Canada’s Digital Services Tax — the DST — is slated to take effect at the start of 2022. Find out about the details of the new tax
In Budget 2021, the federal government confirmed its plan to introduce a federal Digital Services Tax (DST), as first announced in the Fall Economic Statement 2020. The budget also revealed some key features of the new DST and how it will be implemented, although draft legislation has not yet been released at the time of writing.
The DST is designed to tax proliferating business models that rely on digital technology to engage with online users in Canada, including intermediation and social media platforms. Unlike traditional businesses, these businesses often do not need a local physical presence to engage with users in Canada and they usually generate some or all of their profits from their users’ participation, data and content.
Although the Organisation of Economic Co-operation and Development (OECD) has been working to gain international consensus on a solution to deal with the tax challenges of the digitalized economy, an agreement has not yet been reached (as discussed further below). Budget 2021 says Canada’s proposed DST would apply as of January 1, 2022 until an acceptable multilateral approach takes effect.
In the budget, the federal government also invited feedback from stakeholders on the details of the proposed DST and implementation approach. In response, in our recent submission we highlighted some important concerns with some of the DST’s main elements.
OVERVIEW: BUDGET 2021’S DST PROPOSALS
While many questions remain in the absence of detailed legislation, the key features of the DST as set out in Budget 2021 are as follows:
Rate and base
The DST would apply to in-scope revenue at the rate of three per cent. This excludes any value-added tax or sales tax collected on the transaction.
In-scope revenue
The DST would generally apply to revenue from four types of online business models that rely on engaging with Canadian online users in order to generate income:
- online marketplaces – including services provided through an online marketplace that helps match sellers of goods and services with potential buyers
- social media – including services provided through an online interface to facilitate interaction between users or between users and user-generated data
- online advertising – generally includes services aimed at the placing of targeted online advertising based on data gathered from users of an online interface
- user data – generally, the sale of data gathered from users of an online interface
For online marketplaces, the DST would not generally apply to:
- tangible goods stored, sold and shipped through the marketplace
- goods and services sold by a seller through the marketplace on their own account (including the sale, licensing, or streaming of digital content such as audio, video, games, software, ebooks, newspapers and magazines)
Taxpayers
The DST would apply to large foreign and domestic entities (including corporations, trusts, and partnerships) or members of a group that meet both conditions:
- €750 million or more in global revenue from all sources in the previous calendar year, and
- in-scope revenue associated with Canadian users of $20 million (CAD) in that year
The €750 million threshold is the same threshold that triggers the OECD’s country-by-country reporting requirements.
If the two conditions are met, the DST would apply only to in-scope revenue associated with Canadian users that exceeds the $20 million threshold. The proposals indicate that the definition of groups in the DST legislation would follow the definition in the country-by-country reporting rules.
Source of revenue
When revenue flows from both in-scope and other business activities, the in-scope revenues would need to be reasonably allocated among the activities. Budget 2021 proposes two general approaches for determining an entity’s in-scope revenue related to Canadian users:
- when transactional information can be traced to Canadian users, that revenue amount would be in-scope
- when tracing is not possible, the in-scope amount would be allocated through a formula that varies depending on the revenue’s nature
Location of users
To source revenue related to digital service users in Canada, Budget 2021 suggests looking to the users’ ordinary location, although the user’s real-time location could be used for specific types of revenue. The digital service provider can determine a user’s location through data it already has, such as the user’s IP address, billing address, delivery address and telephone area code. Digital service providers would be expected to use a consistent approach for determining their users’ locations.
Income tax treatment
The DST would be deductible from an entity’s taxable income based on the usual Canadian income tax principles — that is, whether the entity incurred the expense in order to earn taxable Canadian income. DST liabilities would not be eligible for a Canadian income tax credit.
DST filings and payments
Businesses subject to DST would have to file an annual return after the end of the proposed calendar-year reporting period. One annual DST payment would be required after the end of the reporting period, and one designated entity would be allowed to file the DST return and pay the related liability for the entire group. However, the group would be jointly and severally liable for DST payable by any other group member.
Also coming soon: GST changes for ecommerce
With all the talk about new taxes on electronic transactions, it’s also important to keep in mind that GST changes for ecommerce will take effect on July 1, 2021. These GST rules will generally apply to a broader range of goods and services than the DST. For example, cross-border video streaming services will become subject to the GST but generally not the DST.
About the Author: Bruce Ball
Source: CPACanada