August 23, 2017 – Foreign providers of online services enjoy a tax advantage over domestic providers, according to a new report from the C.D. Howe Institute. In Bits, Bytes, and Taxes: VAT and the Digital Economy in Canada, author Rosalie Wyonch notes that the digital economy in Canada is expanding access to global markets for online services that are not subject to sales tax when they enter Canada.
“Canada hasn’t kept pace in adapting tax policy to the digital economy in comparison to its peers,” states Wyonch. “Other entities such as the European Union, Japan, and Norway have already acted on this issue, and moved ahead of Canada in terms of addressing the differing tax treatment that puts domestic vendors at a competitive disadvantage relative to foreign suppliers of goods and services from the digital economy.”
Foreign providers of digital products and services are presently not obligated to collect and remit sales tax if they are not ‘carrying on business’ in Canada. Technically, the consumers of these products have the onus of paying the associated GST/HST taxes, but the tax is rarely enforced by the online services.
This creates two major problems for Ottawa:
- Compliance is virtually nonexistent among consumers, meaning significant levels of tax revenue remain uncollected. Moreover enforcement of the taxes for individual consumers would likely be incredibly expensive and unpopular.
- Since these taxes are not being paid by consumers, foreign suppliers have an advantage over domestic companies that are obligated to collect taxes from their consumers.
Foreign vendors are able to charge the same price as domestic companies for a good or service, but by not charging GST/HST, they can extract more revenue than domestic providers, who are required to charge individual consumers the necessary tax.
The author recommends that Ottawa amend the Excise Tax Act so that it applies to businesses that supply digital goods and service for consumption within Canada. Canada can learn from the policies of its peers that have already moved on this front in order to implement changes that coincide with our existing excise tax regulations.
Further delaying policy changes on this issue will prolong the disadvantages faced by domestic providers of online services, and leave tax revenue at large at the expense of the Canadian economy.
The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada's most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.
For more information contact: Rosalie Wyonch, Policy Analyst, C.D. Howe Institute; or Alexandre Laurin, Director of Research, C.D. Howe Institute; or email: firstname.lastname@example.org.