The Office of the U.S. Trade Representative (USTR) announced today it is requesting consultations with Canada over its digital services tax (DST) under the U.S.-Mexico-Canada Free Trade Agreement (USMCA), marking the first step in an official dispute.

This move follows Canada's Parliament passing the DST in June through Bill C-59, a measure that predominantly affects U.S. companies. An Order in Council formally enacted the tax, and a subsequent explanatory note highlighted its burdensome and discriminatory nature. The Parliamentary Budget Office of Canada estimated that initial payments due by June 30 next year could exceed $3 billion, mostly from U.S. firms.

The Computer & Communications Industry Association (CCIA) joined ten other trade associations in June to urge the Biden Administration to respond vigorously to Canada's DST enactment and has consistently called for U.S. action on this issue.

A CCIA Research Center study indicated that the DST could impose direct losses of up to $2.3 billion annually for U.S. companies, significantly undermining the U.S. tax base and potentially resulting in thousands of full-time job losses in the United States. CCIA has previously expressed concerns about Canada's DST through comments to Finance Canada and a letter sent in December 2023.

Jonathan McHale, Vice President of Digital Trade at CCIA, stated: “We applaud USTR’s decision to initiate action against Canada’s discriminatory tax that primarily targets U.S. digital services providers. This is an overdue but welcome development to protect the fair and non-discriminatory market access promised between these close trading and diplomatic partners through the U.S.-Mexico-Canada Free Trade Agreement."

McHale added: "The very design of the DST subjects U.S. digital services firms—in an industry in which the U.S. is a world leader—to unreasonable and burdensome taxation while sparing many domestic providers that compete with these services such as those in bricks-and-mortar retailing and broadcasting-based advertising services."

He continued: “We expect that under USMCA, the facts and law will demonstrate that Canada should remove this measure expeditiously. And absent compliance, we look to USTR to follow through on its pledge to use all tools available to remedy this trade-distortive measure."

McHale also noted: “The DST will exact billions from the U.S. tax base, costing U.S. businesses, workers, and taxpayers dearly, and unless challenged will likely be replicated by many countries actively looking at similar measures."

He concluded: "We look forward to this USMCA dispute process reversing Canada’s ill-considered action and putting U.S.-Canada relations on a more productive path. While we strongly support initiation of USMCA-based dispute settlement, we also urge USTR to seek resolution well before next year’s tax payment deadline and not preclude action pursuant to a Section 301 investigation."