Canada refuses to delay digital services tax further as overall multinational tax agreement pushed back

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The federal government says it cannot consent to further delaying a digital services tax targeting tech giants in the absence of a clear timeline for a global multinationals taxation deal to come into effect.

Ottawa said Tuesday that unless international talks set firm dates for an agreement to collect a greater share of the wealth generated by the world’s richest companies, it will proceed with what amounts to a Plan B: a new digital services tax that was outlined two years ago.

That new tax would impose a 3-per-cent levy on Canadian revenue from digital services exceeding $20-million that is earned by companies with at least $1.1-billion in global revenue. This would include revenue from search engines, social-media platforms and online marketplaces.

Canada found itself isolated Tuesday in Organization of Economic Co-operation and Development (OECD) talks in Paris, unwilling to endorse a deal negotiated by the United States that would see countries that had planned to enact their own digital services tax put it off for at least another year.

In 2021, Canada and many other countries froze plans to enact a digital services tax while negotiations continued on a multilateral international tax deal. Such a deal would overhaul rules governing how governments tax multinationals that are widely considered to be outdated as digital giants such as Apple or Amazon can book profits in low-tax countries.

The first part of the two-pillar deal – known as Pillar One – aims to reallocate taxing rights on about US$200-billion in profits from the biggest and most profitable multinationals to the countries where their sales occur.

The second pillar calls on governments to put an end to tax competition between governments to attract investment by setting a global minimum corporate tax rate of 15 per cent from next year.

Deputy Prime Minister Chrystia Freeland said the lack of set dates for a treaty implementing Pillar One puts Canada at a disadvantage to countries that have already implemented a digital services tax. These include Britain and France.

“Many countries participating in negotiations in Paris agreed to a further one-year standstill on the imposition of any new domestic DSTs, despite there being no deadline stipulating when Pillar One will come into force,” Ms. Freeland said. “This puts Canada at a disadvantage relative to countries which have continued collecting revenue under their pre-existing DSTs.”

She said Canada has only held off imposing its own digital services tax because it wanted to work with other countries if possible.

“Two years ago, we agreed to pause the implementation of our own Digital Services Tax (DST), in order to give time and space for negotiations on Pillar One,” Ms. Freeland said in a statement. “But we were clear that Canada would need to move forward with our own DST as of Jan. 1, 2024, if the treaty to implement Pillar One has not come into force.”

She added: “Without any firm and binding multilateral timeline to implement Pillar One, Canada cannot support the extended standstill.”

It’s not clear, however, if Canada will now follow through on plans to enact a digital services tax by itself.

A senior federal government source said Tuesday that Ottawa has not yet made a decision on whether to enact legislation this fall and bring in a digital services tax. It’s possible, the source said, but noted Canada hopes that the multinational tax talks will set a firm date for collective action instead.

Last week United States trade representative Katherine Tai urged Canada “to refrain from imposing a digital services tax while the OECD process continues this year.”

Toronto lawyer Mark Warner, who once worked for the OECD, said the U.S. would likely launch a trade challenge against Canada if Ottawa enacted a digital services tax now.

U.S. trade official expresses concerns about Canada’s proposed digital services tax

He said it appears as if Canada is trying to force change at the OECD talks rather than making unilateral plans to start imposing a new tax on tech giants.

“I think it’s posturing. The posturing will play well, with a very simple message, in Canada: being tough on Big Tech,” he said. “The language doesn’t amount to very much concretely and allows them to pull back.”

While the second pillar is moving ahead with more than 50 countries already in the process of implementing a minimum corporate tax rate of 15 per cent, some countries have concerns about a multilateral treaty underpinning the first pillar, the OECD said after talks in Paris.

The plan is to nail down the details so governments can sign off before the end of the year with the aim now for the treaty to come into force in 2025, instead of in 2024 as previously planned.

The latest development follows years of multilateral struggles over how to fairly tax the giants of global industry in the digital age. Physical offices or operations are no longer necessary for a company to do business in a country, which, thanks to outdated tax laws, has allowed for profits to be generated in some jurisdictions without being taxed locally.

The federal government had estimated that its proposed new digital-services tax would bring in $3.4-billion in revenue over five years, while the Parliamentary Budget Officer said it could bring in $4.23-billion.

With a report from Reuters