In a strategic move to have a tax system that promotes fairness, the Canadian government’s Federal Budget 2021 confirms the implementation of a digital services tax (DST) at a rate of 3% on revenue from digital service providers such as Amazon, Facebook, and Netflix that rely on data and content contributions from Canadian users.
“The government is committed to ensuring that corporations in all sectors, including digital corporations, pay their fair share of tax on the money they earn by doing business in Canada,” a statement derived from the government.
The DST would apply to large digital businesses with gross revenue of 750 million euros or more. To be effective on January 1, 2022, Canada intends to take action until an acceptable multilateral approach comes into effect. It is estimated that this new taxation policy will raise $3.4 billion in revenue over five years beginning in 2021-22.
Until now, US tech giants have operated without following specific regulations in Canada. This is an unfair case in comparison to local broadcasters and cable players that mandatorily contribute a share of their revenues to subsidize production. Previous concerns about over-the-top (OTT) usage in Canada have been discussed as Netflix entered the Canadian streaming landscape. Therefore, taxing US streamers in the near future sorts out their advantage of local incentives, currency savings, soundstages, and production crews to make original productions.
For the most part, the proposal is consistent with the Organisation for Economic Co-operation and Development (OECD) guidelines on digital taxation. Applicable to both foreign and domestic companies, the DST will be levied on revenue from online marketplaces, social media platforms, online advertising, and user data.
In line with this, work is already underway to reach a multilateral agreement on cross-border digital taxation by mid-2021 within the country. Canada’s new goods and services tax (GST) and harmonized sales tax (HST) regime is anticipated to take effect on July 1, 2021.
Being focused only on business-to-consumer (B2C) sales, non-resident vendors of cross-border digital services and products, as well as certain online platforms that sell to Canadian consumers, must register with the Canada Revenue Agency (CRA). Accordingly, these vendors must charge and remit GST/HST if their total taxable supplies are worth CAD 30,000 and above in a year.
As Canada gets closer to levying DST, possible retaliatory tariffs from the US government can be expected. In response, a compromise agreement may come up as a result of further negotiations. It is worthy to note that Canada is not the only country to introduce some form of digital tax, especially as countries struggle to recover their economy due to COVID-19. Hence, taxing billion-dollar multinational web businesses appears to be objective and beneficial to the greater public.
