Canada looks set to follow in the footsteps of New Zealand in introducing goods and services tax (GST) obligations on foreign suppliers of electronic services to domestic consumers, also known as a "Netflix tax."
Although New Zealand did not alter its GST regime for telecommunications services, the change was based in large part on the reforms to VAT rules on broadcasting, telecommunication, and electronic (BTE) services in the European Union from 2015. Indeed, the Organisation for Economic Cooperation and Development proposed changes for all countries that were largely based on the EU's changes as part of Action 1 of its base erosion and profit shifting project (which resulted in the release of new VAT/GST Guidelines – the first internationally agreed framework for applying national VAT rules on cross-border transactions) and, as such, Canada's regime is therefore likely to be fundamentally similar.
From 1 January 2015, the EU changed its place of supply rules concerning BTE services to make all such supplies taxable in the location of the consumer. For the first time, the change uniformly introduced a requirement for both non-EU and EU businesses to collect VAT from foreign suppliers of electronic services. This was to ensure that foreign suppliers of digital services, regardless of where they are based, must collect VAT, levelling the playing field for domestic providers. Further, they must collect VAT at the rate in place in the country of the consumer, rather than that of the supplier, removing VAT competition between EU member states that saw many companies locate operations in particular in Luxembourg, which had the lowest available VAT rate.
New Zealand has put in place the reforms necessary to adopt the EU-like reforms set out also in the VAT/GST Guidelines, and Canada looks set to be the next jurisdiction to follow suit. Like New Zealand, Canada looks set to propose changes to create a level playing field between resident and non-resident suppliers.
Potential Changes In Canada
Under current rules, those companies considered to have a permanent establishment (PE) in Canada are required to register for GST/Harmonized Sales Tax (GST/HST) for activities carried on through that permanent establishment. They are therefore obligated to charge and collect GST/HST on all taxable supplies made in Canada in the course of carrying on a business in Canada. However, if a company does not have a PE they can escape taxation.
In January, broadcasting company CBC reported that Canada's ruling Liberal party is considering levying a consumption tax on digital services purchased from overseas firms, based on a briefing note it obtained via an Access to Information request. The note was prepared for Heritage Minister Melanie Joly, who last year launched a consultation on "Canadian content in a digital world."
According to CBC, the briefing warned that the lack of tax collection by foreign electronic services suppliers "not only represents a significant loss of potential tax revenue for government… it can also place domestic digital suppliers at an unfair competitive disadvantage."
The briefing warned the Government that, under the current regime, "beyond voluntary compliance, little can be done to enforce a sales tax regime, even when a foreign-based company has registered with the relevant authority." It went on to add tax authorities have "little recourse where a foreign-based supplier does not remit any sales tax or where there is a dispute over the amount of tax remitted."
Canada is therefore likely to follow in the footsteps of New Zealand – and the EU before it – in putting in place a regime equivalent to that recommended by the OECD. It may not necessarily be called a "netflix tax," but it's a case of when not if Canada joins the club and changes tax rules for electronic services suppliers.