U.S. President Donald Trump is indeed eyeing the trade of digital goods for some kind of retaliatory action. Mr. Trump arrives at the White House on Feb. 22.John McDonnell/The Associated Press
Ever since U.S. President Donald Trump started moving to impose sweeping tariffs on Canada, many software entrepreneurs here have cautiously assumed they would be exempt, particularly since computer programs are now primarily shipped digitally over the internet, not on compact discs.
But lawyers with Dentons Canada LLP warn that is no sure thing.
“It is currently unclear whether proposed U.S. tariffs will cover software,” a team of lawyers led by Ottawa partner Andrea Johnson wrote in a briefing last week, noting that the proposed across-the-board 25-per-cent tariff, announced on Feb. 1 and later postponed by 30 days, only states the penalty will cover “articles that are products of Canada” imported to the U.S.
Dentons wrote it will only be clear once U.S. Customs and Border Protection issues a notice setting forth what exactly is covered by Mr. Trump’s executive order, expected by early March. Software companies should keep an eye on the number 8523.49 – that’s the tariff code for their wares. If it’s in the notice, software will be subject to tariffs, Dentons said.
“People in the software sector don’t spend much time thinking about tariffs, but that’s changing,” Ms. Johnson said in an interview. “Because of the broad and sweeping nature of the changes coming from the U.S. administration, it’s entirely possible this 25-per-cent tariff, when it comes into effect, will apply to software. We have to wait for details.”
Software has seemed an unlikely target for tariffs for two reasons. Digital products transmitted electronically – as software has increasingly become with the widespread adoption of cloud, or subscription-based software – are exempt from customs, duties, fees or other charges related to their trade between Canada and the U.S. That is according to a clause added to the free trade agreement renegotiated between the two countries and Mexico at Mr. Trump’s behest during his first term.
Software would also be trickier to tariff, as digitally transmitted software doesn’t cross ports of entry like physical goods and would require “a massive regulatory overhaul to operationalize,” including tracking transmissions over telecommunications networks, said Chris Cochlin, a partner with international trade law firm Cassidy Levy Kent (Canada) LLP in Ottawa.
Plus, given how prevalent U.S.-made software is in Canada from giants such as Microsoft MSFT-Q, Apple AAPL-Q, Salesforce.com CRM-N and others, the U.S. is in a trade surplus with this country, whose software industry is much smaller.
But Mr. Trump is indeed eyeing the trade of digital goods for some kind of retaliatory action. Last week, the U.S. President said he would sign a memo compelling the Office of the U.S. Trade Representative to suggest retaliatory actions such as tariffs on Canada and dozens of other countries that have moved to impose a digital services tax (DST) on American tech companies, Bloomberg reported.
Canada’s digital services tax and online regulation bills are likely Trump trade targets
Canada’s DST, which received royal assent last June, requires large businesses – both foreign and domestic – to pay a 3-per-cent tax on revenues from online services here. The administration of then-U.S. president Joe Biden didn’t like it either, but Mr. Trump has taken a more aggressive stand criticizing foreign countries’ DSTs since taking office.
Whether that could result in a tariff on Canadian software is uncertain, but “everything is thrown up in the air” with Mr. Trump’s return to the White House, said Ms. Johnson. She added that she believes the chance of software tariffs is “relatively low. But we need to be ready for everything. Low-probability things happen all the time.”
Katy Pitch, a partner with law firm Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, PC in Toronto specializing in cross-border corporate income tax, said Mr. Trump “could use U.S. tariffs on Canadian software as a sword to get Canada to back off on the DST” as a negotiating tactic, though she agreed “it would be quite complicated” to put into effect.
“There are likely to be some ramifications from the DST, given his dislike for it. This would be an easy way to start the negotiation.”
Others agree anything is possible with regard to potential U.S. tariffs on Canadian software. “I mean, who knows. Trump is Trump,” said Mr. Cochlin. “Everything is on the table with these guys. It’s a brand-new world in trade policy.”
David Wismer, global head of technology and investment banking with BMO Capital Markets, said “you’d be a fool to rule anything out” with Mr. Trump.
Chad Bayne, co-chairman of Osler, Hoskin & Harcourt LLP’s emerging and high-growth companies practice group, said “we can’t assume anything at this point given the uncertainty that’s already occurred. … We just don’t know how the Trump administration is going to react on any of that stuff.”