November 12, 2019 – New OECD proposals on digital taxation would mean a substantial overhaul of Canadian tax rules if they are brought into effect, according to a new report from the C.D. Howe Institute.
In “The Big Shakeup: Making Sense of the OECD Digital Tax Proposals,” authors Jeffrey Trossman and Jeffrey Shafer examine recent proposals from the Organisation for Economic Co-Operation and Development (OECD) which aim to deal with the issue of multinational enterprises (MNEs) earning significant profits in places where they have no obligation to pay income tax locally.
The proposals aim to provide “market” jurisdictions with a new, internationally agreed, taxing right overriding traditional international income allocation rules. Market jurisdictions would gain the right to tax a to-be-agreed percentage of the profits of large affected MNEs that are attributable to that country.
The key proposed measure would require a tax calculation based on the MNE group’s profits as reflected in its consolidated financial statements.
This would introduce a new form of tax base into the Canadian system, note the authors. The Income Tax Act generally imposes tax on income of a non-resident company that carries on business in Canada, and not on separate entities in its corporate group that may themselves have no connection to Canada – notably companies operating in the digital space with a limited physical presence in the country. Domestic rules would need to be substantially overhauled to align with the OECD proposal.
“With the increased digitalization of the economy, profits are more readily generated with no meaningful physical presence,” said Trossman. “This has generated controversy over the perceived unfairness of businesses earning significant profits in places where they have no obligation to pay income tax locally, but in which they nonetheless generate sales to consumers.”
Unlike unilateral digital service taxes (DSTs) introduced in France and proposed in the United Kingdom, the proposal’s scope extends to not only digital centric businesses but also to other so-called “consumer-oriented” businesses that generate significant profits attributable to intellectual property and other businesses that have adapted modern business methods to generate sales in a jurisdiction without establishing a physical presence. The consultation paper acknowledges that further discussion is required to define the proposal’s scope; for now, it does not specify whether financial services businesses would be affected.
For more information contact Jeffrey Trossman and Jeffrey Shafer, Partners, Blake, Cassels & Graydon LLP; or David Blackwood, Communications Officer, C.D. Howe Institute 416-865-1904xt 9997.