Trump’s Plan to Exit OECD Deal Threatens Two Canada Tax Rules

The future of Canada’s digital services tax and proposed undertaxed profits/payments rule—and possibly its approach to Pillar Two and international tax more broadly—is precarious in the face of international trade pressures and the Trump administration’s threats about the OECD’s global tax deal.

Those threats include imposing 25% tariffs against all steel and aluminum imports (and possibly all other goods from Canada, which have been temporarily paused).

President Donald Trump’s January memo clarifying that the Organization for Economic Cooperation and Development’s global tax deal has no force or effect in the US also called for an investigation into countries that impose extraterritorial or discriminatory taxes on US citizens and companies. The memo suggested doubling the tax rate imposed on the US income of companies and individuals of foreign countries whose laws are found to discriminate against the US.

Pillar One Outlook

Trump’s memo also made it clear that Pillar One’s Amount A, which requires a sufficient global consensus, is dead by any measure. Despite the OECD’s optimistic statements earlier this year, any pretense that it’s still alive shouldn’t be taken seriously.

As designed, the US has an effective veto over Pillar One’s Amount A, and it is very unlikely that Pillar One will be implemented by the current US administration. While important differences between countries also remain with respect to Amount B, individual countries may decide to adopt Amount B on a voluntary basis.

The US likely will resist digital service taxes such as Canada’s due to their retroactive features—Canada’s DST came into effect last year with retroactive application to 2022—or because the US determines that they discriminate against US companies.

Canada could abandon all or parts of its DST to mitigate the risk of US tariffs or other retaliatory measures. Canada’s DST was designed to allow the government to amend its key features (including its retroactive application and the main thresholds for its application) by order in council without the need for the parliamentary approval usually required to amend Canadian laws.

Faced with the demise of Pillar One’s Amount A, the OECD should consider formally abandoning Amount A and instead focus on alternatives that are either more aligned with existing US laws or that don’t require participation from the US.

For example, the OECD could attempt to establish a consensus to enact a coordinated digital minimum tax—which could be easier to administer than Amount A and could be capped at an agreed rate (based on a percentage of standardized in-scope revenue).

The DMT wouldn’t apply to the extent the relevant multinational group is otherwise taxed on earnings in the jurisdiction, such as through a local subsidiary or permanent establishment. The rate also could be reduced for entities in countries that agree to provide a foreign tax credit for the DMT—encouraging, but not requiring, more global participation. Countries with existing DSTs or similar measures that sign on to a DMT could be required to repeal their existing DSTs and agree to not introduce any similar measures in the future while the DMT remains in force.

While reaching consensus on this type of approach isn’t guaranteed, it seems preferable to the much more complicated Amount A—where consensus is very unlikely—or the unilateral approach of uncoordinated DSTs—which risks fragmented implementation globally and retaliation from the US or other countries that view such DSTs as discriminatory.

Pillar Two Outlook

The UTPR, which has been proposed as part of Canada’s adoption of Pillar Two, is also part of the fallout from Trump’s memo. The UTPR serves as a backstop for income considered to be undertaxed that isn’t otherwise caught by other Pillar Two rules—where the parent of a multinational enterprise, or MNE, is in a jurisdiction that hasn’t adopted Pillar Two’s income inclusion rule.

Consider a US-based company with subsidiaries in Canada and elsewhere, for example. Canada’s UTPR would allow for a top-up tax to be collected in Canada in respect of certain low-tax income earned by the group in the US or elsewhere. This would be the case despite the Canadian subsidiary not having a direct or indirect economic interest in the relevant low-taxed income.

Canada’s draft legislation for the UTPR includes a transitional safe harbor that allows the top-up tax to be deemed nil until 2026 for jurisdictions (such as the US) with a statutory corporate income tax rate of at least 20%. This measure ensures that high-tax countries that haven’t yet adopted qualifying Pillar Two rules shouldn’t be immediately subject to a top-up tax under the UTPR.

In this context, the OECD and countries such as Canada should consider two key actions: making this safe harbor permanent or dropping the UTPR entirely, and revisiting the broader implications of their participation in Pillar Two for the competitiveness of MNEs in their jurisdiction.

If the US decides not to adopt Pillar Two and continues with its global intangible low-taxed income system, the OECD should consider aligning Pillar Two more closely with the GILTI framework rather than pursuing the current alternative approach.

This could include allowing global blending rather than enforcing a rigid jurisdictional approach. The OECD’s adherence to rigid policies doesn’t make sense when the largest economies in the world aren’t participating. Countries such as Canada should question the rationale behind agreeing to these terms when major economies such as the US and China aren’t on board.

Steps for MNEs

Multinational groups should participate in lobbying efforts to make sure their voices are heard. With an upcoming federal election in Canada and the uncertainty raised by today’s political and international trade climate, this is a critical time to advocate for change that could benefit companies and the economy.

MNE groups should be vocal about the need to minimize tariffs and other countermeasures, as well as the need to eliminate or minimize the impact of DSTs and similar unilateral measures. They also should push for a more effective global solution than what the OECD initially proposed with Pillar One and Pillar Two (such as by seeking consensus on a DMT as an alternative to Amount A/DSTs and better aligning Pillar Two to ensure competitiveness).

When a pillar shows major structural damage, it needs to be replaced rather than coated with more paint. It’s time for the OECD to go back to the drawing board and try a new approach that is better aligned with the existing US tax rules.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Patrick Marley is co-chair of Osler, Hoskin & Harcourt’s national tax group and former president of the International Fiscal Association’s Canadian branch.

Kaitlin Gray is an associate at Osler, Hoskin & Harcourt focused on tax controversy and international tax.

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