Trump challenges foreign regulation and taxation of the digital economy

Torys’ Canadian and New York offices will be providing regular briefs on the legal ramifications of the tariffs and other cross-border policy developments on the horizon.

On February 21, U.S. President Trump issued a memorandum titled “Defending American Companies and Innovators From Overseas Extortion and Unfair Fines and Penalties”. The memorandum focuses on the administration’s response to foreign taxes and regulations on U.S. companies, particularly in the technology sector, that the U.S. views as discriminatory (even if they apply to domestic and foreign actors). With the America First Investment Policy, these measures represent an expansion of President Trump’s economic measures beyond tariffs. The United States’ responses on these issues may cause further uncertainty and instability in the international economy and could broaden the potential scope of international economic disagreements.

Expansive assertion of U.S. economic interests

The memorandum asserts an expansive approach to U.S. economic interests abroad, including by evaluating the impact of foreign tax rules on those interests.

The memorandum states that “where a foreign government, through its tax or regulatory structure, imposes a fine, penalty, tax or other burden that is discriminatory, disproportionate, or designed to transfer significant funds or intellectual property from American companies to the foreign government or the foreign government’s favored domestic entities”, the administration may impose tariffs or take other responsive actions necessary to mitigate the harm. The memorandum highlights particular areas of focus: taxes or regulations imposed by foreign governments that may discriminate or “inhibit the growth or intended operation” of U.S. companies; and any act, policy or practice of a foreign government that could jeopardize U.S. intellectual property or serves to undermine global competitiveness of U.S. companies.

It will be important to see how this is applied in practice. One key focus of the Trump administration is expected to be the Digital Services Taxes (DSTs) of Austria, Canada, France, Italy, Spain, Turkey and the United Kingdom, among others. Though nominally neutral on their face—i.e., applicable to all actors in the digital economy, both foreign and domestic—DSTs are evaluated in the memorandum as having a discriminatory, disproportionate, or extraterritorial effect on U.S. companies, on the basis that the major players in the digital economy are American.

The Trump administration is seeking to use these potential actions to assert free market access for U.S. companies to the international digital economy. To further this goal, the President has ordered the U.S. Trade Representative to “identify tools the United States can use to secure among trading partners a permanent moratorium on customs duties on electronic transmissions”.

Canadian DST implicated

Canada introduced a DST in 2024 retroactive to 2022—a 3% tax on revenue generated from digital services provided to Canadian users, applicable to any large organization, foreign or domestic, earning more than $20 million in Canadian digital services revenue. This applies to online marketplace, advertising, news aggregator, streaming, and social media services, as well as certain sales of user data. It was introduced as a backstop to the OECD and G20 Pillar One global minimum tax initiative that would allocate some taxing rights to market countries. Canada stated that the DST was intended as a temporary measure that would be repealed if Amount A of Pillar One comes into force. The U.S. perceives that Pillar One would likely increase U.S. firms’ taxes and reduce the U.S. tax base.

After it was announced, the United States under the Biden administration announced that it would formally challenge the DST under the Canada-United States-Mexico Agreement (CUSMA) on the basis that it targeted U.S. companies providing Canadian digital services and that it discriminates against U.S. companies. The memorandum indicates that the U.S. will continue to challenge Canada’s DST under CUSMA. The memorandum also signals a new U.S. willingness to invoke heretofore never-used retaliatory U.S. tax laws or other tax-related legal authority, in the event that President Trump determines foreign tax laws to be discriminatory or extraterritorial.

President Trump has signed an order asking the Treasury secretary to “investigate whether any foreign country subjects U.S. citizens or corporations to discriminatory or extraterritorial taxes”—apparently aimed at DSTs. This could set the stage for the U.S. to apply section 891 of the U.S. Internal Revenue Code (which allows for retaliation where a foreign country is imposing discriminatory or extraterritorial taxes on U.S. citizens or corporations), to double corporate taxes on Canadian companies operating in the United States.

Can-Con implicated

Under the Online Streaming Act, the Canadian Radio-television and Telecommunications Commission requires foreign streaming services with at least $25 million in annual revenue from Canada to contribute 5% of their Canadian revenues to media funds that support Canadian content, including local news, French-language content, and Indigenous content. These measures may also be seen as discriminatory in their impact on (largely U.S.) major streaming services.

U.S. measures will likely be asymmetric and unpredictable, causing greater instability

In contrast to a trade war in respect of goods, in which in-kind tariff retaliation is the most likely tool, the U.S. is unlikely to implement reciprocal in-kind measures. A simple U.S. DST against foreign companies, for example, is unlikely to be effective. The U.S. may therefore consider more general measures to target the technology sector or unrelated industries. This may in turn provoke further retaliation by other countries, potentially increasing unpredictability and instability in the international economy.

We expect the DST to be part of the upcoming CUSMA renegotiation—a prospect that Prime Minister Trudeau has acknowledged¹—as well as similar trade negotiations involving other governments.

 
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