Canada’s decision to rescind its digital services tax (DST) to restart trade negotiations with the U.S. represents a boon for major tech firms and could be a harbinger of what’s to come for similar measures in other countries, experts told The Hill.
The Canadian government announced late Sunday that it would scrap the tax on U.S. tech firms that was set to take effect Monday in a bid to bring the Trump administration back to the table and avoid heightened tariffs in the coming weeks.
The move was successful for Ottawa, with the White House saying that trade talks would resume immediately. It was also cheered by the tech industry, which has lambasted digital services taxes as “unfair” and “discriminatory.”
But experts say Canada's move could put pressure on other nations to follow suit and rescind their tech taxes.
“Going forward, I think the fact that Trump managed to bully or cajole Canada into dropping its [digital services tax] means that this will be a big item that he insists on in talks with Europe and any countries in all these trade negotiations,” said Gary Hufbauer, a nonresident senior fellow at the Peterson Institute for International Economics.
“I see this as a harbinger of a more general repeal of digital services taxes,” he added, calling it a “pretty big deal and a real victory for Trump.”
Since taking office for a second time, Trump has repeatedly criticized taxes and fines on U.S. tech firms. He slammed the European Union (EU) in January, alleging that the bloc’s hefty fines against American companies amount to a “form of taxation.”
The EU’s top court ruled in September that Apple owed more than $14 billion in back taxes to Ireland, while upholding a $2.7 billion fine against Google by European antitrust regulators.
Meta, the parent company of Facebook and Instagram, was also fined about $840 million for antitrust violations in November. The social media giant was hit with another $228 million fine in April, alongside Apple, which faced a $570 million penalty.
Trump railed against the EU during a meeting with the NATO secretary-general in March, calling the European bloc “nasty” over the tech fines, as well as a tariff on U.S.-made cars.
“They’re suing Google, they’re suing Facebook, they’re suing all of these companies, and they’re taking billions of dollars out of American companies,” he said at the time.
The president has also taken aim at digital services taxes in particular, signing an executive order in February slamming the taxes as “designed to plunder American companies” and declaring that the U.S. would respond to such measures with tariffs or other actions.
DSTs are taxes on tech companies from countries where their products are used. Canada sought to impose a 3 percent charge on revenues above $14.57 million, or 20 million Canadian dollars. Given the retroactive nature of the tax, companies were preparing to pay nearly $2 billion on Monday.
The United Kingdom, France, Italy and numerous other countries have enacted similar tech taxes, with several others, like Germany, weighing their own.
After Canada doubled down on its commitment to its digital services tax last week, Trump suspended trade talks and vowed to hit Ottawa with higher tariffs, calling the tax a “direct and blatant attack on our Country.”
“Based on this egregious Tax, we are hereby terminating ALL discussions on Trade with Canada, effective immediately,” he wrote on Truth Social.
The Canadian government quickly backed down and stripped the tax, with Prime Minister Mark Carney emphasizing that his government “will always be guided by the overall contribution of any possible agreement to the best interests of Canadian workers and businesses.”
“It's a big climb down by Canada,” Hufbauer said. “I think was very sensible for them to do it because what’s at stake and the ongoing trade talks is far larger than whatever Canada might collect on the [digital services tax].”
Tech industry groups cheered the announcement. The Computer and Communications Industry Association (CCIA) called the move “encouraging” and urged other governments to follow Canada’s lead. The Information Technology and Innovation Foundation (ITIF) similarly suggested it was the “right decision.”
However, it could set a precedent, as the U.S. continues to negotiate with other countries ahead of a July 9 deadline when Trump’s 90-day pause on most reciprocal tariffs is set to expire.
“Canada doesn’t want to die on this hill, so they’re going to move past it, and I think it’s a positive relative to getting some sort of deal framework done,” Wedbush Securities analyst Dan Ives told The Hill. “But it also sets a blueprint for others that head down the path with the U.S.”
“Canada conceding that they’re going to have to move away from this, it opens up a pandora’s box, especially with the EU,” he added.
The Trump administration could take aim at Europe with Section 301 tariffs, which are import taxes used to target countries considered to be engaged in unfair trading practices, noted Daniel Bunn, president and CEO of the Tax Foundation.
“There are findings from the first Trump administration and a specific executive order on digital services taxes that could lead to Section 301 retaliatory tariffs any day really,” Bunn said. “Those findings already exist. They’ve already checked the box on the procedure there. So, if they are interested in building momentum, then they have the opportunity to do so.”
Trump already appears to have his eye on the EU, suggesting Friday that Canada was “obviously copying” the bloc with its digital services tax and that the issue “is currently under discussion.”
The EU itself does not impose such a tax, even though some of its members do. It has passed two key tech laws, the Digital Services Act (DSA) and Digital Markets Act (DMA), which have been responsible for several large fines against U.S. tech firms.
A draft agreement obtained by The Wall Street Journal last month suggested the U.S. would engage in talks with the European bloc on the DMA, pausing enforcement on American companies in the meantime.
However, the European Commission — the EU’s executive arm — has pushed back on the suggestion that either law is part of trade negotiations.
"Our legislation will not be changed,” Commission spokesperson Thomas Regnier said, according to Reuters. “The DMA and the DSA are not on the table in the trade negotiations with the U.S.”
While Hufbauer seemed skeptical of Trump’s ability or desire to push for the repeal of the two tech laws, he suggested the UK and potentially the EU could be pressured into pulling back on their DSTs.
Others are less convinced about the ripple effects of Canada’s decision. Edward Alden, a senior fellow at the Council on Foreign Relations, emphasized that Ottawa is in a “uniquely vulnerable situation.”
“The Europeans are in a much stronger position,” Alden said. “They have a market that’s collectively roughly the size of the U.S. market. Their retaliation has some significant effects on U.S. companies.”
“The Canadians are just in a much weaker position because 75 percent of their exports go to the United States,” he continued. “So I think this was a decision by the Carney government in Canada that it couldn’t be out in front in this particular battle with the United States.”
However, he also noted that he “would not be surprised” if the Europeans were willing to negotiate away their digital services taxes as part of a broader deal.
Canada’s decision could also empower tech companies to push back on the taxes, Alden added.
“Rather than seeing [Trump’s] trade policies as disruptive, which they obviously are in certain ways, [they are] seeing them as a potential tool to tackle some foreign practices they dislike,” he said. “So, I think this will embolden the tech companies to continue pressuring other countries that have implemented or are considering implementing similar measures.”
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