US President Donald Trump on Friday halted all trade negotiations with Canada over Ottawa's new digital services tax, which will affect American tech giants. Trump described the tax as a "blatant attack" on the United States, escalating political tensions amid his ambitions to potentially annex Canada. "Based on this egregious tax, we are hereby ending all trade discussions with Canada, effective immediately," Trump wrote on his Truth Social platform. "We will be notifying Canada of the tariffs they will be paying to do business with the United States within the next seven days." Trump has repeatedly expressed his opposition to digital services taxes during trade negotiations with other countries, viewing them as a "non-tariff trade barrier." Canada's new digital tax is scheduled to take effect next Monday and will be applied retroactively from 2022. In response, Canadian Prime Minister Mark Carney said Friday that he still wishes to continue negotiations with the United States. "We will continue to conduct these complex negotiations in the best interest of Canadians. These are negotiations," he told reporters. US Treasury Secretary Scott Bessent commented on CNBC on Friday, stating, "We knew it was coming, and we were hoping it would not be implemented." He added, "We think it's fundamentally unfair to make it retroactive. This is a Trudeau-era issue, so we were hoping as a sign of goodwill that the new Carney administration would at least hold off on this tax during trade negotiations. But apparently, they did not." Bessent indicated that if the Canadian government proceeds with the tax, Trump is prepared to impose higher tariffs on all Canadian goods, without specifying the rate. Canada is the largest buyer of American goods, importing $349bn worth last year, according to US Department of Commerce data. In turn, Canada exported $413bn in goods to the US, making it the third-largest source of foreign goods for the American market. The imposition of higher tariffs could provoke retaliatory measures from Canada, which some estimates suggest would cause economic harm to both nations. What is the Digital Services Tax? The government of former Prime Minister Justin Trudeau passed Canada's Digital Services Tax Act in June 2024, with its rules coming into effect the same month. The federal tax applies to large foreign and domestic companies that meet two specific criteria: total global revenues of €750m or more, and annual earnings exceeding $20m from Canadian sources. The legislation imposes a 3% tax on digital services revenue exceeding $20m. It applies retroactively to January 1, 2022, which according to some estimates, means Ottawa could collect billions of dollars. Taxable revenues include earnings from online marketplaces, digital advertising, social media, and user data, which will primarily affect US tech giants such as Amazon, Apple, and Meta Platforms. Pierre Poilievre, leader of the Conservative Party of Canada, wrote in a social media post that he hoped both sides would return to the negotiating table: "I am disappointed that trade talks have stalled. Hopefully they will resume soon." Several Canadian companies and groups have expressed concern about proceeding with the tax, fearing an escalation of trade tensions with the US Why is Canada Imposing This Tax? A primary reason is to increase revenue. The Parliamentary Budget Office estimated last year that the tax would generate more than C$7bn over five years. The Liberal Party of Canada, under former Prime Minister Justin Trudeau, had promised to introduce the tax during the 2019 federal election. However, its implementation was delayed for several years as a number of countries hoped to reach a unified international digital tax plan. As delays continued, Canada decided to proceed with its own plan. In addition to raising revenue, Ottawa is promoting the tax as a way to modernise its tax system to include profits generated within Canada by foreign companies that do not have a physical presence in the country, according to the Toronto Star. What is the US Position on the Tax? The United States has strongly opposed the tax from the outset because it primarily affects American tech giants. US officials have argued that the tax discriminates against American companies. In a rare display of unity, both Democrats and Republicans in Congress have rejected Canada's plan and have been united in their criticism. Early in his second term, Trump had threatened to impose a 25% tariff on all Canadian exports, with the possibility of raising it further for some products. To date, most Canadian goods remain exempt from these tariffs, provided they comply with the United-States-Mexico-Canada Agreement (USMCA), which Trump negotiated during his first term. The most notable exceptions have been a 25% tariff on all foreign cars and parts, steel, and aluminum. Trump later doubled the tariffs on steel and aluminum imports to 50%. Canadian goods not compliant with the USMCA faced combined tariffs of 50%. In response to the auto tariffs, Canada imposed a 25% tariff on non-compliant US cars. It also retaliated against Trump's original steel and aluminum tariffs by imposing a 25% tariff on nearly $43bn of US goods, including alcoholic beverages, sports equipment, and home appliances. Despite Trump's latest tariff threats, US markets ended Friday on a high note. The S&P 500 and Nasdaq, which dipped slightly after Trump's post, rose 0.52% to close at record highs. The Dow Jones Industrial Average also climbed 432 points, or 1%. Why is Canada Not Delaying the Tax Amid Trade Tensions? Although Canadian and American business groups, organisations representing US tech giants, and several US lawmakers have signed letters in recent weeks calling for the tax to be repealed or at least postponed, Canadian Finance Minister François-Philippe Champagne has stated that the law has been approved by Parliament and that Canada will move forward with its implementation. The Canadian Chamber of Commerce has argued that the tax could increase costs for consumers and risks "damaging our mutually beneficial trading relationship with the United States." "In an effort to get trade talks back on track, Canada should immediately offer to repeal the Digital Services Tax in exchange for the removal of tariffs from the United States," Goldy Hyder, the Chamber's President and CEO, told Bloomberg. How Could the United States Respond? Trump said he would withdraw from bilateral trade negotiations because Canada intends to proceed with the digital services tax, calling the move "a direct and blatant attack on our country." This has cast doubt on whether a 30-day deadline to reach an agreement in the trade dispute can be met. The previous administration of President Joe Biden also opposed the tax but sought to resolve the dispute differently. In August 2024, it requested dispute settlement consultations with Canada under the Canada-United States-Mexico Agreement (CUSMA). The US has said that American companies are obligated to pay Ottawa $2bn under the digital services tax. In a statement issued in February, Trump said, "America alone should be allowed to tax American companies." In response to the Canadian rules, tech giant Google is imposing an additional 2.5% fee on advertisements shown in Canada, effective October 2024. Google stated that the surcharge, named the "Canada DST Fee," will cover "a portion of the costs of complying with Canada's DST legislation." Do Other Countries Apply Similar Taxes? Yes. France, Italy, Spain, and the United Kingdom, among others, all have such tax systems. According to the Tax Foundation Europe, about half of the European OECD countries have announced, proposed, or implemented a digital services tax. The United States has met these proposals with threats of retaliatory tariffs. France's Council of State, which advises the government on draft laws, has referred the country's digital services tax to the Constitutional Council for review, marking the first constitutional challenge to a DST since the legislation was passed in 2019.
