Canada’s New Digital Services Tax Could Cost Apple Billions
Credit: Yulia Grigoryeva
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Canada’s new Digital Services tax, which is set to take effect later this year, could cost Apple and other US tech firms billions of dollars. However, the US government says the fees are discriminatory against American tech firms and is pushing the Canadian government to delay the tax.
The tax legislation was first proposed as an interim measure in 2021. Canada took its cues from a statement from the G20 international digital service tax (DST) reform. While the G20 countries have been working to pass a multilateral tax on global tech companies’ profits through services, progress has moved at a snail’s pace.
Canada and other G20 countries are looking to tax profit from social media services, advertising services, online marketplaces, and revenue connected to selling user data. Under the new Canadian legislation, technology companies that earn $750 million or more in qualifying revenue per year and make at least $20 million of that income from Canadian users would be required to pay the tech tax.
The DST would apply at a rate of three percent on revenue earned by these businesses from certain digital services reliant on the engagement, data, and content contributions of Canadian users.
Whether a user is located in Canada would be determined based on a customer’s data, including the customer’s billing, delivery, or shipping address, area code, GPS data, or IP address data.
The United States government is unhappy with the Canadian government’s actions because it believes it unfairly discriminates against US-based companies, which include many of the largest global technology firms such as Apple, Amazon, Google, Meta, and others.
The Biden administration claims that if passed, the interim tax structure may violate the North American Free Trade Agreement (NAFTA). The administration is seeking trade dispute settlement consultations with Canada.
While United States Trade Representative Katherine Tai is working to reach an agreement to resolve the government’s concerns about the Canadian tax, if an agreement is not reached within 75 days of the consultations, she could request a settlement panel under the US-Mexico-Canada Agreement (USMCA). Failure to resolve the dispute might lead to retaliatory tariffs on imports into the US from Canada.
If the US does impose tariffs on Canadian goods coming into the country, it won’t be the first time. The US has previously prepared tariffs on seven other countries — Austria, Britain, France, India, Italy, Spain, and Turkey — that have passed similar digital service tax legislation. However, those sanctions have been suspended while negotiations are conducted over a globally distributed DST agreement.
The US “opposes unilateral digital service taxes that discriminate against US companies,” says Tai. “As we pursue these consultations, we will continue to support the Department of the Treasury in the OECD/G20 global tax negotiations to bring a comprehensive solution to the challenge of DSTs.”
If the Canadian DST legislation goes into effect later this year, tech companies will be required to pay amounts backdated to January 1, 2022. Some observers see the Canadian legislation as a negotiation tactic designed to encourage progress on the global distributed DST agreement.
