As a mid-year target looms for a consensus on a new global tax deal, Canada is moving forward with its own proposed tax targeting tech giants. But while the federal government has framed the measure as a placeholder until there’s an international agreement that accounts for how businesses operate across borders in the digital economy, tax lawyers say implementing such an agreement is likely to take years—and the government won’t say exactly when along the way it’ll lift the new charge.

Ottawa plans to charge companies three per cent of revenue made from Canadian users’ “engagement, data and content contribution,” if that figure is over $20 million and the firm has €750 million ($1.1 billion) or more in worldwide sales. The digital-services tax (DST), scheduled to take effect in January 2022, targets online marketplaces and advertising as well as social media services. Modelled on a French measure, the Liberals first suggested the levy during the fall 2019 federal election campaign, then signalled its intention to introduce it in the November 2020 fall economic statement (FES) and formally proposed it in the April federal budget. 

The budget described the DST as “interim in nature,” stating that it would apply “until an acceptable multilateral approach comes into effect.” The FES used near-identical language, as did a release from Finance Canada following the G7 Finance Ministers’ Meeting in London earlier this month; at the conference, the advanced economies committed to a package of corporate tax measures including a global minimum rate of 15 per cent and giving countries the right to levy the largest multinational firms’ profits if the companies sell to their residents.

The OECD and G20 are facilitating ongoing negotiations between more than 135 governments on the issue, with a target of reaching a political agreement ahead of a July meeting of finance ministers of the latter body’s members. Finance Minister Chrystia Freeland said last week she was “optimistic that we’re going to get a deal.”     

But the Liberal government hasn’t explained what it means by “comes into effect,” and in response to The Logic’s questions declined to specify the threshold for lifting the DST. 

“With delays having occurred in arriving at an international consensus,” the government has committed to “implementing a tax on large digital-services corporations, until an acceptable common approach is agreed upon and comes into effect,” said Finance Canada spokesperson Marie-France Faucher in a statement. Freeland’s spokesperson Kat Cuplinskas cited the June release and the department response, neither of which provide any details on timelines or thresholds.  

However, tax lawyers say a consensus in the ongoing negotiations is just the start of what will be a long implementation process. “That agreement probably would not come into effect for several years,” said Patrick Marley, co-chair of Osler’s tax practice. “It’s going to require both domestic law changes and tax-treaty changes” to implement the first pillar of the OECD process, which would reallocate some taxing rights to countries if companies have customers there, even if they lack a physical presence. 

The federal government could choose to wait to lift its DST until a majority of countries have passed legislation enabling the changes and signed onto an international treaty, or hold out until all do so. “At a minimum, they would want the U.S. to be on board,” said Marley. While the Biden administration is seeking a breakthrough in the international negotiations, any final deal will still require Congressional approval.  

The U.S. has threatened retaliatory tariffs on other countries that have imposed DSTs, although it’s temporarily suspended the latest set in hope of a deal in the OECD process. U.S. Trade Representative Katherine Tai expressed concern about Canada’s measure in a May call with International Trade Minister Mary Ng, but did not raise the possibility of tariffs. 

Implementing an international overhaul of the corporate tax system will take “a number of years, because even once you get enough countries on board conceptually, you’ve still got to hammer out the details,” said Paul Casuccio, who leads Fasken’s global-commodity and value-added tax group. Industries and companies are likely to lobby their home governments for exemptions; the U.K. is already seeking to carve financial services out from the G7 deal, while the original OECD proposal excluded extractive companies.

The details of Ottawa’s DST also need to be finalized. Finance Canada is consulting on its design, including the types of revenue to which it should apply and how to calculate it. Determining the tax base will be challenging, said Casuccio. He cited the example of a platform deriving revenue from the content contributions of an influencer with a large following and a roving lifestyle. “Instagram makes tons of dough on them, but they spend three months [each] in Toronto, Miami and Monte Carlo,” he said. “How much of that revenue is really based on Canadian content as opposed to other content?” The budget states that platforms should include or exclude users based on their “ordinary location.”

Finance Canada estimates the DST will bring in $3.4 billion in its first five fiscal years. “It’s a fairly large amount of revenue that countries like Canada might be reluctant to give up,” said Marley, especially if a more limited version of the multinational tax overhaul—the Biden administration’s proposal restricts it to about 100 corporate giants—yields less.  

The department’s consultations close on Friday.