U.S. backlash over Frances digital tax raises fears Canada could be in for a new round of tariffs
The United States threatened tariffs on US$2.4-billion of French imports including wine, cheese and luxury handbags in retaliation against a French digital services tax, raising concerns in Canada that Justin Trudeau’s minority government will also face backlash from Washington if it proceeds with a campaign promise to impose a similar levy.
The U.S. says the digital tax unfairly penalizes large U.S. tech firms such as Google, Apple and Facebook.
The French measure applies a 3 per cent levy to multinational digital firms with revenue exceeding 850 million euros, of which 25 million euros is earned in France. The tax is retroactive to early 2019 and is expected to affect 30 companies, in particular Apple, Google and Amazon.
“They’re American companies. They’re tech companies. They’re not my favourite people, but that’s OK, I don’t care, they’re American companies. And we want to tax American companies. It’s not for somebody else to tax them,” said U.S. President Donald Trump, in London for a summit of the North Atlantic Treaty Organization.
“So it’s either gonna work out, or we’ll work out some mutually beneficial tax. And the tax will be substantial. I’m not sure it’s gonna come to that, but it might.”
During the federal election campaign, the Liberals proposed a similar 3 per cent levy targeting digital services from businesses with overall revenues of at least $1 billion and Canadian revenues of more than $40 million, according to the Office of the Parliamentary Budget Officer, which reviewed the proposal. The tax would raise hundreds of millions of dollars that would otherwise flow to the United States where Google and Facebook are headquartered.
They’re not my favourite people, but that’s OK, I don’t care, they’re American companies. And we want to tax American companies. It’s not for somebody else to tax them
U.S. President Donald Trump
The policy “would replicate the proposed digital services tax announced by the French government,” the PBO states, and would be implemented by April 2020.
Canada isn’t the only country pondering such a tax. The G20 and the Organization for Economic Co-operation and Development are also working to manage the collection of sales tax on digital sales and establish new rules for corporate taxation on multinationals.
Other countries have moved ahead with measures of their own. In its statement announcing the French tariffs Monday, U.S. Trade Representative Robert Lighthizer said his office was considering additional investigations into the digital services taxes of Austria, Italy and Turkey. The statement did not mention proposed taxes in Canada and the United Kingdom.
But the Canadian proposal hasn’t gone unnoticed. In a letter to the White House last month, U.S. business associations took aim at Canada for seemingly expressing an intention to move on a tax even as OECD talks are ongoing.
“The U.S. is part of the OECD, so any approach there would presumably have American buy-in and be a less risky approach,” said Michael Geist, a law professor at the University of Ottawa. “But the Liberal platform does seem to suggest it would move forward even without the OECD.”
The U.S. businesses complained that the Canadian tax proposal would violate the intentions of the new North American Free Trade Agreement — called the U.S. Mexico Canada Agreement or USMCA — which allows for digital levies but prohibits discriminatory tax treatment. The deal is currently awaiting ratification in the U.S., where Congressional Democrats have been demanding changes to labour and environmental provisions.
Given that the Canadian proposal focuses on firms booking very large revenues — such as Google and Facebook — “the reality is U.S. companies would be discriminated against,” said Dan Ujczo, international trade lawyer specializing in Canada-U.S. relations at the law firm Dickinson Wright.
“So this might not violate the letter of the trade deal, but it certainly violates the spirit,” he said. “And with all the heated discussion over USMCA the last thing we need is another irritant between Canada and the U.S.”
In a statement, Finance Minister Bill Morneau’s office did not say whether it would wait for the OECD talks to conclude before imposing a tax, but stated that it remained committed to working with its international partners.
With all the heated discussion over USMCA the last thing we need is another irritant between Canada and the U.S.
Dan Ujczo, international trade lawyer
“At the same time we will make sure that multinational tech giants pay corporate tax on the revenue they generate in Canada,” it said.
The strong reaction from Washington to the French digital services tax together with the importance of Canada’s relationship with the U.S. suggests Ottawa will opt for a multilateral approach, said Jack Mintz, president’s fellow at the University of Calgary’s School of Public Policy.
“Given Canada’s relationship with the U.S., a unilateral tax by us would be madness,” he said. “I think we would invite retaliation from an elephant when we’re a mouse. It’s far better to work with other countries.”
The Liberal government will introduce its legislative plans during the Throne Speech on Dec. 5.