Digital Services Tax: Trump's Latest Beef With Canada

US President Donald Trump is once again going after Canada. He has announced through Truth Social that he is "terminating all discussions on trade" with Canada with immediate effect. The reason for his tirade this time is the Digital Services Tax. The Digital Services Tax was enacted last year, but companies are expected to start paying the tax from June 30. And since it will directly impact the big tech companies and large e-commerce platforms headquartered in the US, President Trump is seeing red.

What is the Digital Services Tax

The Digital Services Tax requires foreign and domestic large businesses to pay revenue tax that is earned from engaging with online users in Canada. It applies a three per cent tax on revenue earned from some digital services that rely on engagement, data, and content contributions. So, the taxable revenue could be generated through online marketplace services, online advertising services, social media services, and sales of user data.

The Digital Services Tax will apply to companies or groups with annual global revenues of €750 million or more and Canadian digital services revenue of more than CAD 20 million.

Significantly, the tax is retroactive to January 1, 2022, and companies will start paying the tax on June 30, 2025.

Canada's rationale vs US pushback

The overarching premise of the Digital Services Tax is that if big companies, that are based abroad, are earning significant revenue from Canadian users, then Canada should be able to tax a portion of that income.

The revenue that Canada would make from the Digital Services Tax is expected to be around $875 million per year, said a note from the US Trade Representative last year. Over five years, the Digital Services Tax will increase federal government revenues by CAD 7.2 billion, per the Canadian Parliamentary Budget Office.

The Computer and Communications Industry Association (CCIA) in the US claims that companies will end up paying up to $3 billion in taxes to Canada. It is also predicting 3,000 US job losses.

What has been US' response in the past

The US Trade Representative (USTR) had previously investigated Digital Services Tax in other countries and said that it had found them discriminatory toward US companies. The US had announced plans for retaliatory tariffs against the countries with Digital Services Tax and had said it would use the same yardstick for Canada.

In August 2024, USTR Katherine Tai announced that the United States had requested dispute settlement consultations with Canada under the United States-Mexico-Canada Agreement (USMCA or CUSMA) regarding Canada's Digital Services Tax. The USTR had alleged that Canada's tax appeared to be inconsistent with its commitments under the Cross-Border Trade in services and investment chapters of the USMCA, not to treat US businesses less favourably than Canadian businesses.

The US said that it had raised the concern with Canada in three official comments about its plan to enact a Digital Services Tax in June 2021, February 2022, and in September 2023.

The US Chambers of Commerce has called the Digital Services Tax "discriminatory" and said that it is in contravention of prevailing international tax principles. It adds that doing so would not only discriminate against US companies but also directly contravene Canada's obligations under both the US-Mexico-Canada Agreement (USMCA) and the World Trade Organisation.

Hence, President Trump's reaction to the Digital Services Tax as the date of payment closes in is hardly a surprise.

Why is Canada not flinching yet on Digital Services Tax

Earlier this month, Canadian Finance Minister Francois-Philippe Champagne had said the Digital Services Tax was passed by Parliament, and the government would hence go ahead with the tax. The reason why Canada went ahead and implemented its own Digital Services Tax was that the global effort to establish a broader, multinational digital taxation plan had been woefully delayed.

Some argue that the Digital Services Tax is a unilateral measure that would undermine the stability of the agreed multilateral framework. However, with the Trump administration imposing unilateral tariffs - from aluminum and steel to automobiles and energy, against Canada - this argument is unlikely to move Canada.

At a time when Canada feels betrayed by its largest trading partner, the United States, and is already reeling under the onslaught of the punishing Trump tariffs, it is beginning to assert its economic leverage. And the Digital Services Tax could perhaps serve as a negotiating tool in the process.