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Canada’s proposed Digital Services Tax could initiate US trade war

Canada’s proposed Digital Services Tax could initiate US trade war - Route Newsletter: November 2023

While the Organization for Economic Cooperation and Development (OECD), consisting of 130 member countries, tries to establish a multinational approach to the Digital Services Tax (DST), Canada has said that it intends to implement the 3% DST beginning January 1, 2024, if work by the OECD fails to adopt an approach by that date.

The tax – a three per cent levy aimed at foreign companies, many of them based in the U.S., that derive revenue from Canadian subscribers and contributors – is scheduled to take effect in January, retroactive to 2022, and would almost certainly provoke the U.S. to impose retaliatory trade sanctions, causing significant economic pain in Canada.

The new rules may result in a filing obligation and tax liability for any entity – Canadian or otherwise – that as a corporate group has global consolidated revenues of €750 million or more and earns Canadian digital services revenue from providing online marketplace services, online advertising, social media services or the monetizing of user data in excess of CA$20 million.

Unlike corporate income taxes, digital services taxes are levied on revenues rather than profits, not taking into account profitability. Seemingly low tax rates of such turnover taxes can translate into high effective tax burdens.

U.S. Trade Representative Katherine Tai met with Canadian Trade Minister Mary Ng on October 28th, to discuss Canada’s proposed Digital Services Tax. Ottawa has said it plans to impose this tax beginning January 1, 2024, a move the U.S. has strongly opposed, and the United States Senate Committee on Finance recently advised they are prepared to respond immediately.

For more information, contact Brian Rowe, Director – Customs Compliance & Regulatory Affairs.

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