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Canada is considering targeting online sellers like Netflix Inc., Alphabet Inc.'s Google, and Facebook inc. with sales and income taxes that could raise C$2.6 billion ($2 billion) a year in revenue.
Taxing online sales of tangible and intangible products follows international efforts to address profit shifting, but the proposal could stall given the reluctance of Canadian political leaders to tackle online taxation issues, tax lawyers told Bloomberg Tax. The idea also requires taxing non-resident sellers, which is challenging for a tax authority to achieve.
The House of Commons International Trade Committee, with a majority being part of Prime Minister Justin Trudeau’s governing Liberal Party, recommended April 26 that the government apply sales taxes on tangible and intangible products sold in Canada by foreign sellers using e-commerce platforms.
Canada also should continue working with other countries to ensure that profits from online sales by non-resident companies are taxed in Canada, as recommended by the Organization for Economic Cooperation and Development, the committee said in a report on e-commerce-related trade issues.
The committee heard that Canadian firms selling online face a disadvantage against non-resident competitors that don’t pay tax because they have no physical presence in Canada, the report said. Witnesses said taxing foreign entities’ sales in Canada could generate C$2 billion ($1.6 billion) in sales tax revenues and another C$600 million in income tax revenues, it said.
Quebec on March 27 proposed 9.975 percent sales tax on digital platforms, which at the time was seen as a potential model for other provinces and the federal government.
Netflix and Facebook declined to comment on the topic. In response to Quebec’s proposal, Netflix previously said that it pays all taxes “where legally required.”
Google Inc. didn’t respond to a request for comment, nor did eBay Canada, which has a presence in Canada and offered testimony before the parliamentary committee suggesting that tax policy needs to be made more fair.
The proposal is “tricky” politically because it would effectively impose a new tax on consumers, Toronto sales tax lawyer Simon Thang told Bloomberg Tax April 30.
Trudeau and Conservative leader Andrew Scheer, whose party is the main opposition in Parliament, have both rejected the idea of taxing Netflix Inc., said Thang, a principal with Thang Tax Law Professional Corp.
“It’s a gap in the current rules that’s been around since 1991, but it’s been blown wide open by the rise in e-commerce. If they start taxing Netflix, it would close a hole that has been relied on by non-residents from the beginning,” Thang said.
Canadian Heritage, the federal department that spearheads e-commerce taxation, didn’t respond to requests from Bloomberg Tax for comment on the committee’s recommendations, but recent comments from federal officials highlight the political issues involved.
Taxing web giants is “very important”, but also “very complex”, Joel Lightbound, parliamentary secretary to Finance Minister Bill Morneau, said April 27. OECD countries have committed to working together to review tax rules on e-commerce, Lightbound said in the House of Commons, responding to a question from an opposition politician on the committee’s recommendations.
“Our goal, as a government, is not to take a piecemeal approach, but rather a cautious approach that ensures we have a fair system,” he said.
Taxation of non-resident online sellers is a hot topic worldwide, but there are still questions about how a country can enforce a tax against a business that has no office or assets there, Joel Nitikman, a tax partner in the Vancouver office of Dentons Canada LLP, said April 30.
“The answer is that you can’t. You have to hope they pay the tax. Most will, some won’t,” Nitikman told Bloomberg Tax. “I guess there is nothing to lose by imposing the tax, as the companies are not paying it now anyway.”
The success of such an effort then “depends on what penalties or other consequences for non-compliance are drafted into law,” Bobby Solhi, a tax partner with TaxChambers LLP, told Bloomberg Tax April 30.
Toronto tax lawyer and author David M. Sherman said April 30 that Canadian consumers already have a legal obligation to self-assess sales tax when buying foreign goods and services, but noted that compliance is “basically zero.”
“It’s not just Netflix—it covers all services and intangibles, and for Quebec, tangible property as well when shipped from other provinces in Canada to Quebec,” Sherman told Bloomberg Tax.
Taxing non-resident online companies makes sense and will likely happen soon, if the federal government has the political will, Sherman said. “Perceived ‘new taxes’ are always disliked by the public,” he said.
Netflix is only a test case, not the main problem, John Reid, chief executive officer of high-tech industry group Canadian Advanced Technology Alliance, said April 30.
“The sales tax discussion needs to be broadened, factoring in all intangibles,” Reid told Bloomberg Tax.
The issue needs to be addressed, as a foreign company that doesn’t need to collect sales tax is automatically 15 percent cheaper than a Canadian competitor—the sales tax rate that applies in some provinces, he said.
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