How a complicated big-tech tax could cause a major headache for Canada-U.S. relations

Cross-border economy experts are warning that Canada's decisionto strike out alone on a digital services tax could put it offside with its allies and risk retaliation from the United States.

"There are a number of Canada's allies that are anxious because Canada is breaking ranks when it's usually a consensus follower" and has been engaged in the development of a multilateral approach to the issue, said Christopher Sands, director of the Canada Institute at the Woodrow Wilson International Centerfor Scholars in Washington, D.C.

The Liberal governmentfirst pledged in 2020 to bring in a digital services tax (DST) on big tech companies, but so farno levy is in place.The tax would apply to revenues of large tech companies that provide digital services, such as e-commerce, social media and online advertising.

The delay is due in part to the existence of a large-scale international process led by the the Organization for Economic Co-operation and Development (OECD) and the G20 that would implement a taxation system on major multinationals and would potentially replace digital services taxes that are currently in place around the world.

Along with the rest of the OECD, the government agreed to a two-year deferral period in 2021 to implement that tax, but Canada has now said it will not go along with an additional year's delay.

The House9:05Why a new tax on big tech companies could spur the next Canada-U.S. spat

Move over, softwood lumber there's a new trade war on the horizon. CBC's Emma Godmere looks at Canadas move to press ahead with its long-planned Digital Services Tax on global tech giants and why it has U.S. lawmakers fuming. Tax law professor Allison Christians, former Canadian consul general James Villeneuve, cross-border trade watcher Laura Dawson and the Wilson Center's Christopher Sands weigh in.

Deputy Prime Minister and Finance Minister Chrystia Freeland argues that delaying implementation of the international agreement by another year puts Canada at a disadvantage relative to countries that have been collecting revenue under their pre-existing digital services taxes.

In a revised estimate released last week, the Parliamentary Budget Officecalculated that Canada's proposed DST could increase federal government revenues by $7.2 billion over five years.

James Villeneuve, a senior business adviser in the Toronto law office of Fasken who previously served as Canada's consul general in Los Angeles, said there are a few reasons why Canada is committed to the tax.

"Revenue to the government is one big benefit," he said. "The second benefit could be a communication policy that says we as a country are prepared to dig in against giant tech companies that aren't based in the country."

As part of a series of interviews with cross-border economics experts on CBC's The House, which aired Saturday, Sands said Canada facespressure on both the domestic and international fronts, making for a complex situation.

Canada's closest trading partner has been hostile to the Canadian digital services tax. In a letter releasedin September, members of aU.S. House of Representatives committeedenounced what theydescribed as Canada's "unusually aggressive and discriminatory approach."

"It's funny, everyone's up in arms about U.S. divisions in Congress and how Congress can never agree on anything. Well, you know, one of the things they agree on is that this proposed tax in Canada is bad for American business," said Laura Dawson, executive director of the U.S.-Canada group Future Borders Coalition.

Dawson, a Canadian based in Georgia, says Canada should think twice about its course of action on the potential tax, or risk widening a possible trade war with the U.S.

"When the U.S. Chamber of Commerce comes out and says, 'Hey, don't do this,' maybe you raise an eyebrow. But when the Canadian Chamber of Commerce and the Business Council of Canada both say, 'Hey, this is not good for Canada,' it suggests to me that this offside independent approach is really not in the national interest," she said.

Canada risks blowback from U.S., experts say

Sands and Dawson both said that Canada's stance could make it into a target during next year's U.S. presidential election.

"I suspect that Donald Trump or other Republicans will feel free to bash away at Canada," Sands said, referring to the former U.S. president who's running again.

Ottawa also risks escalating a conflict with big tech companies, who experts say could try to single Canada out.

"The idea had been that we would all move together because together it would be harder for the companies to sort of play us off of one another," Sands said.

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"The companies have an incentive to make an example out of Canada, trying to make this as painful for Canada as possible to try to drive them back into a consensus," he said.

Dawson said Canada's best move right now is to fall back in line with the international, multilateral approach, rather than striking out on its own.

"No one is arguing in favour of leaving big tech companies untaxed. I think there's general agreement worldwide that there needs to be some form of fair taxation," she said.

"But first of all, it needs to be multilateral because digital service is not one-way trade, not one country to another country. It's multilateral, it's moving everywhere."