Canada and the New Digital Services Tax
“Even though the corporation is formally speaking the taxpayer and has to the write the cheque. The actual burden of that tax is borne between shareholders, employees and customers of that business; and in the case of Netflix in France, it was borne entirely by French customers.” – Gareth Williams
On Episode 23: Canada and the New Digital Services Tax – Mark Fancourt-Smith and Alix Stoicheff speak with Gareth Williams about recent legislation that could change the way digital services corporations are taxed in Canada and what that means for consumers.
Guest:
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Don't have time to listen to the full podcast? Here's what this episode covered:
- What is a Digital Services Tax? 01:06
- Why is the Digital Services Tax being considered? 02:59
- Who is ultimately going to bear the burden of this tax? 06:48
- Are there mechanisms for enforcement? 08:09
- What does the Digital Services Tax accomplish? 09:31
Transcript
Mark Fancourt-Smith 00:15
Welcome to LawsonInsight. I'm Mark Fancourt-Smith and I use the pronouns he/him. I'm a partner in Lawson Lundell’s Vancouver office and I practice in the dispute resolution group.
Alixandra Stoicheff 00:24
And I'm Alixandra Stoicheff. I use the pronouns she/her. I'm an associate in the firm's Calgary office and I practice primarily in the dispute resolution group as well. Thank you for joining us on LawsonInsight. On this episode, we'll be speaking with Gareth Williams about the new digital services tax that is being introduced in Canada.
Mark Fancourt-Smith 00:40
Gareth is a partner in our Vancouver office bringing over 15 years of experience to Lawson Lundell Tax Group. He obtained his legal education in the UK prior to coming to Canada in 2003. And advises clients in various industries from large private BC based companies to international public companies. Gareth’s also one of my favorite people to talk to so, Gareth, welcome to the podcast.
Gareth Williams 01:00
Thank you, Mark. Well, thanks. It's delighted to be here, longtime listener, first time participant.
Mark Fancourt-Smith 01:06
Well, we wanted to talk to you today about the new digital services tax. And you had done a blog recently on it, and I don't think I can do better than how you introduced it in the blog, where you specified that most taxation is concerned with raising revenue for government expenditure in the short term. A well designed modern tax will also typically involved a well thought out withholding mechanism. And this one does neither one of those things. So what can you tell us about the digital services tax?
Gareth Williams 01:34
You are quite right Mark, it is a bit unusual. And so for that reason, I was drawn to it and into and to write about it like a lot of your participants, I suspect I'd write about things that interest me, and I'm excited to find out that it might interest somebody else too. So digital services tax, it's a bit unusual, in that it's a tax on revenue, rather than on profit or consumption or some of the more typical tax bases. The Digital Services Tax is designed to tax digital business in Canada. And there are a couple of thresholds, there’s a revenue threshold and Canadian profits threshold. And it's also focusing in on four types of digital activity. But you're quite right, it doesn't seek to bring in tax right away, the earliest will be will be 2024. And there is no withholding or collection mechanism. So those features interest me and my interest your listeners.
Mark Fancourt-Smith 02:25
So you mentioned that one of the somewhat unusual aspects of it is that it's taxing revenue and not profit. What aspects of digital services revenue, is it targeting?
Gareth Williams 02:35
Yeah, there are four categories Mark. So there's online marketplace services revenue, think of your eBay's buy and sell that sort of thing. There's online advertising services revenue, so that might be directed to a Google or Facebook, indeed, social media services, revenue, usual platforms, and then use a data revenue and all those kind of defined in some detail in the legislation. Those are the four buckets that are looking to tax.
Alixandra Stoicheff 02:59
And so why is it being brought in now? What is it, I guess, about the current tax structure that is viewed as being insufficient in order to target those particular categories of businesses?
