While Canada and its southern neighbor generally get along quite well, the new Digital Services Tax is about to throw a wrench in the machine. In this article, we’ll examine the proposed tax, why so many are upset about it, and what it could mean for Canada’s future.
The DST is a tax on large corporations that provide digital services in Canada. These digital services would include revenue from four sources: social media, online targeted advertising, online marketplace facilitating, and data collection. The tax would be set at 3% of revenue from these sources, but it would not be the company’s entire revenue. Instead, it would only be the revenue attributed to services provided to Canadians. Even with these limitations, the tax is projected to bring in more than $7 billion dollars over a 5-year period.
The DST is scheduled to take effect in January 2024, with taxation retroactive to Jan 2022. It isn’t new: Canada has been discussing it since 2020. They have put off implementation a few times already because of severe disapproval and threats of economic retaliation from the United States. The January 2024 implementation date is considered a final date for the Canadian Revenue Authority, where the tax will either stand or fall.
The DST is an outgrowth of an agreement created by the Organization for Economic Co-operation and Development (OECD). This is a group of 37 democratic countries from around the world, who have met to create new ideas about taxation, and global economic equality. Part of the OECD’s plan is to redistribute global tax revenues for large multinational corporations to reflect company activities rather than company location. This plan is known as Pillar One.
This is intended to prevent large global corporations from tax planning and sheltering activities. Up until now, taxation was largely based on a corporation’s physical address location, rather than where they conducted their activities. This leads to companies basing their operations in countries with favorable tax laws, leading to them paying less tax overall. Pillar One aims to capture more of these revenues from corporations that operate around the globe.
The Digital Services Tax is an outgrowth of the ideas of Pillar One. It is based on the idea that Canada can tax services provided to Canadian citizens, even if the company providing those services is not in Canada.
Up to ⅓ of the companies that would pay this tax are US-based, and the US does not want to see revenue dollars from US-based companies flowing to foreign governments. Economists also warn that this additional tax may be a burden on these large corporations that leads them to make less money overall or “hide” their profits even more effectively, creating lower tax revenue for all governments.
Canada’s Digital Services Tax is also a model for many other countries in the world. If Canada successfully implements this tax in the face of US disapproval, many other countries may follow suit with similar taxes of their own. This could have far-reaching implications for the corporations themselves and the governments in those companies’ home countries.
In August 2023, the Canada Revenue Agency (CRA) made some changes to the not-yet-effective digital service tax legislation. This change made it easier for companies with tax due in 2024 to calculate their tax due for 2023 and 2022. Instead of performing separate calculations to report 2022 and 2023 tax due, they can use their 2024 tax bill as a baseline to calculate their tax liability for the other two years.
There are a few possible outcomes of the DST. Each has possible implications for all involved parties and for global understandings of democratic taxation.
This could happen in two ways. The first is that Canada backs down under US pressure, and totally scraps the DST.
The second is that Canada revisits the underlying OECD treaty that is the basis of the DST. If Canada chooses to amend or rewrite part of the OECD treaty as it applies to taxation, it could change how democracies worldwide understand corporate taxation. This could temporarily delay the DST, but it could have other far-reaching economic consequences for other G20 countries in the future.
If Canada does choose to go ahead and implement the DST this coming January, there will undoubtedly be some sort of economic retaliation from the United States. While the tax is calculated to bring in billions of dollars in new revenue for Canada, this does not include any possible negative economic effects against that. If Canada loses revenue due to a trade war with the US, this will of course cut into the increased revenue from the tax.
The DST is the first in what may be an entirely new way democratic governments think about taxation. Anything new causes a great deal of talk and speculation, and the DST is no different. No matter what happens come January, we will be here to assist you with your business and personal tax planning and preparation. Contact us today.