Canada goes it alone on taxing tech
REGARDING FOREIGN PLAYERS SUCH AS GOOGLE AND NETFLIX, IT’S VERY DIFFICULT TO TAX REVENUE THAT YOU CAN’T MEASURE. — JOEL TRENAMAN
Beneath the spending spree found in last week’s federal budget, there was at least one small attempt to offset those expenditures with some new revenue: a planned three per cent digital services tax that the government hopes to levy on billion-dollar tech companies. It could turn out to be a meaningful move to bring tax-avoidant international tech conglomerates to heel, or an empty attempt at wringing some money out of nearly un-restrainable businesses that happen to be an easy target politically. Based on the complex factors at play, I’d bet on the latter.
Budget 2021 pledged to ensure “that digital service providers pay their fair share of taxes,” which is apparently thought to be three per cent on “revenue from digital services that rely on data and content contributions from Canadian users.”
The move goes handin-hand with one from the 2020 Fall Economic Statement, which said that the government would require non-resident vendors and online platform operators to collect GST/HST starting on July 1. After years of bad press and declining public trust resulting from issues like the spread of fake news, privacy scandals and shifted advertising revenues that threaten the viability of local news, digital giants like Facebook, Google, Amazon and Netflix have become an acceptable mark for tax collectors.
The corporate tax plan has been discussed seriously since at least 2019, when both the Liberals and Conservatives promised a version of it during the election campaign and all of the major parties asked the Parliamentary Budget Officer (PBO) to estimate the impact of their pledges. The current revenue estimates of $3.4 billion over five years are in the ballpark of those past analyses, but as the PBO concluded, “The estimate has high uncertainty, (which) derives primarily from the difficulty in accurately estimating the tax base.”
Canada will be hard pressed to overcome the many hurdles associated with taxing foreign players like Google and Netflix, as it’s very difficult to tax revenue that you can’t measure. Determining what percentage of the revenues of companies come specifically from Canada, when they don’t have an office base here, will be spotty at best.
When it comes to taxing multinational corporations, most countries tax their home-country operations and declared profits, but not those of their foreign subsidiaries or affiliates. Therefore, this type of corporate tax on digital companies must be seen in the broader context of tracking and taxing corporate earnings, as companies increasingly look to take advantage of ever-evolving tax havens.
For example, Apple was one of many firms to take advantage of Ireland’s lowered corporate tax rate (12.5 per cent) and the “Double Irish” scheme, which allowed the company to eliminate tax on almost all of its non-american revenue. In 2015, Google created Alphabet, a holding company for itself, without any say or vote from its shareholders, thanks to Delaware’s exceptional corporation law, which also confers many tax advantages.
Many industry analysts say the main solution to these issues is to set a unified global taxation standard for Big Tech, or for all multinational corporations. Canada’s Liberal government previously stated that it would only implement digital sales taxes as part of a multilateral consensus, but now simply says that such a solution would be preferable. Canada continues to participate in OECD discussions led by the European Union, but no agreement has come to fruition after years of recommendations and talks. So was it finally time to go it alone?
The budget’s proposed tax scheme is nearly identical to a tax adopted by France (also three per cent) that has had a bumpy debut. The French government pulled in roughly 400 million euros in 2019, but following trade threats made by the United States, France suspended the tax to facilitate good-faith negotiations at the OECD. It was reinstated last November, after the Trump administration withdrew from the talks.
The proven revenue stream and the lack of new U.S. retaliatory tariffs seem to have given the Liberals the confidence to implement their own unilateral tax, but it’s unlikely that they would choose a rate or a regime that’s wildly different from what’s on the global negotiating table. In the budget, the Liberals even copied the French corporate revenue threshold and currency — “750 million euros or more” — without even changing it to a Canadian dollar value.
Renewed regulatory interest from our neighbours is key, as antitrust court battles in the U.S. are now being waged against Facebook and Google by federal agencies and nearly every state, and the Internal Revenue Service sued Facebook for US$9 billion ($11 billion) in unpaid taxes after its own shift to Ireland. The Biden administration has recommitted to multilateral negotiations in general, including the fledgling OECD process on digital services, and has been talking about a global minimum corporate tax rate.
In theory, it’s better policy to reach agreement on an international structure, but if that actually happens, it’s bound to be watered down and unresponsive to individual country goals and conditions. After all, how would such a scheme stop a NON-OECD country from becoming another perfect tax haven? Alternatively, other countries besides Canada could continue to follow the European lead with individual structures, and thus mitigate the long-term risks of a trade war with U.S. protectionists. Either approach seems set to carve off only a tiny tax slice of Big Tech’s oligopoly. But I’d say that’s better than nothing.