A coalition of U.S. business groups is asking the White House to press the Liberal government to abandon plans for a new corporate digital-services tax, saying it unfairly targets big American technology companies and could violate the yet-to-be ratified continental free-trade agreement.
During the federal election campaign, the Liberals said they would introduce a 3-per-cent levy on certain digital services by large companies operating in Canada. It would raise hundreds of millions of dollars a year by capturing a slice of the tax revenue that has accrued to the United States, where much of Big Tech is headquartered.
The proposed tax would apply to companies with more than $1-billion in global sales and $40-million in Canadian sales, but the 3-per-cent levy would only be charged on revenue generated in Canada.
Ottawa’s proposal “purposely targets” big U.S. technology companies, 15 U.S. industry groups state in a public letter on Friday to several officials in the Trump administration, including Secretary of State Mike Pompeo and Trade Representative Robert Lighthizer.
In it, the groups urge the Trump administration to “engage rapidly” with Ottawa to discourage the government from going ahead with the proposed digital tax. And they say Canada is at a minimum violating the spirit of the renegotiated continental trade deal, which has language prohibiting discriminatory treatment of digital products – but also expressly allows governments to impose digital taxes. (That deal has yet to be ratified by Canada or the United States.)
“Our industries strongly support the new commitments made on digital free trade in the USMCA, and are disheartened to see the Canadian government pursue a measure that goes against the spirit of that new chapter before the agreement has even been ratified,” the letter states.
One of the signatory groups said the structure of the proposed tax could even violate the letter of the agreement, particularly if its defined range of revenue largely captures only U.S. companies. “It does raise serious concerns about a violation,” said Jordan Haas, director of trade policy for the Internet Association, which represents the U.S. digital industry.
And the groups also criticize Canada for taking unilateral measures while a multilateral approach is still being negotiated within the Organization for Economic Co-operation and Development.
In a statement, the U.S. State Department did not respond directly to the letter, but said the United States will continue efforts to work within the OECD.
Pierre-Olivier Herbert, a spokesman for Finance Minister Bill Morneau, did not directly respond to questions about the letter. But in an e-mailed statement to The Globe and Mail, he said Canadians had voted for “a plan that will continue to grow the economy.”
Dan Ujczo, chair of the U.S.-Canada practice group at law firm Dickinson Wright LLP, questioned why Ottawa would move forward with a controversial tax when the continental free-trade deal has yet to be ratified by the U.S. Congress, particularly when a multilateral approach is being negotiated within the OECD.
The letter from U.S. industry organizations comes less than three weeks before the re-elected Liberal government will lay out its legislative agenda in the Dec. 5 Throne Speech, and just days before the Nov. 20 announcement of the new cabinet – in which ministers will receive mandate letters spelling out their marching orders.
John Murphy, senior vice-president for international affairs for the U.S. Chamber of Commerce, said he believes a digital-services tax will be “front of mind” for the new government, adding that he views the Liberal proposal as being discriminatory both in its effect and in its intent. Mr. Murphy said his organization wants the White House to reach out to Ottawa “swiftly” and for Canada to delay any action until the OECD negotiations conclude. “Let’s make them succeed.”
The Liberal platform counted the revenue from such a tax starting by April 1, 2020, meaning the government would need to move in coming months to turn its proposal into law. The Parliamentary Budget Office, in its evaluation of election platforms, estimated that the digital tax would raise $540-million in fiscal 2020-21, rising to $1.2-billion by 2028-29. But the PBO warned that its estimate is highly uncertain because of the difficulty in obtaining global data, and the likelihood that companies will adjust their services and prices in response to the tax.
Indeed, Mr. Haas of the Internet Association said that it is possible that some digital companies will choose to scale back services in jurisdictions that implement unilateral taxes if their profit margins are severely affected.
Michael Geist, a professor at the University of Ottawa, said that if Canada and other countries were to be successful in implementing such digital taxes, they would result in a “sizable hit” to the United States. The prospect of lost revenue helps to explain the reaction of the Trump administration this summer, when France introduced its digital-revenue tax. The White House threatened to retaliate with tariffs before reaching an agreement with France under which Paris agreed to refund any difference between its tax and any levy eventually agreed upon through the OECD.
“There’s every reason to believe we would face the same thing," Mr. Geist said.
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