Gareth Williams 03:11
That's very good question, Alix. So the answer is partly an old answer and partly a new answer. So you know, for roughly 120-130 years, the OECD and other groups have grappled with how to tax multinational corporations, and the answers aren't obvious. And they involve some element of compromise both kind of political, and from a policy perspective. You might tax a company based on the location of its head office, you might tax it, based on where it makes sales. We might tax it based on the location of its incorporation something like that some other factor. But the answer is inevitably an element of it was an element of compromise. And the digital service tax sort of fits into that discussion and debate, after 2008 after the financial crisis, and kind of tied in with a look at Google and Starbucks, both in the UK and the US Senate. And in the EU with state aid investigations. There's been a lot of focus on whether the global tax system, the international corporate tax system is adequate for taxing multinationals. And this is the new aspect of the question. A digital business can go into a jurisdiction and make sales and have lots of profits without doing the things that you might traditionally have to do. You don't have to have a mind site or an office or a local staff. You can make sales and make profits without attracting tax charge. That's the issue that many countries are grappling with and Canada is not alone in trying to address that issue.
Mark Fancourt-Smith 04:41
Gareth, you mentioned the OECD has been considering this. Where is Canada's digital services tax or how is it in alignment with what the OECD is doing or not?
Gareth Williams 04:50
That's good question Mark. So, I suppose the answer is that Canada, at least in its stated aims with this new legislation, hopes that the tax won't come into effect so the great hope is that there will be a multilateral solution at the OECD at some point between now and 2024. And the terms that tax people like to use are pillar one and pillar two. And they're kind of dual aspects of the same overall approach, which is, here's how we propose to tax multinational corporations in the 21st century. And a very, very brief summary of these approaches is that there's a shift in allocation of taxing rights away from the residents, jurisdictions, to the marketplace jurisdictions. So if you are a Google or somebody and you go make sales in France, France will have a little bit more capacity to tax you if the OECD compromise is accepted and kind of put into place.
Alixandra Stoicheff 05:41
So it's looking at… yeah. So is it fair to say that it's looking at where those revenues are actually earned, as opposed to where the business itself is located?
Gareth Williams 05:50
Right. If there is a multilateral solution, Canada has said that it won't bring into effect the digital services tax. And so then you might will say, well, why produce draft legislation and why put it forward now, and that we think fits into the context of a ongoing trade dispute with the US on things like electric cars and tariffs, and those sorts of things. So it's a lever to encourage other countries to hurry up and get on board with the OECD deal, because if that doesn't occur, then lots of countries will introduce digital services taxes, that will be economically inefficient. And it's not really what the kind of collective wants to get done.
Mark Fancourt-Smith 06:30
So in addition to not being designed to generate revenue in the short term, not having a withholding mechanism, it's also legislation produced in the hope that it never needs to be passed.
Gareth Williams 06:41
That's exactly right. Yeah. This is why I love talking about this tax. It's, you know, almost entirely theoretical.
Mark Fancourt-Smith 06:48
Now, has there been any reaction from industry or from the digital services industry with respect to this potential tax? I mean, it's, it's come out as a possibility, but whether one could look at past practices, how they defray the cost to them? Or do we have any indication about who is ultimately going to bear the burden of this?
Gareth Williams 07:05
Yes, we do. So the French introduced a digital services tax a year or two ago, and fairly shortly thereafter, Netflix raised its prices in France. And this points towards a truism of corporate taxes. And that's that they can't really be borne by corporations themselves. Even though the corporation is formally speaking, the taxpayer, and has to the write the cheque. The effective instance or the actual burden of that tax is borne in some proportion between shareholders, employees and customers of that business; and in the case of Netflix, in France, it was borne entirely by French customers. So France introduces a digital services tax, and the Netflix bill to the French customers that buy the same amount. And you know, that's not a direct relationship, because it does depend on what economists call the elasticity of demand for the streaming services. But really, it's just how much is Netflix able to pass the burden of that tax on? And how much is the French consumer willing to put up with? Early indications are that digital services taxes are borne almost entirely by customers in the countries which introduced them.
