to USTR comments alone. If that is the case, we anticipate a formal Section 301 investigation with a affirmative finding and recommendation for retaliatory tariffs on Canadian goods. Given how the other DST 301 investigations played out, however, it is unlikely these potential tariffs ever actually go into effect.
