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Canada may face ‘big fight’ with U.S. over digital tax plans, American envoy warns

OTTAWA — The United States ambassador to Canada says there could be a “big fight” looming if the federal government goes through with its plans for a digital services tax. 

U.S. envoy David Cohen made the remarks today in a question-and-answer session following a luncheon speech hosted by the Canadian Club of Ottawa. 

The three per cent levy, which is slated to take effect in January, targets foreign companies such as streaming services that generate revenue from Canadian users.

It was delayed until 2024 in hopes of waiting out a similar international digital tax regime being assembled under the Organization for Economic Co-operation and Development.

Cohen says the U.S. understands Canada’s position, but wants more time for the OECD framework to fall into place. 

Last month, members of the powerful House Ways and Means Committee wrote to warn of “significant consequences” if Canada proceeds with the tax. 

“That will be an area of contention unless it is resolved,” Cohen told his audience when the question of a digital services tax came up. 

“There’s a place where we’re either going to have to have agreement, or we’re going to have a big fight.”

Cohen was quick to note that the Canadian position is “not crazy,” and that both Canada and the U.S. want to see the OECD framework in place sooner rather than later. 

But the alternative, a “country-by-country” approach, is simply unfair, he added. 

“The United States thinks digital services taxes are discriminatory against United States companies,” Cohen said. “What the United States has asked … is for an additional year or two to try and put the OECD framework in place.” 

The prospect of Ottawa imposing a digital tax on an industry that’s heavily concentrated south of the border has been steadily gaining traction in Washington as a significant irritant in Canada-U.S. relations. 

“Canada’s unusually aggressive and discriminatory approach would target U.S. companies and workers who would disproportionally bear the burden of this new tax,” members of Congress wrote last month. 

The letter, addressed to both Treasury Secretary Janet Yellen and U.S. Trade Representative Katherine Tai, was co-signed by an array of 41 committee members, Democrats and Republicans both. 

It also called into question whether the measure would constitute a violation of Canada’s obligations under the U.S.-Mexico-Canada Agreement or its commitments to World Trade Organization treaties. 

“Given our prolific trading relationship with Canada, its retroactive DST proposal would be especially damaging to U.S. industry and workers.”

The letter noted that the vast majority of OECD countries working on the issue have agreed to extend their own timeline to the end of 2024. 

Prior to a key bilateral meeting in Ottawa earlier this year between Joe Biden and Justin Trudeau, industry lobbyists urged the U.S. president to take a hard line on the issue with his Canadian counterpart. 

Canada’s position, they warned, would set a “harmful precedent” for other countries taking part in the OECD effort that might be inclined to follow the Canadian lead and impose taxes on U.S. digital services. 

This report by The Canadian Press was first published Oct. 31, 2023.

— By James McCarten in Washington, D.C., with files from Dylan Robertson in Ottawa

The Canadian Press

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