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Canadian Digital Tax Likely as Trudeau Hangs On to Power

Posted on Oct. 23, 2019

Canada appears poised to introduce a French-style digital services tax after Prime Minister Justin Trudeau’s Liberal Party clinched another election victory, this time on a platform calling for unilateral action to tax digital giants.

Following the October 21 federal election, the Liberal Party retained power by a slim margin, winning 157 seats but falling short of the 170 seats needed to secure a parliamentary majority. The opposition Conservative Party won 121 seats, while the New Democratic Party won 24. The Bloc Québécois outperformed expectations by snagging 32 seats, while the Green Party won three.

The Liberal Party’s win meant that Canadians “rejected cuts and austerity and . . . voted in favor of a progressive agenda and strong action on climate change,” Trudeau said during his October 22 victory speech in Montreal. “You are sending our Liberal team back to work, back to Ottawa with a clear mandate. We will make life more affordable, we will continue to fight climate change . . . and we will keep investing in Canadians.”

Chief among the tax pledges in the Liberal Party campaign platform is a proposal for a 3 percent revenue-based levy applied to companies with worldwide annual revenues of at least C $1 billion and annual Canadian revenues of at least C $40 million.

The tax, which would be implemented on April 1, 2020, would replicate France’s controversial 3 percent revenue-based DST, and is projected to bring in C $540 million in 2020-2021 and as much as C $730 million by 2023-2024, according to a September 29 Parliamentary Budget Office costing estimate.

International digital companies doing business in Canada ought to pay the same amount of tax as their Canadian counterparts, so the Liberal Party seeks to even the odds for Canadian companies, a party spokesperson told Tax Notes in a September 30 email.

“We will work with international partners to ensure that global technology giants pay corporate taxes in the country where they generate their revenue,” the spokesperson said. But until consensus is reached through the OECD framework on a solution to overhaul the corporate tax rules by the end of 2020 to address the tax challenges of the digitalization of the economy, a Liberal-led government will press ahead with a DST, the spokesperson added.

A Liberal-led government will also implement the OECD’s standards “to ensure that international digital corporations whose products are consumed in Canada collect and remit the same level of sales taxation as Canadian digital corporations,” according to a platform document.

The pledge appears to reference implementation of the OECD's updated VAT/goods and services tax guidelines, which includes mechanisms to ensure foreign vendors will collect and remit VAT/GST on digital business-to-consumer sales in the countries in which their final customers are located.

If the Canadian government moves ahead with a DST, it will join several other countries introducing unilateral measures as international discussions continue within the OECD framework on a consensus-based, multilateral solution to allocate more profit to market jurisdictions, create a new nexus, and ensure global effective minimum taxationItaly and Austria on October 10 joined France, the United Kingdom, the Czech Republic, and other countries that either have already implemented or are in the process of implementing digital taxes.

DST Reality?

Although Trudeau will now lead a minority government, the possibility of a DST remains high, according to Patrick Marley of Osler, Hoskin & Harcourt LLP in Toronto. “It seems to me that a unilateral digital tax will manage to get passed without much resistance, as all the parties have proposed some type of digital tax as part of their platforms,” he told Tax Notes.

Indeed, a DST was a rare policy measure that all parties could agree on, said Toby Sanger, executive director of Canadians for Tax Fairness, which had previously welcomed the Liberals’ DST proposal as a step toward more fundamental international tax reform. It’s uncertain whether the proposal would get wrapped up in discussions at the OECD, but there are pretty clear commitments to go ahead with it, he added.

The Liberal government previously did little to tax digital companies except for negotiating a deal with Netflix, Marley said. Then-Minister of Canadian Heritage Mélanie Joly had announced in September 2017 that Netflix would invest C $500 million in Canadian productions over five years in exchange for an exemption from federal GST.

However, provinces are starting to act on their own, according to Marley. In March 2018, Quebec moved to require foreign e-commerce suppliers to collect and remit sales tax on digital services and intangible property they sell in the jurisdiction .

Marley speculated that the Liberal Party’s about-face may have come from political pressure to pay for the spending promises it outlined in its platform, and that a DST would be an easy sell to voters who think they wouldn’t bear the costs themselves.

The left-leaning New Democratic Party is more likely to fully support a DST, but the Conservative Party, which had initially proposed its own digital tax as part of its platform, is apt to highlight the negative consequences of such a tax, Marley said. Those include a negative effect on investment into Canada and the possibility that companies would simply pass on the costs of the tax to consumers, he added.

A Canadian DST poses many potential problems, according to Aaron Wudrick, federal director of the Canadian Taxpayers Federation. “One is the general challenge of imposing a revenue-based, as opposed to income-based, tax,” he said. “Aside from a lot of guesswork, it will be an administrative nightmare for the Canada Revenue Agency, which is already struggling to plug tax loopholes.”

Wudrick also flagged the risk that Canada would strain its global trade obligations if the tax is seen as a tariff. “I am hoping that risk alone prompts a rethink — the last thing Canada needs is to invite a trade dispute with the United States,” he said.

Sanger speculated there wouldn’t be any major movement on any proposals, including the DST, until the budget announcement early next year.

A Department of Finance spokesperson said that once the next Cabinet is sworn in, it will decide the government’s legislative agenda. “Canadians chose forward and we are eager to get back to work on behalf of Canadians,” the spokesperson said.

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