Digital tax has emerged as one of the most contentious Canadian digital issues with groups advocating for a wide range of new enforcement or policy measures including digital sales tax, taxes on online video services, income taxes on digital companies, tax measures in support of media organizations, Internet access taxes, and digital device taxes. Unfortunately, the debate is often muddled by the use of the same terms, creating considerable confusion. For example, references to “Netflix taxes” have been used with regard to digital sales tax on Netflix, mandated Canadian content contributions for Internet services such as Netflix, and income taxes payable by Netflix.
This blog series will attempt to unpack digital tax debate. The series begins with digital sales taxes, which was back in the news earlier this month when Finance Minister Bill Morneau confirmed that Canada is awaiting an international agreement on digital sales taxes before implementing any domestic reforms. Morneau indicated the government would support a quick resolution of the issue – the current deadline is 2020 – but that a provincial digital sales tax in Quebec will not spark a matching federal tax until the global issues are resolved.
Creating a global sales tax system that requires foreign providers to register and remit sales taxes is fraught with complexity. Registration requirements alone create new costs that some businesses may be unwilling to bear. In order to avoid burdening small businesses, countries may set a revenue threshold before registration and collection requirements kick in. In fact, some businesses may simply decide to avoid or block the taxing market altogether, leading to services that either decline to sell locally or which increase their prices to account for the regulatory cost burden.
The sales tax issue has been framed by some as a “tax holiday” for Internet companies, yet the reality is that when applicable, sales taxes are paid by consumers, not the companies. Companies resident in Canada are merely required to collect and remit the applicable sales taxes. The tax does not come out of earnings or represent a gain for the companies, who act as intermediaries by collecting the sales tax and remitting it to the government. Sales tax is applied to digital services by companies with a digital presence in Canada. That means there is no sales tax when subscribing to Netflix directly from the company, but there is for those who subscribe through Apple iTunes. The difference is that Apple has a physical presence in Canada, whereas Netflix does not.
Quebec plans to launch its digital sales tax in January 2019, but the provincial plan raises significant enforcement challenges and compliance costs that will exceed actual payments for some businesses. Those challenges were highlighted at a 2017 hearing at the Standing Committee on Canadian Heritage, where officials stated:
E-commerce sales by foreign-based companies can present a challenge for proper sales tax collection. Foreign-based Internet vendors’ businesses with no physical presence in Canada are generally not required to collect GST/HST on their sales. Instead, in the case of physical goods that are purchased online and shipped to Canada by post or courier, the applicable customs duties and GST/HST would generally be collected by the Canada Border Services Agency at the time the goods are imported.
In cases other than the importation of physical goods, the GST/HST legislation imposes a general requirement to self-assess the tax. For businesses that would be entitled to recover any tax payable by claiming input tax credits, there is generally no requirement to self-assess tax on such imports. The challenges related to the proper collection of sales tax on digital supplies by foreign-based vendors are not unique to Canada. It’s a difficult issue for all jurisdictions with a sales tax.
Indeed, the issue is not new. The prospect of extending GST/HST emerged as an issue in 2014 when the Conservative government raised the idea in its budget and launched a public consultation on the matter. For all the talk of an unfair playing field or lost revenues, the extension of sales taxes to foreign digital providers appears to be a question of when, not if. In the meantime, Canadians anxious to pay the sales tax on digital services such as Netflix need not wait for governments to act since the law allows for self-reporting of the applicable sales tax.