The “digital economy” is now worth equivalent to ~15% of global GDP according to the World Bank, and so it is little surprise that its rise has sparked global debate - the most critical of which is the discussion regarding the most appropriate, fair, and efficient way of taxing so-called “digital services” which is currently underway at the OECD (Organisation for Economic Cooperation and Development) and G20 under the Inclusive Framework on BEPS (Base Erosion and Profit Shifting).
At the OECD/G20’s most recent discussions - a virtual plenary held January 27th to January 28th of this year - Canada’s Deputy Prime Minister and Finance Minister, Chrystia Freeland, seemingly foreshadowed the possibility that Canada would take unilateral action on a “digital services tax”, although she couched her comments by noting that an agreement on Pillar One of the BEPS project is “doable and essential” and there is a need to “get it done by July.” It is indeed notable that the United States of America - who’s government feels uniquely targeted by the discussions surrounding the digital economy and potential digital services taxes - has previously threatened tariffs when faced with the prospect of unilateral taxes on digital MNE’s (multi-national enterprises), seemingly many of which are “American” (Facebook, Google, Twitter, etc). And of course, it is also notable that Canada’s largest international trading partner is the United States of America. However, this anticipated unilateral action from the Canadian government is consistent with the federal government’s proposal in their “Fall Economic Statement 2020” to require that (Chapter 4.8.1.1) “foreign-based vendors selling digital products or services to consumers in Canada be required to register for, collect and remit the GST/HST on their taxable sales to Canadian consumers.”
What to make of these comments? Is the international order with respect to our current system of international taxation breaking down? Does the reality of potential double-taxation and market distortions no longer rule the day?
It is also interesting to note that these comments from Minister Freeland regarding unilateral action on digital taxes from the Canadian government reflect increasing world-wide attention and sentiment toward these changing business practices that test the adequacy of typical thresholds for countries to tax business income earned by providing “automated digital services” and in “customer facing businesses”, two terms that animate the OECD’s Pillar 1 proposal. The Minister’s comments also are consistent with Canada’s own initiatives contemplated in the Fall Economic Statement 2020, and also follow France’s decision in December to re-implement their own digital services tax on MNE’s - the 3% benchmark agreed to by the European Commission, after the United States backed away from its promised tariffs. However, Austria, the United Kingdom, and Spain have all likewise taken, or are planning on taking, unilateral actions on digital service taxes themselves, while the United States of America has maintained their actions are “discriminatory."