Aside from being complicated and short-lived, the proposed DST may require Canadian companies to pay more tax overall (Getty Images/10’000 Hours)
As part of 2021 budget, the federal government committed to imposing a digital services tax (DST), effective January 2022.
This proposed tax, first announced in the Fall Economic Statement 2020, is to be in place until a multilateral solution can be implemented by the members of the Organisation for Economic Co-operation and Development (OECD). As part of the federal government’s stakeholder consultation on the interim DST, CPA Canada made a submission detailing its concerns and recommendations about what’s been revealed so far.
“A lot of our concern is that it looks like it could be pretty complicated, but might not apply for that long,” says Bruce Ball, FCPA, vice-president, taxation at CPA Canada. “We’re concerned for those companies that are going to be impacted, that there might be a fair bit of work for a relatively short-lived tax.”
Given the July 1 announcement from the OECD about a new two-pillar solution to address multiple tax issues, to potentially be implemented by 2023, CPA Canada’s concerns that Canada’s interim DST could be temporary appear to be justified. More information should become available in the lead-up to another key event in October 2021, the finalization of the OECD/G20 agreement and an implementation plan.
Here’s what we know so far about the proposed Canadian DST.
WHO IS AFFECTED BY THE DST?
Foreign and domestic entities who had global revenue (from all sources) of €750 million or more in the previous calendar year and whose applicable revenue from Canadian sources during that year was $20 million (CAD) or more would have to pay DST on the applicable Canadian revenue exceeding the $20 million threshold.
Applicable revenue comes from four online business models:
- Online marketplaces, including those that match buyers and sellers. However, DST would not apply to tangible goods sold in those marketplaces, or goods and services sold by third parties via the marketplace on their own account.
- Social media platforms that facilitate interactions between users or between users and user-generated content. It excludes platforms whose sole purpose is to provide communications services such as telephone services.
- Services placing and displaying targeted online advertising based on user data, including search engines.
- The sale or licensing of user data gathered online.
The DST would be charged at a rate of three per cent of applicable revenue that exceeds the threshold, excluding sales or value-added tax from the transaction. Businesses would be required to file an annual return and make one annual payment for each reporting period.
WHAT THE CONCERNS ARE
CPA Canada believes that a January 1, 2022 implementation does not give businesses enough time to prepare, especially since there isn’t any legislation in place yet. And, given the likely brief existence of the tax, it would be inadvisable for both businesses and the CRA to incur the significant implementation costs.
“If [the G20] reaches an agreement this year, then we have fairly good assurance something is coming,” says Ball. “So, why would you make companies gear up for a relatively temporary period and incur all the costs of having to comply with it?"
If implementation of the DST proceeds, CPA Canada worries about the goal of the tax. Is it intended to be an indirect tax or a proxy for income tax? If the latter, there’s the significant issue of possible double taxation. The OECD warns about this possibility as well.
“We are concerned about the situation where the revenue is subject to the DST and the underlying profit is also subject to corporate income tax,” explains Ball. “In this situation, the taxpayer will be subject to a higher overall tax when compared to non-digital taxpayers where the business is operated only in Canada. That was the main concern that was raised by people we were talking to.”
Furthermore, a company could have a lot of revenue, with very little of it subject to the DST. “You could have organizations that spend a fair bit of time looking for relatively minor amounts of revenue,” he says. For example, if the total revenue is just over $20 million, only the part over that threshold is taxable, which may not be significant tax revenue but could be a lot of work to identify.
CPA CANADA’S RECOMMENDATIONS
According to CPA Canada, the newly proposed DST should be more targeted. “We are concerned that the DST might apply to a much broader group of companies than intended,” notes the CPA Canada submission, outlining that businesses would first have to do a detailed analysis to determine whether they have that $20 million plus in applicable revenue. As a possible solution, CPA Canada has asked the federal government to consider a simpler way to determine whether the tax applies and to clarify exactly which industries and businesses must pay the tax.
Another issue is the impact on the competitiveness of Canadian companies, who will be required to pay local income tax (not required by foreign operators), plus the additional three per cent DST. Since the DST would not be creditable against Canadian income tax, but instead be a deduction, companies would be paying more tax overall. Thus, “Canadian companies should be either excluded from the DST or be given an income tax credit for their payments,” suggests CPA Canada’s submission.
Until all of the details are finalized, CPAs who are part of advising organizations that would be subject to the DST can’t do much at the moment. But, Ball advises, “I think the first step would be to go through what you have, to try to make a determination whether you think you’re going to be subject to the tax or not. Then start thinking about how you’ll react to it. I’m not sure you can go into much more at this point without some of the details, but it’ll at least give you an idea of the issues that may be faced.”
Dive deeper into the concerns raised by CPA Canada about Canada’s proposed digital services tax. And, as more DST-related details become available, stay updated through our tax blog and tax news page.