The Digital Services Tax (DST) has been in force since the end of June and following its introduction, the Government of Canada has been getting pushback from the industry, as well as both foreign and provincial governments. The U.S. was quick off the mark in September when the Office of the United States Trade Representative requested dispute settlement consultations with Canada under the United States-Mexico-Canada Agreement (USMCA). Here in Canada, the Ontario government recently asked the federal government to delay taxing major tech giants because it puts Canadian jobs at risk.
The DST requires large foreign and domestic businesses to pay tax on certain revenues earned from engaging with online users in Canada. The 3% tax applies to revenues from online marketplaces, online targeted advertising, social media platforms, and user data. The Digital Services Tax Act was passed on May 28, 2024 and came into force June 28, 2024. Accordingly, the Digital Services Tax will be effective for the 2024 calendar year and will apply retroactively to in-scope revenues earned since January 1, 2022.
At the beginning of its enforcement, there were concerns about whether media sellers would pass on the tax costs – in addition to how clients would respond to it. The Canadian Media Directors’ Council (CMDC) called it more than just a tax on multinational digital corporations and instead a fee that Canadian advertisers would have to absorb. The Interactive Advertising Bureau of Canada (IAB) said it would have a catastrophic impact on Canada’s $18 billion digital advertising ecosystem and hit businesses hard – everyone from agencies to publishers.
“IAB Canada has been in contact with Finance Minister Freeland’s office to express our concerns over the negative fall-out of the targeted tax on our sector,” says the association’s president Sonia Carreno. “With a change in leadership in the U.S. and the CUSMA negotiations kicking off in the coming months, we are monitoring the situation closely and anticipate a repeal of the DST and Canada’s return to the OECD bargaining table to resume talks on the multilateral pillars that address a fair international taxation structure.”
Carreno says advertisers are still grappling with the reality of the DST and the confusion it has caused in the marketplace. Meanwhile, Robin LeGassicke, chief transformation officer at Cairns Oneil, says her teams have been going through reporting from various media sellers to gauge the impact so far. “At this point, the only vendors that have been transparent are Google and Amazon, who were upfront about it all along. We continue to monitor cost and outcomes for clients and haven’t yet seen any negative impact on performance. That said, it is still early days.”
For clients, LeGassicke says there is concern about whether the tax can potentially translate into less effectiveness or efficiencies with their budgets. “The supply chain impact will at some point come through as a decline in performance. If there is a 2% to 3% negative impact across media costs, data costs, platform amounts, etc., there will be a decline in how far the same budget pre-DST will go post-DST to generate results. Stay tuned. I think there will be greater impact that will be quantified and shared in the coming months.”
The rollout of the DST has had a big impact on ad agency operations as planning budgets, campaign settings, and even planning documents had to be changed to account for the cost increase. Additionally, technical systems and administrative processes have had to be modified.
Sean Dixon, head of digital at PHD, says further complications came from the fact that platform-level rollout varied by publisher and in some cases, product, adding complexity to evaluating media results between time periods. “On the whole, it may be another year before we settle into a more consistent view of media performance. Since the DST was positioned as something of an interim measure until there’s a more global policy, I’d expect that we’re going to go through it all over again at some point in the near future, so perhaps this wasn’t a bad test run.”
Dixon says there also hasn’t been a uniform approach to how the various publishers and platforms have changed processes to accommodate the DST. He says local teams have been helpful in ironing out the implications the DST has had on operations and billing. “The expected impact to media costs is similar, whether the DST appears as a line item on an invoice or is baked in, there’s an increase. We’ve had no issue around transparency, for the most part. Platforms affected by the DST have dictated how the cost is incorporated and provided clear timelines as to when changes take effect.”
Dixon adds, “To date, we haven’t seen major effects on client budgets but, being that much of the media was planned before the change took effect, it’s expected that 2025 budgets from clients will absorb the incremental costs associated with the DST and be incremental in nature.”
