New US Tax Bill Hits Canada & Allies With Massive Penalties Over Digital Taxes

A new tax bill making its way through the US Senate is threatening to upend international tax agreements by imposing higher tax rates on income earned in the United States by investors from allied nations, including Canada, the United Kingdom, France, and Australia. These countries have implemented digital service taxes that Washington deems unfair to American tech companies, prompting a retaliatory response from US lawmakers.

The controversial provision, known as Section 899, passed the House of Representatives on May 22. It proposes a sharp increase in federal income taxes on passive US income—such as dividends, interest, and royalties—earned by individuals and institutions from nations with tax practices that the US government opposes. This includes sovereign wealth funds, pension plans, and even government bodies like central banks.

Tax experts say the legislation signals a significant departure from established norms. “It effectively overrides key provisions in US tax treaties,” noted attorneys at Greenberg Traurig LLP. These treaties are designed to prevent double taxation, but Section 899 would raise the tax rate by 5 percentage points initially, with annual increases eventually reaching up to 20 points above the standard rate.

Canadian investors could face one of the steepest impacts. Ronald Nobrega, a tax law partner at Fasken Martineau DuMoulin LLP, explained that even institutions like the Bank of Canada—currently exempt from US withholding taxes—could see their exemptions nullified under the bill. The same could apply to tax-sheltered retirement accounts, potentially triggering unexpected tax liabilities for ordinary Canadians.

The Securities and Investment Management Association of Canada has estimated that Canadian investors could face as much as C$81 billion (USD $59 billion) in additional taxes over seven years if the bill is enacted.

The legislation would authorize the US government to identify countries with so-called unfair tax regimes, providing those nations an opportunity to negotiate terms to avoid the penalties. However, that process is far from guaranteed to result in favorable outcomes.

The move is closely tied to former President Donald Trump’s long-standing opposition to global digital tax frameworks, particularly those led by the Organisation for Economic Co-operation and Development (OECD). During his presidency, Trump withdrew the US from the OECD’s global tax negotiations and repeatedly objected to taxes aimed at large American tech firms like Meta and Alphabet.

Industry groups are sounding the alarm about the broader implications of the proposed law. The Global Business Alliance warned that the measure could ignite a “global tax war,” damage US credibility, and ultimately hurt American workers by disrupting investment flows.

Canada’s government, for its part, has shown no signs of reversing its digital services tax. Finance Minister Francois-Philippe Champagne recently reaffirmed Canada’s sovereign right to set its own tax policies, stating, “Every country is sovereign in how they determine what’s in their best interest and their tax policy.”

Introduced under Prime Minister Justin Trudeau, Canada’s digital services tax imposes a 3% levy on revenues exceeding C$20 million generated from digital services that rely on Canadian user engagement. This affects major US firms operating in Canada, and mirrors similar policies enacted in France, the UK, and Italy.

With cross-border economies deeply intertwined, particularly between Canada and the US, many experts warn that escalating tax disputes could have lasting economic repercussions on both sides of the border. As the Senate takes up the bill, businesses and governments alike are watching closely for signs of a looming shift in international tax diplomacy.

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