National Post (National Edition)
Deductions for foreign online ads in crosshairs
A Senate committee wants the government to revisit a tax rule that entices companies to advertise on foreign online platforms like Google and Facebook, spending that it says is “hobbling Canada’s already declining news industry.”
The Standing Committee on Transport and Communications recommends the feds study the section of the Income Tax Act that allows companies to deduct advertising expenses for ads placed online and how this rule “contributes to the media industry’s decline,” according to a report released Tuesday.
While Section 19 also allows advertisers to deduct expenses for ads purchased in Canadian media outlets, the committee questioned whether foreign internet giants should get the same tax break given the ongoing flight of ad dollars from traditional media to the internet.
“There’s no secret the internet has been a gamechanger for publishing in Canada, especially for the country’s news industry. It’s time for the government to respond to this rapidly changing sector with policies that address this reality,” Senator Dennis Dawson said in a news release.
The committee released the report after hearing testimony on tax deductibility from the news industry, academics and government officials in May and June.
Friends of Canadian Broadcasting called on it to extend Section 19 to internet advertising. The law, which was originally introduced in the mid-1970s in part to discourage local advertisers from buying TV ads from U.S. stations near the American border, prohibits deductions on ads placed with foreign broadcasters.
But a 1996 decision excluded digital ads from that category. This made ads on foreign websites completely tax-deductible, whereas ads in Canadian-owned newspapers and magazines are only 100 per cent deductible if the issue has more than 80 per cent original content.
Digital advertising revenue has exploded over the past decade while traditional media — particularly newspapers and magazines — have grappled with shrinking revenue sources.
Digital advertising revenues hit $5.5 billion in 2016, up from $560 million in 2005, with about threequarters of that cash going directly to Google and Facebook, according to the Canadian Media Concentration Research Project. Meantime, daily newspaper advertising fell to $1.3 billion in 2016 from $2.7 billion in 2007, according to News Media Canada.
“As Canada’s news media industry searches for ways to remain financially viable, our committee urges the government to revisit the 1996 tax decision which is still being applied in today’s dramatically different world of technology,” Sen. Patricia Bovey said in the news release.
Representatives from the news industry have been urging the government to eliminate tax deductions on internet ads. They argue this would encourage companies to spend money with Canadian news outlets, a socalled “repatriation” of the funds.
But academics and government officials question how much it will help news outlets.
“You shouldn’t be under any illusions the tax change … is a silver bullet that will solve the problems of the news industry,” April Lindgren, a journalism professor at Ryerson University, testified in June.
“If Facebook and Google are offering rates that are significantly — and they are — lower than the local news organization, I’m not sure how many people are going to change their advertising practices.”
Eliminating the deductible would result in roughly 10 per cent of foreign internet ad spending shifting back to Canada, based on estimates from the Friends of Canadian Broadcasting.
“This suggests the measure would likely not change firms’ behaviour to a significant degree,” stated Miodrag Jovanovic, Finance Canada’s associate assistant deputy minister.
“As such, it seems it would mainly result in a tax increase on Canadian businesses,” Jovanovic said, estimating the tax burden at about $1 billion.
The committee didn’t recommend eliminating the tax deductible outright given the potential burden on Canadian businesses. Instead, it suggested the government study changes to Section 19. Options include classifying internet companies as broadcasters or applying the tax deduction rules to all foreign media, including media delivered online.
Abacklash against the app stores of Apple Inc. and Google is gaining steam, with a growing number of companies saying the tech giants are collecting too high a tax for connecting consumers to developers’ wares.
Netflix Inc. and video game makers Epic Games Inc. and Valve Corp. are among companies that have recently tried to usurp the app stores or complained about the cost of the tolls Apple and Google charge.
Grumbling about app store economics isn’t new. But the number of complaints, combined with new ways of reaching users, regulatory scrutiny and competitive pressure are threatening to undermine what have become digital goldmines for Apple and Google.
“It feels like something bubbling up here,” said Ben Schachter, an analyst at Macquarie. “The dollars are just getting so big. They just don’t want to be paying Apple and Google billions.”
Apple and Google launched their app stores in 2008, and they soon grew into powerful marketplaces that matched the creations of millions of independent developers will billions of smartphone users. In exchange, the companies takeupto30percentofthe money consumers pay developers.
For most of the decade, the companies won praise for helping to build an app economy that’s projected to grow to US$157 billion in 2022, from US$82 billion last year. But more recently, smartphones and apps have become so important for reaching customers that these app stores have been criticized for taking too big a share of the spoils. Rather than supporting innovation, Apple and Google are being talked about as tax collectors inhibiting the flow of dollars between creators and consumers.