Once, borders defined taxation. Factories and offices marked where profits were made and where governments could collect their share. Then came the digital age… Borderless, invisible, and unaccountable. 

By: Abarna Kamalakumaran

Big Tech has long mastered the art of paying as little tax as possible. 

Companies like Amazon, Google, and Meta channel profits through low-tax jurisdictions such as Ireland and Luxembourg, exploiting intellectual property rules, intra-company charges, and loopholes in traditional profit-based taxation. Historically, countries could only tax foreign companies with a physical presence, like offices or factories, under the “permanent establishment” principle. But in the digital age, revenue is generated online and physical presence rules no longer capture the real economic activity. 

Domestic tax base erosion and profit shifting (BEPS) are tax planning strategies that multinational enterprises use to exploit loopholes in tax rules to artificially shift profits to low or no-tax locations as a way to avoid paying tax.

France was the first country to introduce a Digital Services Tax (DST) in 2019, marking a turning point in global tax policy. The 3% levy applied to revenues from digital activities such as online advertising and marketplace operations, but only for companies with at least €750 million in global and €25 million in French revenue effectively targeting tech giants like Google, Amazon, Facebook, and Apple. 

The move sparked immediate backlash from the United States, which viewed the tax as discriminatory and threatened retaliatory tariffs on French exports such as wine and cheese. Despite the tension, France’s DST became a model for other countries, including Italy, Spain, India, the UK, and eventually Canada, as they sought to redefine taxing rights in the digital economy while global negotiations under the OECD’s “Pillar One” framework struggled to deliver a consensus.

The U.S. and Canada share a significant digital trade relationship. Of the maximum $16.4 billion in digitally delivered services exports from Canada, $11.2 billion, or roughly 82 percent, were exported to the United States. In 2020, the U.S. exported $39.4 billion USD in digitally enabled services to Canada.

The pursuit of a unilateral tax under the Digital Services Tax Act is inconsistent with Canada’s participation in the OECD/G20 Two-Pillar Solution.  As part of the agreement announced on October 8, 2021, parties made a commitment not to enact new discriminatory digital services taxes and instead focus on implementation of the global agreement.

Canada DST Timeline: 

• The DST became law and came into force on June 28, 2024. 
• It was designed to be retroactive to January 1, 2022 (meaning companies would have to account for digital revenues earned from 2022 onwards). 
• The first payment was scheduled to be made by June 30, 2025. 
• On June 30, 2025 the government announced that it would halt collection and would proceed to rescind the DST legislation. 

Trade law obligations under CUSMA

On the flip side… 

Despite Canada’s constitutional authority to legislate taxes under federal power, the U.S. argued that the DST violated Canada’s commitments under CUSMA to hold off on new digital taxes while the OECD finalized a global framework, threatening tariffs and trade retaliation. Under Chapter 15 of CUSMA, which governs trade in services including cross-border digital services, member countries are obliged not to discriminate against foreign service suppliers. 

A Canadian DST applied exclusively to U.S. tech companies could therefore be seen as violating these obligations. While CUSMA does not explicitly prohibit digital services taxes, its Annex on Digital Trade encourages coordination among member countries on taxation of digital goods and services. 

In practice, this meant that Canada had agreed, in international consultations and under CUSMA, to pause unilateral DST measures until a multilateral consensus later formalized through the OECD’s Pillar One framework could be reached, balancing national taxation rights with international trade commitments.

Canada’s DST may have lit the fuse, but the trade clash exposed deeper tensions between national taxation, international obligations, and the global digital economy. In the end, the law wasn’t the sole cause, it just made the underlying conflicts impossible to ignore.

Sources:

[1] Digital Services Tax Act, S.C. 2024, c. 15, s. 96.

[2] OECD. (2019). Model Tax Convention on Income and on Capital 2017 (Full Version). OECD Publishing. https://doi.org/10.1787/g2g972ee-en

[3] OECD. (n.d.). Global Minimum Tax. https://www.oecd.org/en/topics/sub-issues/global-minimum-tax.html