Digital taxes will mean higher costs

As the global economy becomes ever more digital, a highstakes debate is taking place about how countries should tax multinational digital corporations like Amazon, Facebook and Google. The Organization for Economic Cooperation and Development ( OECD) is leading these deliberations, which could end up transforming the global tax landscape. Closer to home, both digital businesses and Canadians should be prepared for new tax rules that may be in store when Finance Minister Bill Morneau delivers his upcoming federal budget.

A key issue on the OECD agenda is the “digital services tax” ( DST), which is a levy on the overall revenues earned by the supplier of specific digital services. In law, at least, the businesses would bear the cost. The DST should not be confused with the so- called “Netflix Tax,” which may also be coming. The Netflix Tax is essentially a “value- added tax” on digital services where the consumer bears the entire tax burden on the value of the final product. In Canadian terms, the Netflix Tax would mean charging consumers the federal goods and services tax ( GST) or, in provinces that have it, the harmonized sales tax (HST).

The federal government has signalled it will wait for a multilateral consensus before revisiting an election pledge to impose a three per cent DST on multinational tech giants. This France-style tax, which to date the U. S. opposes, would apply to the proceeds of online ads and user data sales for digital firms with revenues of more than $ 40 million in Canada and $1 billion globally.

As for the Netflix Tax, Ottawa has indicated it is actively considering applying GST/ HST to digitally supplied services. At the moment, Canadian companies supplying digital services must register with the Canada Revenue Agency ( CRA) and collect GST/ HST from their customers. That is not the case, however, for many foreign digital service providers that do not have a physical presence here but nevertheless provide the same services to Canadian customers. This may soon change.

In January, an expert panel on Canadian telecommunications and broadcasting joined with others in calling for reforms to level the playing field for Canadian broadcasters and digital media companies. This includes requiring foreign media companies to collect federal sales tax. Currently, both Quebec and Saskatchewan require Canadian and foreign digital service suppliers to register for and collect provincial sales tax on similar services. In February, British Columbia announced plans to do the same, effective July 1. These developments set the stage for Finance Minister Morneau to announce a change in his upcoming budget.

If the federal government does proceed, Canadians can expect to pay an extra five to 15 per cent on their monthly bill for streaming of digital music, software, movies, TV shows and games, depending on their province’s harmonized sales tax rate.

At the federal level, this change would be a boon for government revenue, generating an estimated $781 million in 2020-21. On the other hand, the cost of implementation for foreign digital companies could also be significant. This is particularly true for smaller firms and startups, which will need to update their billing and accounting systems to ensure they are applying the correct GST/ HST rates, depending on the type of service they provide and where they sell it in Canada. Their compliance burden will also rise substantially once tax authorities begin to scrutinize this activity.

If the future is digital, so too is the future of tax. Consumers and companies should be aware.