September 5, 2023
Canada moves ahead with its own digital services tax, releasing draft legislation
Canada is moving ahead with enactment of its own digital services tax (DST). It is anticipated that Canada's DST will be enacted by 1 January 2024, with retroactive effect to 1 January 2022.
The new rules may result in a filing obligation and tax liability for any entity — Canadian or otherwise — that as a corporate group has global consolidated revenues of €750 million or more and earns Canadian digital services revenue from providing online marketplace services, online advertising, social media services or the monetizing of user data in excess of CA$20 million.
Affected entities will need to be registered for Canada's DST by 31 January 2025 and file returns and remit DST for both 2022 and 2023 by 30 June 2025.
On 4 August 2023, the Department of Finance released a revised draft of the Digital Services Tax Act (DSTA) for public consultation. The revised draft legislative proposals came shortly after Canada's decision not to further extend a multilateral freeze on the imposition of any new domestic DSTs by another year. Interested parties are invited to provide comments on the draft DSTA by 8 September 2023.
This Tax Alert provides a brief overview of Canada's introduction of the DST as well as a summary of certain changes included in the revised DSTA.
For the past decade, the Organisation for Economic Co-operation and Development (OECD) has been working with its members to obtain international consensus to adopt a solution to address the challenges of tax base erosion and profit shifting (BEPS) of multinational enterprises. To combat this issue in the interim, several countries, including France, Austria, Spain, Italy and the United Kingdom, took a unilateral approach and enacted a domestic DST aimed at taxing certain services performed by large companies and consolidated corporate groups that met certain revenue thresholds. In the fall of 2020, the Canadian federal government announced its intention to do the same and unilaterally implement a Canadian DST. However, Canada concurrently announced that it would delay enactment of its DST until the end of 2023, essentially waiting to see whether multilateral measures were implemented by the end of 2023.
In July 2021, a statement was issued by the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (the Inclusive Framework) describing the key components of a two-pillar approach. Pillar One would allocate a portion of the consolidated profits of large consolidated groups to the jurisdiction from which revenues were earned, and Pillar Two would introduce an agreed global minimum effective tax rate for such consolidated groups. By 8 October 2021, a statement on the implementation of the international tax reform was issued with the intent that the new reforms would come into effect by the end of 2023. One of the conditions of the implementation of Pillar One, however, would be the removal by member states of any unilateral DST or similar measure.
Although supportive of the two-pillar proposal, the Canadian government introduced proposed DST legislation in December 2021 for public consultation. It was understood that the proposed DST legislation would not be declared in force until at least 1 January 2024, or might never be declared in force if the Pillar One measures were implemented by the end of 2023, as planned. If the multilateral approach did not come into force by 2023, Canada's DST would be payable in respect of taxable Canadian digital services revenue earned as of 1 January 2022.
On 11 July 2023, the Inclusive Framework released an Outcome Statement,1 which included an additional one-year standstill on imposing any new DST legislations as it was becoming clear that Pillar One would not be fully implemented by the end of 2023. Although 138 member counties approved of the Outcome Statement, Canada did not. Instead, on 12 July 2023, Canada's Deputy Prime Minister and Minister of Finance, Chrystia Freeland, issued a public statement confirming that Canada will be moving ahead with the implementation of its domestic DST if no multilateral agreement is reached by the end of 2023. Shortly thereafter, on 4 August 2023, the Department of Finance published a revised draft DSTA. Although various changes were made to the draft DSTA, the bulk of the proposed measures remains consistent with its previous iteration.
Draft DSTA released on 4 August 2023
The proposed DST continues to apply to large domestic and foreign businesses where their:
If a taxpayer or its consolidated group meets these conditions, the taxpayer(s) will be required to pay a tax equal to 3% on their taxable Canadian digital services revenue exceeding CA$20 million in a calendar year.
The four categories of taxable Canadian digital services revenue continue to consist of Canadian online marketplace services revenue, Canadian online advertising services revenue, Canadian social media services revenue and Canadian user data revenue:
However, Canadian online marketplace services revenue is expanded to include a supply of a service between users of an online marketplace that meets any of these criteria:
Income that could be included in multiple revenue streams is restricted to a single revenue stream with priority going first to online marketplace services revenue, then to online advertising services revenue, then to social media services revenue, and then to user data revenue.
The draft DSTA also makes the following modifications to various definitions:
In addition, the revised draft DSTA includes the following notable changes:
Businesses and consolidated groups that are above the threshold for DST should review the revised DSTA in close detail and be informed of the following key features:
It is anticipated that Canada's DST legislation will be enacted by 1 January 2024, taking into consideration the comments that the Department of Finance receives on its 4 August 2023 revised DSTA. Impacted or potentially impacted persons should review the draft DSTA and provide feedback by 8 September 2023.
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP (Canada), Toronto
Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor
2 A consolidated group is defined in the DSTA as two or more entities that either are required to prepare consolidated financial statements for financial reporting purposes under acceptable accounting principles or would be required to do so if equity interests in any of the entities were traded on a public securities exchange that requires the use of acceptable accounting principles.
3 A constituent entity of a consolidated group is defined in the DSTA as any entity of the group that (i) is included in the consolidated financial statements of the group (prepared in accordance with acceptable accounting principles), or (ii) if consolidated financial statements are not required to be prepared by the group (or are not prepared in accordance with acceptable accounting principles), would be required to be included in the consolidated financial statements of the group if equity interests in any of the entities in the group were traded on a public securities exchange that requires the use of acceptable accounting principles. A constituent entity also includes any entity that is excluded from the group's consolidated financial statements solely because of size or materiality.