Katherine Tai, confirmed Wednesday as the new U.S. Trade Representative, inherits several longstanding irritants in her country’s commercial relationship with Canada. Along with disputes over softwood lumber and procurement rules, there’s a more recent issue on her desk: Ottawa’s plans to tax tech giants.  

Two major industry organizations representing large U.S. tech companies have urged Washington’s trade office to intervene against Canada’s digital-services tax (DST), first promised in the Liberals’ 2019 election platform then proposed in the November 2020 fall economic statement. Meanwhile in Ottawa, Big Tech firms likely to be affected have been lobbying senior government officials on tax issues.

The OECD and G20 are currently leading negotiations involving more than 135 countries to change the way multinational corporations are taxed. The new system would allow countries to levy taxes on firms that earn revenues within their borders, even if they don’t have a physical presence there, and ensure businesses pay a minimum amount on their earnings globally. The fall economic statement positioned Ottawa’s measure—a “tax on corporations providing digital services” starting in January 2022—as a fallback in case the negotiating countries fail to reach a consensus this year. 

Canada is not alone. France and the U.K. began collecting their DSTs last year, while the USTR has investigated digital-sales taxes “adopted or under consideration” by eight countries as well as the European Union. 

While tech industry groups and some companies have backed the OECD-led process in principle, they have opposed individual governments’ domestic levvies. 

Ottawa’s proposed tax is “a discriminatory trade barrier,” said Jordan Haas, director of trade policy at the Internet Association (IA). The Washington, D.C.-headquartered industry lobby represents 43 tech firms including Airbnb, Groupon, Match Group and Uber. 

According to the IA, country-specific measures unfairly target tech firms, are based on revenue rather than profit, and can lead to businesses being taxed more than once if they already have a physical presence in a country. “We strongly encourage the Canadian government and all governments who are proposing these unilateral taxes to … work within the OECD to find [an] international outcome,” Haas told The Logic. There’s “frustration attached” to Ottawa’s move, given Canada and the U.S. recently agreed to protections for companies conducting online commerce across North American borders in the USMCA’s new digital-trade chapter.  

Trade lawyers have said Ottawa could enact a DST-like policy without contravening the agreement. 

Canada’s measure and others like it “contravene longstanding international tax principles” and often “present trade barriers,” said Megan Funkhouser, director of policy for tax and trade at the Information Technology Industry Council (ITI). The OECD process is “the best forum [to] address these tax challenges associated with the digitalization of the economy.” The Washington, D.C.-based organization’s 77 members include Apple, Salesforce and Verizon. (Amazon, Facebook, Google and Twitter are members of both groups.)

In separate October 2020 submissions to the USTR’s annual survey on barriers to U.S. exports, the IA and ITI called for it to push Canada not to implement a DST. 

Large foreign tech firms have also been lobbying the Canadian government directly. In November 2019—the month after the Liberals won the federal election—Facebook, Google and Twitter each updated their lobbyist registrations to indicate they planned to communicate with the government on digital or tech taxes. 

Since the fall economic statement, representatives of Amazon and Google—companies that may also be affected by changes to sales tax for digital products and services—have each twice contacted Tyler Meredith, Finance Minister Chrystia Freeland’s director of economic strategy, and twice dealt with senior officials in the department’s tax-policy branch. 

Amazon will “work with” Ottawa on implementing a new DST “in a manner that aligns with similar taxes Amazon already collects in other jurisdictions,” said Amazon spokesperson Kristin Gable. “We strongly encourage the movement toward a new comprehensive international framework through the OECD for how multinational companies are taxed,” said Google spokesperson Lauren Skelly, adding that the company is “in active conversations” on the issue with the Canadian government. 

Facebook also backed the OECD process. “Unilateral approaches to tax, like the DST, have potential to create significant uncertainty for both foreign and domestically based multinational companies,” said spokesperson Meg Sinclair, citing the OECD’s October 2020 estimate that trade disputes prompted by such measures could reduce global GDP by more than one per cent annually.

The Liberals’ 2019 election proposal, modelled on the French levy, would have charged three per cent on revenue from selling online advertising and user data on firms with $1 billion or more annually in global sales. Freeland’s office declined to specify how the version of the tax proposed in the more recent fall economic statement will be structured. Since “global digital giants operate at the international level, a multinational approach will ensure these corporations pay taxes wherever they do business,” said Freeland spokesperson Katherine Cuplinskas, noting that the tax will be implemented “until an acceptable common approach is agreed upon and comes into effect.”  

At a January meeting on the OECD framework, Freeland called for participating countries to reach a deal by July. While the administration of former U.S. president Donald Trump sought to slow those negotiations and threatened retaliatory tariffs against countries that imposed DSTs, new Treasury Secretary Janet Yellen indicated starting with her confirmation hearings that the Biden administration is committed to the international effort. 

G20 finance ministers and central-bank governors will likely discuss the international effort at a scheduled July meeting.