Canada has canceled its digital services tax (DST) to entice the United States to return to the negotiating table for a long-awaited trade and defense deal.

The tax, which was due to take effect on Monday, would have applied a 3% levy on revenues earned within Canada by companies — from any country — whose services are digitally based and earn more than 20 million Canadian dollars ($14.7 million, €12.4 million) per year.

But the DST was the target on Friday of a now familiar missive from US President Donald Trump on his Truth Social platform. There, he labeled the tax as a "direct and blatant attack" on the US and set the clock ticking on new tariffs for his northern neighbor as he put trade negotiations on ice.

While DSTs from Canada and other nations avoid naming specific companies among their targets, there is an inescapable reality that such instruments catch a swathe of American companies in their nets — among them digital behemoths like Meta, Google, Amazon, Airbnb and Uber.

The tax's impact was compounded by its retroactive nature, capturing all revenues back to 2022, a boon that would have yielded more than $2 billion to Canada's finances.

Binning the tax on the day it came into effect has potentially prevented Canada from feeling the brunt of harsher Trump tariffs and the loss of a trade deal with a significant trading partner. At the very least, it's brought the US president back to the negotiating table.

Last year, Canada bought nearly $350 billion in US products and exported more than $412 billion to the US.

"Obviously, the revenue from digital services taxes will be much lower than any costs from potential trade conflicts," said Bertin Martens, a senior fellow at the Brussels-based economic think tank Bruegel. "This is the right road to take at this moment for Canada, at least."

Canada isn't alone in pursuing taxes on digital services

Big tech companies make billions in revenue globally and there are few places that haven't been touched by the presence of the dominant US players in e-commerce, digital advertising and social media.

But taxation of these businesses largely falls to the country where they are headquartered. For the majors, it's usually in the US, or even low-taxing countries like Ireland or Luxembourg.

It's why other countries are turning to DSTs to recoup revenue for operating within their borders. While Canada's DST has been shelved, other countries across the Atlantic have been reaping revenues for years.

France, Italy, Spain and the UK have revenue taxes for digital services providers, with criteria requiring a company to meet a minimum level of global revenue, a fraction of which is made within their borders. France, Italy and Spain apply a tax of 3% on those revenues, the UK 2%. France is even looking to increase its rate to 5%.

"Big US tech companies that operate in Europe and elsewhere in the world pay very little, if any, taxes in the countries where they operate and collect substantial revenue and profits," Martens told DW. "But nothing of that can be taxed in the country itself, and so, in the absence of an OECD agreement on how to do this, countries have taken this in their own hands."

The US has historically taken a dim view towards foreign digital services taxes under the last three administrations, Democrat and Republican, with a view that they amount to import tariffs on services.

"It's not just Preisdent Trump, it was President Biden too, it is members of the US Congress in both parties, Republican and Democrat, that agree that DSTs are not appropriate for other countries to adopt," said James Hines, a professor of law and economics at the University of Michigan, US.

"A tax that really is designed just to hit hard the American tech companies, which is what DSTs are," Hines said. "I'm sure the Trump administration is very serious about being upset about DSTs, and being willing to retaliate."

That leaves open the question of whether other countries will be pressured to drop theirs.

"I think the EU could also be persuaded to withdraw these taxes, but the problem is that the EU Commission, as a trade negotiator, has no leverage on member states' taxation policies," said Martens. "It can try to pass the message to member states, but whether they will accept it or not is a different matter."

What's fair when it comes to big digital companies?

The Biden administration opposed DSTs but worked to broker a global trade deal via the OECD. That agreement was scuttled by Trump upon his return to the White House, leaving the prospect of unilateral DSTs back on the table. 

Despite American opposition to these agreements, Allison Christians, a tax law professor at McGill University in Canada, said the idea that major tech corporations should only be taxed in their home country is "antiquated."

"They're headquartered in the US, yes, but they're capitalized all over the world, and they're collecting data all over the world, and they're making profit all over the world," Christians said. 

That, she said, makes it harder for local companies to compete with their "highly digitalized" US rivals. Martens agrees that DSTs are a response to the desire for other nations to have a level playing field.

"There is this distorted playing field between local companies and foreign — in this case US — companies, in online markets," Martens said. "Local companies obviously pay local taxes in the country where they are established, and US companies can avoid that or circumvent that through preferential tax deals with tax havens like Ireland or Luxembourg, or even through repatriation of lots of their profits to the US. 

Martens said a global agreement like those brokered by the OECD would be a better way to proceed. But without US support, national-level taxes are likely to remain, at least until they appear again as a trade negotiation tool.

"[DSTs] have become tangled up in this Trump administration trade policy debates, and that makes a debate even more complicated," Martens said.

Edited by: Carla Bleiker

Shubhangi Derhgawen contributed to this story.