Bye to Canada’s digital services tax

More evidence that Trump hates Canada

If there is one thing that President Trump has done in his tariff rampage, it is that he has made Canada blink. Remember when Ontario said that it would retaliate against the tariffs by imposing tariffs on energy that they exported to the US? Trump immediately said that he would double the already existing punitive tariffs on Canadian goods and Ontario backed down. Then Trump abruptly canceled negotiations over the tariffs when the Canadians insisted that they were going to keep their tax on digital services. Trump promised even bigger tariffs and the Canadians again said “Uncle (Sam?)”. Trump said “Based on this egregious Tax, we are hereby terminating ALL discussions on Trade with Canada, effective immediately! We will let Canada know the Tariff that they will be paying to do business with the United States of America within the next seven day period.” Here again Trump is saying that the other country will pay the tariff which is false.

What is a bit weird is that Trump let the Brits keep their digital services tax in their negotiations. But then again Trump hates Canada and must like the Brits since British cars are subject to smaller tariffs than American cars built in Canada and Mexico. Despite all their assertions the Canadians blinked and rescinded the tax. What galls the Canadians was that this was done on July 1, Canada day. One Canadian wrote “It’s hard to celebrate Canada Day when it feels like a foreign president just rewrote our tax code from his golf cart.”

Canada’s digital services tax would be a tax on the revenues on Big Tech companies that do not have a physical location in the country. The tax was to be 3 percent of revenues above $20 million Canadian retroactive to 2022. But digital taxes are nothing new. Nineteen countries already have such a tax, yet Trump has – to my knowledge – only raised the issue in negotiations with Turkey. Countries contend that if the companies had a physical presence they would be subject to that country’s taxes. Internationals generally pay taxes where production occurs or where the sales occur. But with no physical presence, these companies do not pay taxes on their digital services revenues. I guess there could be some international agreement regarding these taxes but it is doubtful that the US would be on board, given that the majority of the companies affected are US firms. The US’ opposition is that the tax would result in double taxation. One wonder why the issue cannot be resolved by a tax credit for foreign taxes paid? But the hangup seems to be that the digital services tax is taxing revenues rather than income.

Not surprisingly the Big Tech firms have lobbied the administration vigorously to oppose the tax and Trump has complied. Yet one can also understand the frustration of the governments who see revenues earned in their country by corporations that are not taxed. But Trump’s opposition is not unique. Obama and Biden also opposed digital services taxes but only Trump has used the economic heft of the United States to force a country to not implement the tax. What remains to be seen is if Trump will insist that the other countries rescind their digital services tax in their negotiations over the tariffs. If he doesn’t it will be further evidence of his hatred toward Canada.