Washington Urges Canada Not To Pursue a Digital Services Tax, Warns of Retaliatory Tariffs on Imports From Canada

In December 2021, Canada announced plans to impose a digital services tax, or DST. A few days later, the Office of the US Trade Representative (USTR) expressed opposition indicating that if Ottawa were to pursue this plan, “all options” would be considered.

On February 22, 2022, those options were made clear. In a formal statement, the USTR warned Ottawa that its planned DST would be actionable under Section 301 of the US Trade Act of 1974. Under this section, the United States would impose unilateral retaliatory tariffs on potentially a broad range of imports from Canada. The full statement by the USTR can be read here.

For its part, Canada has said that it intends to implement the 3% DST beginning January 1, 2024, if work by the Organization for Economic Cooperation and Development (OECD) fails to adopt a multinational approach by that date.

The scope and timing for US 301 action remain unclear, including what products would be covered by any retaliatory tariffs. A formal 301 investigation has not yet been launched, nor has USTR invited public comments. In its statement, the USTR urged Canada “to abandon any plans for a unilateral measure and instead redouble its commitment to the rapid implementation of Pillar One of the October 8 OECD/G20 agreement and the completion of a multilateral convention in 2022.”

A number of OECD members have been proposing taxes on “digital economy” sectors in recent years, notably Europe and Asia. In response, the US has threatened similar 301 tariff retaliation. We reported on these developments here.

Those investigations have now been concluded with the USTR deciding to suspend the imposition of US 301 tariffs on these trading partners in anticipation of an OECD multilateral agreement.

The use of US Section 301 tariffs introduces substantial risks for companies that import products from Canada and those Canadian companies deemed “importer of record” for US trade rule compliance. While these are still early days, Canadian business leaders should consider how best to engage on this threat from Washington. For instance, once a formal 301 investigation is launched by the USTR, executives may consider filing written comments and appearing at scheduled hearings.

Arent Fox’s Customs & Import Compliance team is experienced both in representing companies before the Section 301 Committee and in counseling companies in mitigating the effects of Section 301 tariffs.

If you would like to speak to us about these developments and their potential consequences, please contact any member of our team. We will continue to monitor further developments in this space.