Canada’s digital services tax

March 4, 2022

Canada has decided to impose a digital services tax on large companies that sell various services in Canada.

About the tax

Under the new rules of the Canadian government, a 3% digital services tax will be imposed on the companies with total annual revenue of at least $850 million and profits of $16 million or more from providing digital services in Canada.
It is to tax large multinational corporations (MNCs) such as Facebook, Apple, and Google which do business in Canada but pay most taxes in USA or tax-havens.

Opposition from the USA

The Office of the U.S. Trade Representative (USTR) has protested against this new tax by arguing that it particularly targets large U.S. technology businesses.
USTR has also stated that it would look into ways available under existing bilateral and other trade agreements to retaliate against Canada’s digital services tax.
USTR has argued that this tax goes against the spirit and the text of the Base Erosion and Profit Shifting (BEPS) agreement, where it was agreed that the signatories would not impose new unilateral taxes that work against the spirit of the BEPS agreement.

OECD agreement

In the 2021 Organization for Economic Cooperation and Development (OCED) meeting, 136 countries including Canada and USA agreed on how to tax large MNCs.
Under OECD/G20 BEPS project, the countries agreed that large MNCs will have to pay tax on a certain portion of their profits to the government of the foreign country where they do business. Companies should allocate 25% of residual profits as profits earned in the foreign country and pay tax on these profits.
The countries also agreed to impose a global minimum corporate tax (GMCT) of at least 15% on corporations with revenues and profits above a certain threshold level. This is to bring an end to tax competition which adversely affects the tax revenues of governments.
The countries agreed to the principles of a two-tier approach to update global taxation arrangements. The first phase calls for a moratorium on new digital service taxes while the members discuss rules regarding tax payment and sharing between countries.

Canada has contested that the digital services tax will not come into effect if the BEPS framework is implemented on time (by the end of 2023). It has also assured the USA that it is committed to cooperating with other governments to implement the BEPS framework.

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