Content: WASHINGTON, D.C. — In June, Prime Minister Mark Carney announced the repeal of Canada’s digital services tax (DST), a three percent levy on revenue from digital services provided by large domestic and foreign companies. This decision came after President Donald Trump threatened to halt trade negotiations if the tax was implemented. The repeal aimed to revive stalled discussions with the United States, which resumed shortly after Carney's announcement but faced further disruptions later.

Despite the repeal, Carney has faced criticism for the lack of tangible benefits from this decision. Adam Michel, director of tax policy studies at the Cato Institute, believes that Trump’s intervention may have ultimately benefited both Carney and Canada. He argues that digital service taxes can negatively impact the economies of the countries that impose them.

With the repeal awaiting royal assent in Parliament, Michel shared his insights on the implications of DSTs, Canada’s decision to repeal the tax, and the challenges surrounding the OECD’s proposed global tax framework under its 2021 Pillars One and Two.

Michel contends that DSTs are detrimental to economic stability. He explained that the OECD’s Pillar One seeks to change the long-standing consensus on corporate taxation, which has been based on where value is created since the 1960s. He stated, "Pillar One takes a piece of the corporate tax base and tries to redistribute it based on where businesses’ consumers are for a subset of large multinational firms."

He expressed concerns that this approach could lead to a fragmented global tax system, potentially resulting in increased economic costs and complications for global trade. Michel emphasized that tax policy should remain under the jurisdiction of national and local governments, rather than being dictated by international bureaucracies.

When discussing the economic effects of DSTs, Michel noted that the burden of these taxes often falls on consumers through higher prices. He explained that DSTs distort economic decision-making, leading companies to reconsider their business operations in affected countries. He added that because DSTs are based on revenue rather than profit, they can create unequal tax burdens among companies.

Reflecting on Canada’s experience, Michel stated that the repeal of the DST is a positive development. He argued that the initial proposal for the tax was misguided and that the pressure from the U.S. may have helped Canada avoid further economic harm. He remarked, "It was a bad decision to propose the DST in the first place."

Michel advised Canadian policymakers to focus on developing strong, pro-growth tax policies that do not attempt to tax foreign revenues. He criticized DSTs as extraterritorial tax grabs that disrupt economic stability. He urged countries to prioritize efficient corporate tax systems and low tax rates to foster investment and trade.

Regarding the potential for new DSTs to emerge globally, Michel predicted that the current U.S. administration would likely impose sanctions or tariffs on countries that pursue such taxes. He noted that countries like France and others in Europe are considering their own DSTs, which could provoke similar U.S. responses.

Michel also highlighted the political motivations behind DST proposals, suggesting they often stem from a populist sentiment against successful U.S. companies. He concluded that while taxing large American firms may seem appealing, the economic consequences could be detrimental to local economies.