The public policy battle over a digital sales tax to cover services such as Netflix continues in Canada with the introduction last week of a Quebec private members bill that would require the collection and remission of provincial sales tax by “persons with a significant online presence.” I’ve already written extensively about the longstanding policy work on digital sales taxes, the misleading claims about a level playing field, and how Canadian subscribers can pay the sales tax on Netflix today if they so choose. While there is an inevitably about digital sales taxes – it will come once global standards are sorted out – some still want the tax now without much regard for the challenges of implementation.
For example, Quebec Bill 997 adopts the “just do it” approach to digital sales tax. The bill covers the waterfront of digital tax issues: sales tax collection for those with a significant online presence, penalties for failure to file income tax returns, as well as penalties for payment providers who do not report purchases in the province when asked and for sites that conceal data about a significant provincial online presence.
The key phrase in the bill is “significant online presence”, which triggers most of the obligations. How is the phrase defined? The bill states:
person is deemed to have a significant online presence if
(1) the person made a significant number of sales or service contracts with persons resident in Québec;
(2) a significant number of persons visit the website, from locations in Québec, through which the person’s goods and services are available;
(3) a significant number of payments are made to the person by persons located in Québec for the provision of goods or services; or
(4) the person collects and uses data of a personal nature from persons resident in Québec.
In other words, it isn’t really defined since a significant number of sales, visits or payments may mean different things to different businesses depending on their size and services. Further, mandated collection solely on the basis of website visitors or data collection seems problematic, requiring increased monitoring of website usage and tax collection with only a handful of sales. The collection and remission of sales taxes would create a non-trivial administrative burden that requires better than vague references to significant website visitors or data collection.
The challenges associated with the issue are not unique to the Quebec bill. The OECD has been actively working on digital sales tax issues, publishing a 2015 report that has served as the basis for digital tax policy efforts in many countries and launching a public consultation earlier this year that included a public event held last week in California.
The call for comments generated dozens of comments from groups from around the world, though notably no major Canadian organizations participated. A review of the hundreds of pages reveals a wide range of digital tax issues and proposals that would have enormous implications for the digital economy. On the issue of digital sales tax, it is clear that progress is being made, but that there remains concerns with the lack of consistency in approach between jurisdictions. This leads to a complicated compliance regime that is very costly, particularly for small and medium sized businesses.
Just how complicated can it get? The Federation of German Industries identified the following challenges with digital sales taxes:
Reverse-charge would not be a proper way of taxation since private final customers should not or cannot properly levy and remit VAT/GST. In this respect it seems a proper way to oblige the supplier itself to collect also local VAT in the destination country.
However, suppliers need to registers for VAT/GST in foreign countries where we identify the following difficulties:
- Different local rules for registration
- Different languages, different official VAT returns, different filing and payment deadlines in different countries
- Different tax rates, different invoicing requirements to be met and to be permanently monitored
- Different regimes in case of audits or requests
- Overall significant burden for VAT/GST compliance in many countries, if supplies are made to customers in different countries
- Significant burden combined with critical deadlines when remitting and paying VAT cross-border wise (international payments)
The submission also highlighted the challenges of place of supply rules with the need to reconcile accuracy and flexibility for digital services.
The Business and Innovation Advisory Committee at the OECD submission also points to some of the compliance challenges associated with digital sales taxes. Its recommendation includes:
Countries should be encouraged to introduce tools designed to alleviate the VAT/GST compliance burden facing particularly foreign businesses. These tools should include digital measures (e.g., allowing for remote e-filing), sensible registration thresholds, and safeguards against unnecessary additional registrations with no need for local bank accounts, local fiscal representation, local invoicing, and local language requirements. Such measures could significantly contribute to achieving greater levels of certainty and consistency.
The CBI, a leading British business association, provides best practices on digital sales taxes from around the world, including relatively high thresholds in Australia. Differing approaches is also a theme in a submission from KPMG, who note the following areas of inconsistency:
- scope (just few digital services v. all services; B2C v. B2C + B2B)
- liabilities of electronic data processors (“EDPs”) vary greatly between jurisdictions
- registration threshold (nil v. same as domestic businesses)
- registration (simplified registration v. standard registration)
- returns (complex v simple returns; monthly v. quarterly returns)
- invoicing requirements (required or not)
- bookkeeping requirements
- data collection requirement (is the customer a business or not; where is the consumer located, etc.)
All of this points to the fact that there is work being done on digital sales taxes around the world with active engagement from governments, businesses, and tax experts. Those efforts should ultimately lead to widespread digital sales tax implementation, but provide a reminder that legislative solutions that work for everyone requires more than poorly defined provisions such as those found in the latest Quebec bill.