Canada advances digital services tax bill despite OECD pact, US objections

By Doug Connolly, MNE Tax

Canada introduced draft legislation on December 14 to implement its planned digital services tax – with a built-in delay and contingency deferring to implementation of the OECD multilateral agreement. However, if the OECD agreement under Pillar 1 is not timely implemented, Canada’s digital services tax would be imposed in 2024 with retroactive application to 2022.

A response from a US Trade Representative spokesperson in a statement issued today was critical of Canada’s advancing of the proposed bill, stating that the retroactive application would create “immediate consequences for U.S. companies.” Noting Canada’s participation in the October 8 OECD agreement, the statement adds that if Canada adopts the tax, the US Trade Representative “would examine all options, including under our trade agreements and domestic statutes.”

Concurrently with the introduction of the bill, Canada’s finance ministry stated in a December 14 economic and fiscal update that the government’s “preference has always been a multilateral agreement.” The government’s update adds that it is their “sincere hope that the timely implementation of the new international system will make [Canada’s digital services tax] unnecessary.”

To allow time for implementation of the OECD agreement, Canada’s digital services tax would not be imposed until January 1, 2024 – and then only if Pillar 1 the OECD agreement has not yet come into force.

However, if the implementation of Pillar 1 is delayed (or abandoned), the digital services tax would apply retroactively to revenues earned as of January 1, 2022, once it becomes due in 2024.

Under the OECD agreement, Pillar 1, which would reallocate a portion of taxing rights between nations and replace unilateral digital services taxes, is intended to be effective in 2023. However, it is an open question how realistic that timeline is – given that implementation will require adoption of a multilateral convention by numerous countries around the world.

US business objections

Several days before Canada introduced the legislation, the US Chamber of Commerce sent a letter to a US Treasury official condemning Canada’s plan to proceed with the digital services tax despite the OECD deal. It states that the “retroactive unilateral measure is directly contrary to both the spirit and the explicit terms” of the OECD deal.

The letter quotes the language of the OECD October 8 agreement (which Canada joined):

No newly enacted Digital Services Taxes or other relevant similar measures will be imposed on any company from 8 October 2021 and until the earlier of 31 December 2023 or the coming into force of the [multilateral convention].

The Chamber claims Canada’s planned legislation violates this term of the agreement and it “stands ready to work with the Treasury to secure a satisfactory outcome.”

A spokesman for Google, quoted in a December 14 Reuters article, was also critical of the bill, stating that Canada’s plan to move ahead with the digital tax “would undermine the multilateral consensus and raise prices for Canadians.”

Digital services tax terms

Canada’s digital services tax, if adopted, would apply at a 3% rate on revenue earned by large businesses from certain digital services that rely on Canadian user data, content, or engagement.

The tax would apply to business groups with both total consolidated revenues of at least EUR 750 million (approximately USD 844 million) and Canadian in-scope revenues in excess of CAD 20 million (USD 15.5 million). In-scope revenue would include online marketplace services revenue, online advertising services revenue, social media services revenue, and user data revenue.

Canada’s Department of Finance is accepting comments on the proposed legislation until February 22, 2022.