The Big Story: Canada digital tax threatens global framework, startup competitiveness
A recent move by the Canadian government could increase the costs of digital services that startups use and lead to heightened trade barriers for technology companies. Last Friday, the Canadian government indicated they will proceed with their planned digital services tax in 2024, threatening to add friction to U.S.-Canada digital trade and upend a global deal to end discriminatory digital services taxes. The tax is retroactive to 2022 and will impose a 3 percent levy on the revenue of large, mostly American technology companies—and goes against the decision of most other countries that are party to the global tax deal, who have agreed to hold off on imposing new DSTs for another year. Costs of digital services taxes are often ultimately borne by startups and Canada’s tax could spark U.S. retaliation leading to heightened digital trade barriers.
The two-pillar global tax deal, agreed to in 2021, sets an effective minimum corporate tax rate of 15 percent and facilitates the allocation of corporate tax profits of certain large multinational enterprises to relevant countries where they generate profit. Importantly, the deal would also provide for the elimination of unilateral, discriminatory digital services taxes, like the one Canada is set to impose. These taxes, while usually directed only at the largest companies, target mostly American businesses that provide critical low- and no-cost services on which many startups rely. The imposition of DSTs ultimately results in technology companies passing the tax down to their customers, including startups, through increased prices for services. Any increase in costs can be detrimental for a startup's bottom line, forcing them to make cuts elsewhere and can hinder expansion.
The deal has faced various hurdles as acquiescing nations must individually adopt the global deal, including in the U.S. where Republican members of Congress have expressed their opposition. U.S. officials have urged Canada to drop the tax, which could prompt a trade fight between the neighboring countries likely to have an outsize impact on small trade stakeholders like startups. Ultimately, absent a global tax deal, the U.S. will likely see a return of varying DSTs across the world, which could harm the dominance of the U.S. startup ecosystem.
Policy Roundup:
Agency pauses program to help underrepresented founders. The Small Business Administration (SBA) has temporarily paused accepting new applicants for its disadvantaged business program—after the U.S. District Court for the Eastern District of Tennessee ruled in July that the agency cannot assume whether or not a small business is “socially or economically disadvantaged based on the owner’s race.” As Engine has long explained, underrepresented entrepreneurs face barriers within the innovation ecosystem—including access to capital. Programs designed to assist underrepresented founders access the resources they need are critical to the diversity of the startup ecosystem.
New op-ed explores importance of startup acquisitions. Following recently released draft guidelines that could negatively impact startups’ ability to be acquired, Steven Cox—the founder of Microsoft-acquired startup TakeLessons—wrote an op-ed this week discussing his experience and the ways in which acquisitions are beneficial for startups. In his op-ed, Steven reiterated that “[s]tartup acquisitions are a good thing, and policymakers need to be very thoughtful when they consider limiting mergers and acquisitions,” because “[f]ewer acquisitions will lead to less capital for startups, less competition, and ultimately, fewer startups.”
Engine, startup founders, call on policymakers to support women’s entrepreneurship. Following a hearing last month in the Senate Small Business Committee exploring barriers to entrepreneurship for women, Engine and Kathryn Rose, founder and CEO of startup wiseHer, each submitted statements for the record highlighting the many challenges women founders face. Rose called on Congress to better support women founders, including around capital access, as all forms of capital, including government grants, require more resources than many women founders may have. She stated “even though there are government programs with the stated goal of supporting women business owners, it feels like those funds never truly get into the hands of those who need them the most.” Engine echoed her comments, and further highlighted that women founders are also held back for other reasons, including a lack of affordable childcare options and diminished access to mentors and networks.
Engine underscores ways to lower digital trade barriers. Engine responded this week to the Office of the U.S. Trade Representative’s request for comment on advancing inclusive trade policy, highlighting ways to help more U.S. startups led by a more inclusive group of founders succeed internationally. By lowering common barriers to trade encountered by startups—especially those led by underrepresented founders that have fewer resources—trade policy can include more people and parts of the economy.
Courts block new Biden administration student loan relief rules. The U.S. 5th Circuit Court of Appeals blocked new Biden administration debt forgiveness provisions for borrowers who were defrauded. The provisions provided for relief under the borrower defense to repayment rule—initially set for implementation in July—were called into question following an emergency injunction request from Career Colleges and Schools of Texas. This is the latest development in a series of roadblocks to President Biden’s efforts to aid in student debt relief. Millions of borrowers are struggling under crippling student loan debt, and without action from policymakers, the U.S. startup ecosystem may suffer as would-be innovators shy away from the risks of entrepreneurship.
India passes data privacy bill. Indian officials passed data protection legislation this week, impacting how technology companies interact with users and the competitiveness of U.S. startups in the Indian market. The law—The Digital Personal Data Protection Bill—follows a yearslong effort and establishes guardrails on how data can be used in the country, but carries myriad concerns. The law empowers the Indian government to restrict cross-border data transfers, pursue increased surveillance, and block content online, threatening privacy, expression, and the overall attractiveness of the Indian market. The law’s provisions for young Internet users also give rise to familiar concerns for privacy and cybersecurity due to age-verification.
Startup Roundup:
#StartupsEverywhere: Chicago, Illinois. Mycocycle is a Chicago-based biotechnology company that harnesses the mycelial properties of fungi to detoxify and transform construction waste into new raw materials. With over 30 years of experience in the construction industry, Founder and CEO Joanne Rodriguez seeks to transform the treatment of waste through regenerative and sustainable approaches. We spoke to her about her experiences launching a company in the Midwest, navigating the patent system, and her goals for Mycocycle for the future.
