The Broadcasting Act blunder series continues with a slight tangent to consider the implications of yesterday’s Government of Canada Fiscal Update for the claim that reforms are needed to ensure that foreign Internet companies make appropriate contributions to the Canadian market. Canadian Heritage Minister Steven Guilbeault emphasized the issue when discussing Bill C-10 in the House of Commons, talking about payments being a “matter of fairness” and concerns that foreign Internet streamers “make money off the system with no obligation to give back.”
Finance Minister Chrystia Freeland yesterday outlined the better way to ensure equality of treatment and payments into Canada, namely tax policy. First, the government plans to apply sales taxes to digital services starting in July 2021. The sales tax issue has often 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. The application of sales taxes will result in increased costs for consumers (companies invariably pass along the sales tax to consumers), but there will be equality of treatment between Canadian and foreign streamers. The government estimates that the expansion of sales taxes will result in $1.2 billion in revenue over five years.
Second, the government also plans to institute a tax on revenues generated by technology companies starting in 2022. The fiscal update is short on details with a promise to expand on its plans in the 2021 budget. The Liberals actually did provide details to the Parliamentary Budget Office during the election campaign for the purposes of costing the proposal:
This proposal would introduce a new 3% tax on the income of businesses in certain sectors of the digital economy. This policy would replicate the proposed digital services tax announced by the French government. It would be implemented on 1 April 2020. The tax would target only the following services: targeted advertising services and digital intermediation services. The tax would apply only to businesses with worldwide revenues of at least $1 billion and Canadian revenues of more than $40 million. The new tax would act as a value added tax.
The PBO estimated that the tax would raise over $500 million in the first year. The implementation was delayed by the inability to reach an international consensus on the issue of taxes on tech company revenues. There is still no consensus, but the government says it plans to move ahead anyway, which could spark a significant backlash from the United States. Indeed, the French proposal that serves as the model has led to the U.S. indicating that it plans to levy billions in retaliatory tariffs. The cost to many Canadian exports to the U.S. could be very significant and cut across many Canadian sectors.
To date, technology companies have unsurprisingly engaged in tax minimization strategies that shifts much of their tax liability to low-tax jurisdictions. That strategy is not uncommon for all multinational corporations, but technology companies are particularly adept at it given their ability to actively participate in local markets without the need for a physical presence. Countries around the world are facing the same issue: how to get a share of the revenue from companies that have a dominant local market impact, limited physical presence, and are structured to pay little tax.
The challenge is that this is viewed as a zero-sum game with more tax revenue for one country (say Canada) meaning less for another (the U.S.).
While there will be concerns about increased consumer costs, corporate uncertainty, and a trade backlash (all of which are likely under the government’s digital tax plan), tax policy is nevertheless the better way to address technology company contributions. Whether the ill-advised lobbying for mandated link payments or Bill C-10’s mandated contribution to support Canadian content, the cross-subsidy model embraced by Guilbeault creates market distortions, risks of tariffs, content being blocked from Canada (both news stories on social media networks and foreign streaming services), and the loss of longstanding foundational policies such as Canadian ownership rules.
Last month I wrote a Globe and Mail op-ed on the tax issue, concluding:
Despite the hurdles, a global tax model would serve as the best foundation for ensuring that technology companies pay their fair share of tax on the revenues earned in Canada. Absent a global solution, the government should be prepared to explore a made-in-Canada approach that would allow it to drop the harmful cross-subsidy model that risks increasing costs for consumers in favour of a general tax revenue approach that can be transparently incorporated into Canada’s standard budgeting process.
The government has started down the road of a tech policy grounded in generating increased tax revenues. Now it needs to rethink the ill-advised cross-subsidy proposals found in Bill C-10.
(prior posts in the Broadcasting Act Blunder series include Day 1: Why there is no Canadian Content Crisis, Day 2: What the Government Doesn’t Say About Creating a “Level Playing Field”, Day 3: Minister Guilbeault Says Bill C-10 Contains Economic Thresholds That Limit Internet Regulation. It Doesn’t, Day 4: Why Many News Sites are Captured by Bill C-10), Day 5: Narrow Exclusion of User Generated Content Services, Day 6: The Beginning of the End of Canadian Broadcast Ownership and Control Requirements, Day 7: Beware Bill C-10’s Unintended Consequences, Day 8: The Unnecessary Discoverability Requirements)