Choosing pragmatism rather than bravado

Opinion

Canadians were caught off guard last Friday when U.S. President Donald Trump announced that he had put an end to trade talks with Canada and would soon announce a new tariff rate in retaliation for what he called “a direct and blatant attack on our country.”

What had Trump all hot and bothered last week was Ottawa’s decision to move forward with its Trudeau-era digital services tax (DST), a retroactive tax that was set to go into effect on June 30. The tax would have seen large tech giants like Amazon, Google, Meta Airbnb and Uber — all U.S.-based firms — pay three per cent on revenues from Canadian users.

The policy, as CBC reported, would have left U.S. companies with a US$2-billion retroactive bill due at the end of July.

More surprising, perhaps, was an apparently snap decision by Prime Minister Mark Carney on June 29 to capitulate to Trump’s demand to scrap the DST, when he announced Sunday night that his government would rescind the schedule imposition of the DST.

In both this country and the United States, Canada’s decision was seen as a show of weakness rather than a strategic move by the prime minister to keep talks with an erratic United States president on the rails.

White House Press Secretary Karoline Leavitt crowed that Carney had “caved” to pressure from Trump.

“President Trump knows how to negotiate, and he knows he is governing the best country and the best economy in this world,” Leavitt said.

Here in Canada, conservative-minded pundits like Joe Oliver at the Financial Post called Carney’s decision a “humiliating public surrender” that would not have happened had “the government taken Washington’s repeatedly expressed concerns about the tax more seriously.”

Certainly this was not a public climb-down that any prime minister would want to make, particularly when dealing with Trump in trade negotiations. But as with most high level negotiations, the devil is in the details. For Canada was not alone in its decision.

For the last several years, the Organization for Economic Co-operation and Development has been trying to set up a multilateral tax approach that is meant to replace digital service taxes imposed by individual countries.

The effort, which was supported by 140 countries — except the United States — was meant to close tax loopholes by digital giants that have avoided paying taxes in the countries in which they operate by exploiting “gaps and mismatches in tax rules” among different countries.

The OECD eventually constructed its own two-tier tax frameworks dubbed the Pillar One nexus rules and the Pillar Two global minimum corporate tax, which were announced in 2021.

Under mechanisms established under Pillar Two, large multinational companies would have to pay a 15 per cent tax “regardless of where they’re headquartered or the jurisdictions in which they operated,” as reported by the Bloomberg newsroom.

However, Canada, France and the U.K. went ahead with their own digital taxes after the OECD work stalled.

Even while Carney was busy announcing Canada’s decision to axe the DST on Sunday, the G7 announced a decision to exempt the United States from applying a 15 per cent minimum corporate tax rate.

The decision had already been signalled to the United States a few days earlier, as a means to shield firms in the rest of the G7 from Washington’s threatened retaliation.

And it worked. With the G7 set to exempt the United States from Pillar Two, the governing Republicans in the U.S. Senate and House agreed to drop Section 899 — a so-called “revenge tax” — from the megabill legislation currently before U.S. lawmakers that would retaliate against other countries that impose “discriminatory” taxes on U.S. corporations.

“Based on this progress and understanding, I have asked the Senate and House to remove the Section 899 protective measure from consideration in the One, Big, Beautiful Bill,” U.S. Treasury Secretary Scott Bessent said in a post to social media site X.

The U.S. Republican decision to drop Section 899 was made one day before Trump’s Truth Social tirade against Canada and his decision to unilaterally end negotiations.

Recall that Carney played host to the most recent G7 talks in Alberta, and was likely instrumental in helping move this decision forward.

For his part, Carney seemed rather unmoved about the whole situation, and suggested that the DST climb-down was merely part of a larger negotiation.

“It’s something we expected in the broader sense that would be part of a final deal,” Carney said. “There’s more to be done, to be clear … And as I just said, it’s a question of timing in terms of negotiations, and when the tax is coming into effect.”

He also said it wouldn’t make sense to collect the tax from the corporations and then have to “remit them back,” suggesting that he always saw the DST as a negotiation tool.

Carney’s approach to negotiations with the United States may not align with the convictions of the “elbows up” crowd here at home — to be frank, we believe U.S.-based digital companies should be paying their fair share of taxes in Canada too.

But it’s very clear that our new results-oriented prime minister sees pragmatism as a superior tactic to bravado, and that he would rather spare Canadian companies further economic distress if at all possible.

Even if it means taking one on the chin.