Income Tax by Images Money (CC BY 2.0)

Income Tax by Images Money (CC BY 2.0)


Making Sense of the Canadian Digital Tax Debate, Part 6: Ensuring Internet Companies Pay Their Fair Share of Income Tax

The series on digital tax issues concludes with the most conventional tax issue: how to ensure that large corporations pay their fair share of income tax for profits generated in Canada (series posts on digital sales tax, Netflix tax, Internet access taxes, digital device taxes, and tax in support of newspapers). The income tax issue was raised by the NDP earlier this year, who called on the government to ensure that Internet companies pay taxes on profits made in Canada.

While the income tax issue is an important one, it is not a digital tax issue per se. Rather, it reflects ongoing corporate tax challenges that implicates all multinational companies that strategically structure themselves in the most tax advantageous manner. The debate on the issue is not limited to Canada with countries around the world struggling with the same question. Indeed, the issue was raised at the Senate committee, with a CRA official commenting:

It is also important to understand the current corporate tax system, which is essentially based on the notion of permanent establishment, which is a traditional concept. For example, when a company does business in another country and has employees and plants in that country, it clearly has a permanent establishment. The general concept of taxation is based on these notions.

A company that does business in another country and sells digital products does not necessarily have a physical presence. Consequently, some important questions arise with respect to income taxation. The key question is whether these permanent establishment concepts on which tax treaties are based still represent the best way to tax those businesses and to determine whether value is being created in the source country by those electronic transactions. If that is the case, one must determine the approach that should be used to tax properly, but also to ensure that the ultimate result is not double taxation of the business in question.

This therefore requires discussions at the international level, such as those currently being held at the OECD, for example. I think the OECD communiqués attest to the fact that the various OECD members have agreed to take time to analyze this question. The ideal solution is to come up with joint and coordinated options or new standards to prevent double taxation.

In other words, the income tax question is not limited to Canada nor to technology companies. There is a general consensus on the need to address income tax standards to ensure fair taxation without double payment in multiple jurisdictions.


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