Alixandra Stoicheff 08:09
Earlier, you mentioned that it's not set to come into force until 2024. If it comes into effect at all, once it does, what are the mechanisms for enforcement?
Gareth Williams 08:19
Well, there aren't any, which is kind of interesting. Now, it'd be a little bit unfair. So there is an entirely separate piece of legislation. So the Digital Services Tax doesn't fit into, for example, the Income Tax Act or the Excise Tax Act, it's a whole new piece of law. And there are the sorts of things you might expect to see such as you know, here's the return that you have to file. And here's how you pay your taxes. But, but we're talking about a taxpayer base that will include both domestic enterprises and foreign enterprises. And of course, that makes sense, Canadian digital services tax would have to address the giants of Silicon Valley, because they are the big players in our market, the difficulty is that there's no obvious means to collect the tax from them. Now, this might be by design. So it might be that Canada assumes that because very high revenue thresholds to be subject to this tax, that the sorts of taxpayers who fall into that bracket are going to comply, necessarily, because they're good corporate citizens, and they want to be on board. And it might also be because there's an assumption, again, that the cost we passed on to the Canadian consumer, and so the corporation will be indifferent as to whether it compliance may as well have faced with the choice. If it doesn't cost you anything, why not comply with the law? Let's put that on T shirt by the way.
Mark Fancourt-Smith 09:31
It's an interesting endpoint to, if this tax was sort of almost born of a populist wish, or a popular wish to have these corporations pay their fair share, but ultimately, it is really just going to result in you paying $3 a month more for Netflix. Has it accomplished anything in the end?
Gareth Williams 09:51
Almost certainly not. But I asked it that way because I'm a lawyer and I think about economics, I think about tax policy, from a political point of view. I'd accomplish something. But I think, you know, our collective duty as citizens is to think about the sorts of laws we'd like to have implemented and adhere strongly to the idea that laws ought to be sensible and well thought out and ought to have stated that clear stated aims. And they ought to be measured by the extent to which they achieve its aims. And then also, tax policymakers ought to be honest in the way that they make their policy. So if the goal is to raise revenue, then state that goal, raise the revenue in the most efficient way that you can and be honest about where the burden is going to fall, because we already have lots of taxes in Canada, that will be well directed at taxing Canadian consumers of digital content, the GST will be an example. And we already have enforced mechanisms in place for that tax. So you know, what, what can you do as a Canadian citizen or consumer, when faced with a new digital services tax? Well write to your Member of Parliament and say, Please put into place sensible laws and tell me why you're doing this?
Alixandra Stoicheff 10:57
I'm curious to check back in with you in two years and 2024. And do part two of this and see whether it's been implemented, whether they've made any changes to it.
Gareth Williams 11:07
I'd like that very much. And almost certainly by then they'll be new and even crazier idea. So I'll have somebody to talk to.
Mark Fancourt-Smith 11:13
Gareth, thank you so much for coming on the podcast. And then you and I will speak and in less time than two years.
Gareth Williams 11:18
I look forward to it. Thanks, Alix.
Alixandra Stoicheff 11:20
Thank you.
Mark Fancourt-Smith 11:21
Thank you for joining us on LawsonInsight. Thanks again to Gareth Williams for joining us today and make sure to check out his blog and the Digital Services Tax available on the Lawson Lundell website [LINK].
Alixandra Stoicheff 11:30
You can also stay up to date by connecting with us on social media using the handle @LawsonLundell. And by subscribing to the podcast on Google Apple or Spotify podcasts. Thanks so much for listening.
Check out our other resources on this topic:
- Canada and the New Digital Services Tax (Business Law Blog)
About LawsonInsight
Hosted by partner Mark Fancourt-Smith and associate Alix Stoicheff, LawsonInsight is a look inside the legal mind. If you would like us to cover a particular topic, please email your requests to inquiries@lawsonlundell.com
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