Pandemic brings renewed calls for digital-services tax on tech giants.

TORONTO • As the federal deficit continues to increase, some tax experts are renewing a call for the Liberal government to introduce a digital services tax to begin to offset the $150 billion spent in the past three months on COVID-19 initiatives.

A combination of stimulus spending and low oil prices will result in the federal deficit reaching $252.1 billion in 2021, according to a Parliamentary Budget Officer report. The Liberals had already expressed their interest in introducing a threeper-cent tax on the advertising and user-data revenues of global tech giants such as Facebook Inc., Amazon. com Inc. and Alphabet Inc.'s Google during the election in September, but have yet to act on it. If it was a good idea before the pandemic, it's an even better one now, said C.D. Howe Institute analyst Rosalie Wyonch.

“Now that (government) revenues are a concern and with this massive shock pulling activity online, I would say absolutely it makes sense,” said Wyonch. “Anything that's good for Canadian businesses indirectly helps with government revenues as well because the more profitable those businesses are, the more revenue they generate, the more tax revenue in general the government can collect.”

According to PBO estimates, such a tax would only generate $540 million in revenue for the federal government in 2021. Together with a proposal to “restrict the deductibility of internet advertising expenses paid by Canadian resident businesses” the PBO said revenues could reach $1.7 billion.

The digital services tax may only cover a small percentage of the COVID-19 spending, but it was still a key recommendation in a report published this week on fiscal sustainability by the C.D. Howe Institute's Monetary and Financial Measures Working Group, which is comprised of several economists, bank executives and a former governor of the Bank of Canada.

There are few measures against the tech giants in Canada, said Wyonch, who is not part of the Monetary and Financial Measures Working Group. Aside from a sales tax imposed by Quebec and Saskatchewan against Netflix Inc., Spotify Technology SA and other media services, these companies run unchecked in the country. Canadian tech firms, however, have always had to pay those taxes, meaning the playing field wasn't even, she said.

York University professor and tax policy researcher Amin Mawani also called for the implementation of the tax, saying the estimated level of revenue doesn't concern him. The federal government was never going to lower its deficit with one massive tax that can cover the shortfall, he said. It'll have to do it through “nickel and diming.” It helps that other governments have already done the same.

Several countries, from South Korea to South Africa, have imposed a sales tax on the tech giants, Wyonch said. The U.K. is currently charging a two-per-cent digital services tax, while France has committed to begin charging one later this year. In the lead-up to making that decision, the French government drew the ire of the U.S. government and President Donald Trump, who threatened to begin another trade war.

The Canadian government has been silent on the issue since December, when Finance Minister Bill Morneau said he still planned to go forward with a tax. In an emailed statement, a Finance spokesperson said the government was still committed to ensuring tech giants pay their fair share.

“Our Government will also work to achieve the standard set by the OECD to ensure that international digital corporations operating in Canada collect and remit the same level of sales taxation as Canadian corporations,” the spokesperson said.

The OECD is working on international tax reform to combat the issue, but the U.K. and France have chosen to go their own route for now. Ernst & Young LLP national leader of tax policy Fred O'Riordan said waiting for the organization would allow for a unified approach. That's important, given the fact that these companies are headquartered in multiple countries. A unilateral approach could result in both business uncertainty and double taxation, he said.