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By Peter Menyasz
Quebec has proposed a plan to tax Netflix, Amazon and other digital platforms without a physical presence in the province, setting a precedent among Canadian jurisdictions.
The proposal, released March 27, would set a 9.975 percent sales tax on digital platforms, and could be a model for other provinces and even the federal government. Still, the province may lack jurisdiction to impose the tax, and it may not survive a provincial election in October, tax lawyers told Bloomberg Tax.
Quebec lost $270 million in 2017 from uncollected sales tax on property and services purchased online, according to the proposal. The proposal is part of a 14-point action plan to combat tax evasion, and is part of the province’s budget for the next fiscal year.
“We are strengthening tax fairness by bringing collection of the sales tax in line with the new economy,” Quebec Finance Minister Carlos Leitao said in his budget speech to the provincial legislature. “We will require sales tax to be collected on services and incorporeal property sold from abroad.”
The plan comes amid pushes from many countries, as well as the OECD and European Union, to ensure multinational companies and digital giants pay the proper amount of tax.
The tax proposal would apply to non-Canadian digital platforms on Jan. 1, 2019, and to Canadian-based platforms on Sept. 1, 2019.
The government’s detailed budget plan calls for creation of a separate registration system for the Quebec Sales Tax for non-resident companies that sell intangible products and services in the province. The registration system will be required for companies “without a physical or significant presence in Quebec that sell more than C$30,000 in taxable supplies per year,” according to the proposal.
The budget also proposes eliminating international tax loopholes, restricting income sprinkling arrangements, rewarding tax cheat informants, and reviewing the province’s voluntary disclosure program.
Netflix pays all taxes “where legally required”, the company told Bloomberg Tax March 28 in an emailed statement. Amazon didn’t return requests for comment.
Quebec’s approach offers a model for other provinces, and even the federal government, which has discussed the idea but has shown no appetite to act, Toronto sales tax lawyer Simon Thang said March 28. Thang is the principal of Thang Tax Law.
It’s like Quebec’s special accommodations tax for companies like Airbnb Inc. and its application of sales tax to ride-sharing services like Uber Technologies Inc., but those focus on individuals located in the province, not non-residents, Thang told Bloomberg Tax.
Technically, Canadian sales and value-added taxes already apply to Netflix and other services, including software, music, and movie downloads, but that’s based on self-assessment by consumers and the vast majority don’t comply, Toronto tax lawyer David Sherman said March 27.
“There’s no policy reason justifying an effective exemption from tax,” Sherman told Bloomberg Tax.
Netflix announced in September a C$500 million ($400 million) investment over five years on production in Canada, but later stressed that it wasn’t based on a deal with Canada to exempt it from taxation.
Quebec’s proposal will work because companies like Netflix don’t want bad publicity from being branded non-compliant with local laws, Louis-Frederick Cote, a partner with Montreal law firm Spiegel Sohmer, said March 27.
“Although the local authorities may not have constitutional powers, they will nonetheless be able to convince the non-residents to register, collect, and remit,” he told Bloomberg Tax.
But Cote noted that legislation might not pass before the province’s Oct. 1, 2018 general election and said it’s unclear if a new government would follow through.
The proposal, which largely mirrors OECD recommendations, is based on Quebec’s concerns about revenue leakage and self-assessment by consumers as an ineffective way to collect sales tax on intangibles and services sold in the province by non-residents, Thang said. The government also suggests it could lead to unfair competition for resident suppliers currently required to collect sales tax, he said.
“What is novel here is that a subnational government is trying to impose them,” he said. “The proposals are very broad and would sweep non-resident suppliers into the Quebec tax net even if they have little connection with the province other than sales to customers residing there.”
Toronto tax lawyer Bobby Solhi warned March 27 that businesses should be careful in electing whether to use the new system or simply register for the general Quebec Sales Tax system. Using the general system would expose them to registering for the federal goods and services tax and federal-provincial harmonized sales tax, with significant compliance implications for their activities across Canada, Solhi, a tax partner with TaxChambers LLP, told Bloomberg Tax.
Kim Moody, director of Canadian tax advisory services with Moodys Gartner Tax Law LLP in Calgary, said March 27 the Quebec government’s proposal wasn’t surprising given how desperate Canadian governments are for additional revenue and the “easy pickings” available with digital platforms.
“The reality is that these digital providers are making profits from Canadian consumers and it is not unreasonable for various levels of Canadian governments to seek to tax such profits,” Moody told Bloomberg Tax.
Sherman, meanwhile, warned the proposal could exceed provincial authority.
“This is totally unenforceable in practice, except for large vendors like Netflix that have enough exposure in Canada that they can be found and taxed,” he said.
Another issue is that the new registration system—which would parallel the existing Quebec Sales Tax system—won’t allow non-residents to claim credits for sales tax they pay on goods or services in Quebec, Jean-Guillaume Shooner, a tax partner in the Montreal office of Stikeman Elliott LLP, told Bloomberg Tax March 27.
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