The Canadian government’s decision to move ahead with the Digital Services Tax Act, legislation that will take effect in 2024 should the international agreement at the OECD fail to materialize by that date, is problematic for reasons that extend beyond sparking a trade battle with the United States and potentially leading to billions in tariffs on Canadian goods and services. The plan also appears to violate Canada’s commitment at the OECD, in which all members agreed to a moratorium on introducing new digital services taxes.

Canada has long recognized the benefits of multilateral policy development and working within organizations such as the OECD. Just two months ago, the OECD reached an agreement on addressing the longstanding concern regarding multinational companies, particularly tech companies, paying their fair share of taxes on revenues earned from online advertising, online marketplaces, and user data. The agreement included a provision in which all parties agreed to remove digital services taxes and not introduce any new measures:

The Multilateral Convention (MLC) will require all parties to remove all Digital Services Taxes and other relevant similar measures with respect to all companies, and to commit not to introduce such measures in the future. No newly enacted Digital Services Taxes or other relevant similar measures will be imposed on any company from 8 October 2021 and until the earlier of 31 December 2023 or the coming into force of the MLC. The modality for the removal of existing Digital Services Taxes and other relevant similar measures will be appropriately coordinated. The IF notes reports from some members that transitional arrangements are being discussed expeditiously.

The Canadian legislative plan, which will apply a three per cent tax on revenues from four sources (online marketplace services revenues, online advertising services revenues, social media services revenues, and user data revenues), violates this agreement. Not only is the legislation incredibly complex, potentially capturing real-space retailers such as the Bay or Walmart, but is likely to anger allies across the OECD. Companies must pay their fair share of taxes and an international agreement on the issue is long overdue. But Canada’s decision to violate its own commitment on the issue made just two months ago is yet another puzzling move that creates significant political, trade, and economic risk.

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