Delaying policy changes only prolongs the disadvantages that Canadian businesses face within their own borders and leaves tax revenue on the table at the expense of the Canadian economy.
Did you pay HST on that streamed movie you watched last night? If it was from a foreign provider, you didn’t. If it was from a domestic provider, you did. Therein lies a problem that puts Canadian providers of online services at a disadvantage.
The digital economy is expanding access to global markets and changing the way Canadians access content, order taxis, find accommodations and shop for goods. It has also made it possible to purchase digital goods and services over the Internet directly from suppliers located outside Canada just as easily as from domestic vendors. While this is useful for consumers, it complicates tax collection and raises competitive pressures for both domestic and foreign businesses.
In particular, foreign providers of digital products and services, ranging from e-books and online games to streaming services such as Netflix and Spotify, are generally not obligated to collect and remit sales tax. Instead, the consumers of the service are responsible for determining and paying the associated GST/HST, though in practice they rarely do. This creates two major problems: Canadian businesses are being put at a disadvantage relative to their foreign competitors who are not collecting and remitting GST/HST and governments are missing out on significant amounts of tax revenue.
To address both problems, Ottawa should amend the Excise Tax Act to apply to businesses that supply digital goods and services for consumption within Canada regardless of where the company is located, in compliance with International VAT/GST Guidelines. Under current policy, whether or not a business is obligated to remit GST depends on some sort of physical establishment within Canada. If a company is considered to be “carrying on” its business abroad, it has no obligation to register with the Canada Revenue Agency (CRA) for GST/HST purposes and goods or services provided by the company are deemed to be made from outside Canada. With the rise of the digital economy, businesses can be fragmented across international borders in ways that can make the physical location of goods, offices, staff, bank accounts or production have very little to do with where goods and services are consumed.
The current rules place Canadian companies at a competitive disadvantage within their own country. Foreign companies, without physical establishment in Canada, can charge consumers 5 per cent to 15 per cent less for the same service by not collecting GST/HST. Digital platforms and marketplaces further complicate the determination of who is responsible for remitting GST/HST to the CRA, since consumers may not know whether they are purchasing from a domestic business or not. Canada should make foreign companies equal to domestic companies, tax-wise, with the same registration and reporting requirements. Whether or not a business has to report and remit GST/HST should be based on the consumer’s, not the supplier’s, location.
The disparity in VAT treatment between domestic and foreign firms with respect to digital products and services is a well-established international tax problem. Australia, Norway, the EU, Japan and other countries have already implemented tax-policy changes to remove the disadvantage to businesses within their own borders. And some companies have exhibited a willingness to co-operate. Airbnb, for example, collects VAT on its service fees in the EU, Switzerland, Norway, Iceland, South Africa and Albania. Uber has complied with the requirement that drivers in Montreal provide a GST and QST number and rebates drivers for the sales tax paid on the business expense of using the platform.
Canada can learn from policies employed in other countries and implement changes that work with our existing excise-tax regulations. Canada could, for example, develop a simplified online registration platform for non-resident businesses, similar to that of Norway; use Japan’s definition of “digital services,” which does not include software or telecommunications carrier services; and, as with Europe, Australia and South Korea, hold marketplace operators (such as Amazon, Ebay and Google Play) responsible for collecting GST/HST on all transactions on the marketplace.
The scope of digital products and services covered, and the explicit requirements to be placed on non-resident businesses, should be designed with the focus on applying GST/HST to domestic consumption – keeping in mind the need to balance the application of new measures with minimizing the additional administrative burden placed on both foreign and domestic businesses.
Delaying policy changes only prolongs the disadvantages that Canadian businesses face within their own borders and leaves tax revenue on the table at the expense of the Canadian economy.
Rosalie Wyonch is a policy analyst at the C.D. Howe Institute and author of the recently published study “Bits, Bytes, and Taxes: VAT and the Digital Economy in Canada."
Published in the Globe and Mail.
