By Kate Jackman-Atkinson, Editor, myWestman.ca
Earlier this month, the federal government gave Canadian businesses an early Christmas present. On December 9, Finance minister Bill Morneau announced plans to tax tech giants on the revenue earned by their Canadian operations. The move is something many Canadian companies have been calling for and will help create a more level playing field.
The three percent digital service tax would be levied on companies with revenues over $1 billion and more than $40 million in Canadian revenues. The tax was one of the Liberal Party’s promises during this year’s federal election campaign and will come into effect on April 1. Four years ago, all the federal parties were opposed to taxing online giants, but the tide has turned — while the Liberals are implementing the tax as government, every party campaigned on this promise and the Liberals, Conservatives and Bloc Quebecois all proposed a three percent tax rate.
Canada isn’t alone, countries around the world have been grappling with how to deal with companies that generate large revenues, but pay no local taxes on them. The Organization for Economic Co-operation and Development (OECD) is in the process of developing a proposed tax regime aimed at harmonizing the taxation of large multinational companies, which would help ensure there are no loopholes.
These tax changes aren’t without pushback though, as countries are also keen to protect their revenue. Tech companies pay taxes in the United States and there has long been a practice of recognizing the taxes paid in other jurisdictions. Earlier this year, France imposed a three percent tax and in response, the United States is threatening retaliatory tariffs on imports of champagne, handbags and other products, to protect their tech companies.
Ensuring there are no loopholes will be vital — these companies operate across international boundaries and already use a wide range of tactics to legally reduce or effectively eliminate their tax bills. According to an analysis done by the Institute on Taxation and Economic Policy, Amazon and Netflix, for example, paid no federal tax in the United States in 2018, despite recording profits of $11.2 billion and $845 million respectively.
This is a bigger issue than many people realize and there’s a lot of money at stake. According to reports from the Canadian Media Concentration Research Project (CMCRP), in 2017, just under 75 percent of all online advertising in Canada was done on Facebook and Google. Beyond just online ads, they found that Google was responsible for about a quarter of all advertising sales in Canada. This problem needs a solution — not only is the government not collecting income tax, but the ad buys are also likely being shifted away from a Canadian-based company that was paying taxes.
It gets worse. It’s not just that teach giants don’t pay Canadian income tax, many of them also don’t pay sales taxes. Some Facebook ads are subject to sales taxes, but only those sold by a sales rep from the company’s offices in Canada. Amazon does charge both GST and PST on purchases, but Netflix charges no GST and only charges PST in Saskatchewan and Quebec, where the provinces have mandated it. In Quebec, the tax raised $38 million by the end of August, much more than the $28 million the government had expected to make in the entire year. Those that don’t collect and remit sales taxes say they will, but only if governments require them to.
Like everything, we are dealing with taxation systems that were developed long before the internet came and are ill-equipped for dealing with companies that generate significant revenues with a minimal physical footprint. Despite the challenges, a solution must be found if Canadian companies are to no longer be at a disadvantage against their much larger foreign rivals.