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Proposed Digital Services Tax

A proposed Digital Services Tax (DST) could raise up to $1.2 billion over five years in Canada, which the Federal government wants to introduce in July 2021. In its fiscal update on November 30, 2020, Ottawa said it will require multinational companies to collect GST or HST on digital products and services. Once implemented, the cost of digital services sold by foreign companies like Netflix, Amazon Prime (streaming video), HBO (streaming video), Hulu (streaming video), Spotify (streaming audio), and Sony PlayStation (video gaming) will go up. The government says Canadian companies and foreign companies with physical presence in Canada (such as Xbox and Nintendo Switch) are already collecting those taxes, so multinationals should do the same. The Finance Minister Chrystia Freeland said during her November update that Canada will act unilaterally, if necessary.

Under current international rules (in place for most of the past 100 years), multinational companies generally pay corporate income tax where production occurs rather than where consumers or users are located (i.e., where the revenues are generated). To address this concern globally with simple rules and compliance and without double taxation, an Organization for Economic Co-operation and Development (OECD) has been hosting negotiations with more than 130 countries to adapt the international tax system for the digital economy (digital viewing, digital sales, and sales from digital advertising). The OECD is an intergovernmental economic organization with 37 members (including U.S., U.K., France, Germany, Spain, Italy, and Canada) founded in 1961 to stimulate economic progress and world trade.

At the recommendation of G20 Leaders (an international forum made up of 19 countries and European Union whose members represent 85% of global GDP and two-thirds of world’s population) in March 2017, the OECD set up a task force to look at the percentage of tax that should be paid, whether DST should vary from country to country, what should be considered a digital transaction, what impact this will have on economies, what impact it will have on small businesses, and to develop a collection process. The OECD was tasked to complete their analysis process by the end of 2020 (recently extended to July 2021) and to bring it to the main body of members to discuss and approve the final recommendations. The OECD task force also consulted the international tax community.

However, despite the ongoing multilateral negotiations over number of years, several countries have decided to act unilaterally and about half of all European OECD countries have either announced, proposed, or implemented a Digital Services Tax (DST) on selected gross revenue streams of large digital companies. The United States has responded with retaliatory threats (such as applying tariffs on goods entering the U.S. from the countries concerned), since this tax mainly impacts U.S.-based companies (Google, Amazon, Facebook, and Apple) and is perceived to be discriminatory. A transition to a new administration may soften the U.S. position, since Joe Biden’s campaign focused on corporate tax avoidance. However, new appointments to the U.S. Treasury Office will leave little time for input to the OECD proposal. The analysis by OECD has raised some further questions about how the DST will be implemented.

To discuss the proposed DST in Canada, please contact us at K&E Professional Accounting Associates | Accounting Firm in Winnipeg .

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