The International Impasse on Digital Tax and Its Implications for Canada

Whether additional taxes should be levied upon multinational technology corporations is an ongoing international trade dispute. Any casual follower of the U.S. stock market will notice that many of the stand-out performers this year are the tech companies. Indeed, the COVID-19 pandemic seems to have spurred the growth of tech giants amidst a global economic contraction. Yet, many of these giant tech companies are being effectively taxed less than other multinational companies because they are particularly shrewd at parking their profits in low-tax jurisdictions. For example, with its 12.5% corporate tax rate—compared with Canada’s 26.5% and the U.S.’s 21%Ireland has been a tax haven for tech giants like Apple to offshore their profits.

More importantly, an increasingly digitalized economy leaves many national governments frustrated with their limited ability to tax tech companies whose cross-borders businesses do not require a physical presence. Given the global scale of many tech companies, both the United Nations and Organization for Economic Co-operation and Development have been developing a new international digital tax model that can help countries collect revenues from non-resident tech companies. However, it is uncertain when a new international digital tax model will come into force. The OECD expects a new digital tax agreement to be reached by mid-2021 but cautions that nothing is certain. The biggest obstacle is the U.S. government, which is unwilling to let other countries levy more taxes on American tech companies.

Without any imminent multilateral tax agreement, many countries have decided to forge their own paths by imposing digital taxes unilaterally. The problem with a proliferation of unilateral digital taxes is that it creates great uncertainty for multinational tech companies and could trigger a trade war that, according to the OECD, could “reduce global GDP by more than 1% annually.”

Where does this current global impasse on digital tax leave Canada? Certainly, a multilateral framework for digital taxes under the OECD model is the most beneficial outcome for Canada, since such a framework allows Ottawa to collect more revenues without antagonizing our trading partners. Another route would be to negotiate a bilateral tax agreement with those countries whose tech companies have a significant economic presence in Canada. The problem with this approach is that the U.S., the most important trading partner of Canada, is unwilling to budge on any digital tax matters, which is precisely the reason why OECD has trouble pushing the tax talks forward.

With the current stalemate at the international level, it would seem to make sense for Canada to propose its own digital tax. In fact, a few commentators are calling Ottawa (see here and here) to follow the examples of U.K. and France in imposing its own digital tax without waiting for an international agreement. In fact, Quebec has already implemented its own digital tax. Saskatchewan is also following a similar path. Although such a move at the national level would likely further strain the trading relationship with the U.S., it might be worth the risk. Together with other countries who have taxed or are considering taxing tech companies, a new digital tax in Canada may incentivize the U.S. to make concessions on a multilateral digital tax agreement to obtain a better deal than the rates imposed by individual countries.

In short, there is a growing global consensus on the urgent need to tax tech giants at an adequate rate. Since nearly all these corporations are American companies, the U.S. remains unwilling to sign on any international agreement that would increase the tax rate on their tech sector. With an uncooperative American government, the world is at the risk of a global trade over a rapidly growing digital economy, which could severely impede the economic recovery from the shocks of the ongoing pandemic. The best scenario for Canada is to work with other partners to pressure the U.S. to accept the multilateral OECD tax framework. Imposing its own digital tax in following the examples of other countries might be one of the ways to achieve that aim.

Written by Jingcai Ying, a contributing editor at the IPilogue and a J.D. candidate at Osgoode Hall Law School (Class of 2023).

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