Recent comments from Canada's Finance Minister, Bill Morneau, and the conclusions of a recent report from a parliamentary committee, suggest Canada has joined the international clamour for “digital” companies to be compelled to pay more tax. Important tax changes may be on the way.
The OECD is studying this issue under the umbrella of its wider project, with a view to delivering proposals to be implemented across as many jurisdictions as possible. This multilateral approach is intended to avoid a patchwork of different e-commerce tax rules emerging that could potentially make the current situation even worse.
Matters have been complicated by the European Union, which, while supporting the OECD’s work, has opened a can of worms by calling for an interim tax on the revenues digital companies operating in the EU, to apply until international recommendations are implemented. It’s not clear whether the EU will proceed with the proposal, with many member states reportedly challenging the plans.
Reasons For Change
On how to tax digital firms, Morneau told Bloomberg in a recent interview that the Government is
looking at it carefully because we need to understand what if anything happens to our tax base based on a changing of the economy towards a different business model.
In other words, tax frameworks built in the 20th century are under strain due to an economy that is increasingly digitalised in the 21, and the Government is losing substantial revenue as a result.
Discussing this challenge in more depth, parliament’s said the issue fundamentally boils down to fairness, and about levelling the playing field between Canadian resident companies that pay corporate and sales taxes because they have a taxable physical presence in the country, and foreign companies, which derive substantial income from selling goods and services in Canada but may have no taxable presence, or nexus.
The committee’s main recommendation was that Canada apply consumption taxes on tangible and intangible products that are sold to Canadians by domestic firms and by foreign sellers, including when such sales occur using an e-commerce platform, by introducing so-called digital nexus rules. However, it also advised the Government to work with other countries that are developing rules for realigning tax with value creation, and ensure a Canadian measure is consistent with any relevant recommendations from the OECD.
But Is There A Need For Change?
Not all agree that new tax rules targeting digital business models are needed. Indeed, in contributing to the committee’s discussion, the University of Ottawa’s Michael Geist said that such changes could be counterproductive economically, because the compliance and enforcement costs associated with levying sales taxes on all sellers might result in certain firms avoiding the Canadian marketplace.
This wouldn’t be such an issue if we end up with a level global tax playing field, as companies and consumers would be faced with broadly similar tax rules in most countries. However, the BEPS project has already demonstrated that not all countries are prepared to toe the multilateral line.
Morneau’s comments and the trade committee report may not necessarily lead to new legislative measures, but that Canada is giving some serious thought to this matter means that the expansion of existing taxes, or the creation of new ones, can’t be ruled out.