^{Photo: Ashraq Al Awsat}

OTTAWA — Canada has officially withdrawn its planned Digital Services Tax (DST), just hours before its first payments were due, following a sharp escalation in tensions with the United States. The move comes in response to a weekend announcement by U.S. President Donald Trump, who abruptly declared that he would be “terminating ALL discussions on Trade with Canada.”

The DST, which was passed into law last year and set to be collected starting Monday, would have imposed a 3% levy on revenues generated by large tech companies from digital services offered to Canadian users. The tax was designed to target both domestic and foreign digital giants — including U.S. companies such as Amazon, Google, and Meta — and applied retroactively to revenues from 2022.

A Tactical Retreat in the Face of Rising Trade Stakes

Canadian Prime Minister Mark Carney framed the reversal as a strategic decision to foster progress on a broader economic and security agreement with the United States. “Today’s announcement will support a resumption of negotiations toward the July 21, 2025, timeline set out at this month’s G7 Leaders’ Summit in Kananaskis,” Carney said in an official statement Sunday night.

Canada’s Finance Minister François-Philippe Champagne added, “Rescinding the digital services tax will allow the negotiations of a new economic and security relationship with the United States to make vital progress and reinforce our work to create jobs and build prosperity for all Canadians.”

Yet, Canadian officials emphasized that the retreat is conditional. “Prime Minister Carney has been clear that Canada will take as long as necessary, but no longer, to achieve that deal,” the Finance Ministry noted, signaling that the tax could return if talks falter.

The Origins and Controversy of the DST

Initially proposed in 2020, the DST was created to address what Ottawa viewed as a significant revenue gap: multinational tech companies were earning billions from Canadian users but paying relatively little tax in Canada. While similar digital levies have been introduced in some European Union countries, Canada’s version drew criticism for applying retroactively — a move that could have cost affected companies over $2 billion collectively.

Unlike other DST regimes, which typically begin after legislative approval, Canada’s law targeted revenues as far back as 2022. This unique retroactivity was one of the primary sources of U.S. frustration.

U.S. Pushback and Threats of Retaliation

The U.S. administration responded forcefully. U.S. Treasury Secretary Scott Bessent told CNBC that the U.S. Trade Representative Jamieson Greer would open a formal investigation into the Canadian tax, assessing both its economic impact and potential violations of international trade norms.

“We strongly oppose the tax,” Bessent said during a segment of “Closing Bell: Overtime.” “Not only does it unfairly target American companies, but it also sets a dangerous precedent by being retroactive. Several EU countries have DSTs, but none have applied them this way.”

He added that the tax could have harmed the U.S. tech sector to the tune of billions, directly threatening American economic interests.

Trade Relations at Risk

The broader context adds urgency to the reversal. Last year, U.S. goods trade with Canada totaled approximately $762 billion, making Canada the second-largest trading partner of the United States after Mexico. Tech companies represent a significant portion of the services component of this bilateral trade, and any disruption would have ripple effects across both economies.

Industry experts say the DST saga reflects deeper tensions in the global digital economy, where traditional tax systems struggle to keep pace with the growing influence of online business models.

“This move isn't just about tax policy; it's about the future of U.S.-Canada trade and the politics of digital regulation,” said Dr. Helena Morris, a trade economist at the Centre for Global Policy. “Canada’s withdrawal avoids an immediate trade war, but the underlying issues remain unresolved.”

What Happens Next?

Ottawa’s decision to step back from the DST buys both countries time. U.S. and Canadian negotiators are expected to revisit the matter in upcoming trade talks, with the July 2025 G7 summit serving as a soft deadline for progress.

In the meantime, Canadian officials are expected to continue working with the OECD and G20 nations on a global framework for digital taxation that could render national DSTs obsolete.

“Canada remains committed to finding a multilateral solution,” Carney reiterated. “We believe coordinated action, not unilateral taxes, is the path forward.”

Still, until such a global deal is reached, the issue of how — and where — to tax digital revenues will remain one of the thorniest challenges in international trade.