Would the Liberals entertain a Netflix tax now?
They should, but the added cost would upset voters at the wrong time, Jack Mintz writes.
Taxing the internet is creeping up Canada’s political agenda whether politicians like it or not.
Governments around the world are having trouble resisting the urge to grab a piece of the growth in digital services. Already in 2017, the Parliamentary Heritage Committee recommended a five-per-cent tax on streaming services such as Netflix and digital cable to fund production of Canadian television shows. Raising taxes for Cancon TV producers is an idea only Ottawa elites could love; the prime minister was right to reject it.
Digital taxes might not be a major election issue when Canadians go to the polls this fall, but they will be high on the agenda soon enough, as G20 countries pressure one another to get on the Netflix-tax bandwagon this year. Will the Liberal government hop on? It would make sense, but the timing would be terrible.
Still, digital service companies like Facebook and Google reap tons of money from the data they gather from users and sell to others. Netflix, Spotify and Amazon are able to sell digital services over the internet without charging sales taxes or paying corporate income taxes to the country in which users reside. Retailers and labour unions say there is no excuse for digital services to be exempt from sales taxes. They have a point: It’s unfair and distortionary.
Sales taxes are least distortionary and most fair when goods and services are taxed regardless of whether they’re purchased at home or from abroad. Starting this year, Quebec is demanding that digital service companies, including Netflix, collect the provincial sales tax. The tax will be added where a bill is registered to a Quebec address or if the IP address is in Quebec. It’s not a perfect enforcement system, but for the most part it should work.
But trying to collect corporate tax is far more complicated. The idea with corporate income taxes is to withhold income at the source of production — company headquarters — not where customers live. If a website lives on servers in the Cayman Islands, is the source of production there, or where Facebook owners reside, or where Facebook users live?
Given that most of the major digital companies currently operate from the United States, the U.S. government will argue it should be entitled to all the corporate income taxes of such companies as Netflix, Google and Facebook.
But that’s not necessarily true. U.S.-based digital companies would not be able to make the money they do without global users providing them their personalized data, free of charge. These data have a lot of value and can be used at a profit. So, arguably, some of the production actually occurs where users reside.
That’s why the European Union and several other countries are looking to shift taxes to where users live. A sensible scenario would have tax collectors dividing profits proportionately — and charging corporate income taxes accordingly — between countries in which the companies are located and those in which the users reside.
The OECD is now preparing a proposal for G20 finance ministers to consider when that group meets in Japan in June. But that’s dangerously close to the Canadian election in October. Would the federal Liberals venture to propose a new tax on digital services before the writ drops? It would surely make for bad politics.
Of course, the Liberals could simply put digital taxation issues on the list of items for a long-overdue comprehensive tax reform. At a minimum, digital services purchased from non-resident suppliers should be subject to federal and provincial sales taxes, and Canada should get some share of the corporate tax on digital giants. If that can be done while giving Canadians some much-needed tax relief in other ways, it wouldn’t only make sense, it might even be politically possible.
Jack Mintz is president’s fellow at the University of Calgary’s School of Public Policy.
Digital taxes might not be a major election issue when Canadians go to the polls.