In this update:
- The Proposed Digital Services Tax (DST) bill was released on December 14, 2021
- The DST is not expected to apply if a multilateral Pillar One agreement is reached by the end of 2023
- The DST will be a 3% tax on Canadian source income related to digital services in excess of US $ 20 million earned by a single company or consolidated group with worldwide sales of at least 750 million euros
- Any taxpayer who earns Canadian digital services income in a calendar year and is part of the consolidated group or is part of a consolidated group that meets the global revenue requirement of $ 750 million at least $ 10 million in that year or an earlier calendar year beginning in 2022 (i) of Canadian sales of digital services must be registered under the DST
- A consolidated group may designate a constituent member who will comply with the DST on behalf of all taxpayers in the group
- A DST is not due by a taxpayer until mid-2025 at the earliest, but that first payment for the DST is made on Canadian digital service revenues generated in the calendar years 2022-2024
On December 14, 2021, the federal government published a bill to implement a digital service tax (DST). The DST was originally proposed in the 2021 federal budget. As explained in the 2021 budget, the DST is only expected to apply in Canada until a multilateral agreement is reached on taxing digital services. The Economic and Fiscal Update 2021, also published on December 14, 2021, confirms the intention of the German government to apply the DST only until a multilateral agreement comes into force.
Canada expects that its work with the OECD, the G20 and members of the Inclusive Framework will lead to a consensus on a new tax law as proposed by the OECD on the first pillar for countries where multinational companies offer digital and certain other consumer-oriented services Consumer. 137 countries reached high-level agreement on the first and second pillars in autumn 2021.
The Canadian DST is not expected to apply if a multilateral Pillar One agreement is reached by the end of 2023. The federal government has prepared the draft DST law as an alternative if no such agreement is reached. The Draft Digital Services Tax Act (DSTA) is a self-contained law to calculate and impose the DST, including all necessary enforcement, valuation, collection and other administrative regulations. Daylight saving time comes into force on January 1, 2024 at the earliest. However, when it goes into effect, Daylight Saving Time will apply to applicable Canadian digital services revenue generated on or after January 1, 2022, the proposed Effective Date in the 2021 Budget.
Structure of the DST
The bill confirms the 2021 budget proposal that the DST will impose a 3% tax on a taxpayer’s taxable Canadian digital service income over $ 20 million in a calendar year. Taxpayers include trusts, partnerships, corporations, and other partnerships, but not individuals and corporations. The DST applies to both individual companies and consolidated groups, i.e. two or more companies that are required to prepare consolidated financial statements in accordance with acceptable accounting principles for accounting purposes or that would be required if one of the companies had holdings on a public stock exchange. The DST applies in a calendar year to an individual unit or members of a consolidated group who have had worldwide sales of at least 750 million euros in a previous calendar year not before 2022 and in the respective calendar year more than 20 million in revenue under the scope of Canadian users. Revenues are determined as they are reported in financial statements that have been prepared in accordance with acceptable accounting principles (e.g. IFRS) or that would have been prepared in accordance with IFRS had no such statements existed.
Canadian digital services revenue is defined as revenue from four categories of activities. Revenue from each category is based on a formula that takes into account the proportion of users who are in Canada versus outside Canada (as determined based on user data such as billing, shipping / shipping address, phone number and other information available) .
- Online marketplace services: Income from providing access to or use of the marketplace; Commissions or other fees to facilitate deliveries between users (plus ancillary services); Premium services, preferential treatment, or other optional enhancements; and other sources required by law. This category does not include income from the provision of storage or shipping services at a reasonable compensation rate.
- Online Advertising Services: Income from facilitating or delivering targeted online advertising and other sources required by law.
- Social media services: Income from providing access to or use of social media platforms; Premium services or other optional enhancements; Facilitating interactions between users or with user-generated content; and other sources required by law. This category does not include income from the provision of private communications services, if that provision is the sole purpose of the platform.
