Canada’s digital services tax might cause U.S. companies to lose up to $2.3 billion annually, and if the United States doesn’t push back, the “global contagion” of DSTs will spread, a tech industry group said.
The Computer & Communications Industry Association (CCIA) published a research report May 1 examining the potential effect of Canada’s proposed 3 percent DST on U.S. business interests. The report notes that DSTs “tend to gerrymander quantitative thresholds and covered activities in order to target leading U.S. digital services providers with tax liabilities while excluding many of their domestic competitors, using DSTs as de facto tariffs.” (Emphasis in original.)
Many U.S. companies are leaders in providing services that are in scope of the tax, so it’s likely that U.S. digital exports will be at a major competitive disadvantage, according to the report.
Canada’s proposed DST would apply to businesses with global revenue of at least €750 million and Canadian digital services revenue exceeding C $20 million annually. The tax targets revenue from social media services, online advertising, user data services, and online marketplaces. If passed, it would apply retroactively to January 1, 2022. Bill C-59, which provides for the DST, is making its way through Canada’s Parliament. It has repeatedly drawn sharp criticism from U.S. lawmakers and trade groups, prompting calls for the United States to take trade action.
Canada has insisted on pushing ahead with a DST in case negotiations within the OECD inclusive framework on base erosion and profit shifting fail on a plan to address the tax challenges of the digital economy. The plan, which would require countries with existing DSTs to withdraw them, aims to prevent the spread of uncoordinated unilateral measures targeting digital activity.
The Numbers
The report sets out four scenarios to estimate the DST’s effect on U.S. companies. The first scenario focuses on October 2023 estimates from Canada’s parliamentary budget officer. Those estimates indicated that the tax would yield an estimated C $7.2 billion ($5.3 billion) in additional government revenue over five years.
The report zeroed in on the parliamentary budget officer’s estimate that Canada would raise C $1.23 billion ($900 million) in the second year. “Assuming that these revenues are overwhelmingly collected from U.S. digital exporters, and further assuming that the U.S. digital exporters do not pass any of these costs through to Canadian customers, the total lost U.S. digital export revenues equal $0.9 billion per year, and a corresponding reduction in the U.S. tax base,” the report says. Estimating $744,000 in revenue per job, the report projects that U.S. digital exporters would cut 1,207 jobs.
The second scenario focuses on CCIA’s lower-bound estimate based on the financials of U.S. digital exporters and the assumption that the tax wouldn’t be passed to Canadian consumers or businesses. The report estimates that U.S. digital exporters would lose $1.02 billion annually and cut 1,368 jobs. “The bottom-up analysis is most likely an underestimate, as DST application to any firms not included in the bottom-up estimation could significantly increase export and jobs losses,” the report adds.
The third scenario sets out the CCIA’s middle estimate, which uses data from the Commerce Department's Bureau of Economic Analysis on exports of services that are potentially enabled by information communication technology. Assuming the tax would not be passed on to consumers, the report estimates a loss of $1.4 billion and 1,884 jobs.
The final scenario, CCIA’s upper-bound estimate, relies on the same Bureau of Economic Analysis data as in the third scenario. However, it assumes that the tax would be passed on to Canadian consumers or businesses and that the resulting effective price increase for those consumers would lead to a 2.1 percent decrease in U.S. exports of services that are potentially enabled by information communication technology. Under these conditions, the report estimates U.S. digital export revenue losses of $2.3 billion and a loss of 3,140 jobs.
The CCIA also identified “contagion risk” as a factor that cannot be quantified. If the United States allows its closest trading partner to enact a DST, it would not only cost U.S. digital exporters revenue and jobs, but it would also set a precedent, according to the report.
“If Bill C-59 goes into effect without protest, investigation, or retaliatory response from the United States, nothing can stop any other countries, even those with whom we have free trade agreements, from doing the same by citing the Canadian precedent, which would expand the cost to U.S. companies, workers, exports, and tax base further,” the report says.