- User Data: Income from sales or access to User Data collected from any of the three categories above, as well as other sources required by law.
The four categories are mutually exclusive: Income from online advertising services is defined to exclude income from online marketplace services; Social media service income excludes the first two categories; and user data revenue excludes the first three categories. The four categories generally exclude intra-group payments. If a member of a group provides the corresponding service or user data and another member of the group generates the income, it is assumed that the income earner has also provided the service or user data.
Canadian taxable digital service revenue is the total of Canadian digital service revenue less a generally $ 20 million. The $ 20 million exclusion will be shared among members of a consolidated group based on their share of the Canadian digital service revenue generated by the group.
Expected entry into force
The earliest date the DSTA will take effect is January 1, 2024. However, each time the DST goes into effect, the DST will apply to all taxable Canadian digital service income earned on or after January 1, 2022 (assuming 750 Million euros / 20 USD.). -Million conditions are met). The intent of this delayed entry into force reflects the government’s preference to rely on a multilateral approach to digital services rather than domestic DST.
Once the DSTA goes into effect, a taxpayer must have completed $ 31 million or more in global sales and the taxpayer has more than $ 10 million in Canadian digital service revenue (half the qualifying amount). The Minister of Finance (Minister) can also unilaterally register a taxpayer upon delivery of a notice, unless the taxpayer confirms to the Minister that registration is not required.
Taxpayers must submit a tax return under the DSTA for a calendar year and all taxes due by the 30th sales conditions for the calendar year.
A constituent member of a consolidated group may decide to appoint another constituent member to represent that member for the purposes of the DST. The nominee then acts on behalf of the electing taxpayers for the purposes of the DST. However, it is not clear whether the designation would allow for consolidated reporting. Members of a group are jointly and severally liable for the DST owed by other members of the group.
Administrative rules
The DSTA contains rules for assessments, appeals, examinations, collections, enforcement, penalties, criminal offenses and all other aspects for the administration of the DSTA. It also contains an anti-evasion rule similar to the general anti-evasion rule of the Income Tax Act (Canada) (ITA). The DSTA anti-circumvention rule applies to the denial of a tax advantage resulting from a contesting transaction or a series of transactions that include a contesting transaction, if the contesting transaction otherwise leads to abuse or misuse of the DSTA, its regulations or other relevant enactments would .
In general, the administrative regulations of the DSTA correspond to those of the ITA. There are notable differences that reflect the fact that the DST could apply to non-resident companies with little or no Canadian physical presence, which can create collection and enforcement problems. In particular, the Minister may condemn any member of a consolidated group for the tax liability of another member of the group, whereby each of those members is jointly and severally liable for the tax liability. The general limitation period for the new setting for a calendar year is seven years after the required deadline has been submitted. The general retention period for keeping the required records is eight years compared to six years under the ITA (provided the taxpayer has filed the required declaration).
Interestingly, the DSTA includes a new rule that if a taxpayer appeals to the Canadian tax court, the government can also request the court to award an additional amount of up to 10% of the amount in dispute if the court finds so (1) in relation on that amount “there was no reasonable cause to complain” and (2) the purpose of the complaint was to defer payment of an amount owed under the DSTA.
Conclusion
There will undoubtedly be many challenges to overcome, both in the administration and in the enforcement of the DSTA. For example, taxpayers who do not work on a calendar year basis will have difficulty calculating and reporting income. The practicalities of determining which users are or are not in Canada, and the associated burden of proof in the event of any review or reassessment activity, should also prove challenging. Finally, there is a serious risk that domestic DSTs from different countries could overlap and lead to double taxation. Conversely, given the so-called “revenue rule”, which generally stipulates that the courts of one country will not enforce a tax debt claim from another country, the government may face its own enforcement task of actually collecting the DST from some taxpayers. These challenges support and reflect the fact that the DST is likely to be viewed by the federal government as a placeholder for a more appropriate multilateral outcome of the OECD process.
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