International corporate tax and digitalization
Implementation of a new corporate income tax for companies offering digital services. The tax will take effect January 1, 2022 and details will be revealed in the 2021 budget.
It is assumed that it will be a 3% tax introduced as a value-added tax (VAT), targeting advertising and digital intermediation services, and will apply to businesses with worldwide revenues of at least $1 billion and Canadian revenues of more than $40 million.
This assumption is consistent with the cost estimate of the tax on digital services carried out during the last election campaign and is based on article 1 of Law No. 2019-759 passed in France.
This is an independent cost estimate of a budgetary measure contained in the federal government’s Fall Economic Statement 2020 (FES 2020). A list of the PBO’s cost estimates of components of the FES 2020 can be viewed on its website.
Implementation of a new corporate income tax for companies offering digital services. The tax will take effect January 1, 2022 and details will be revealed in the 2021 budget.
It is assumed that it will be a 3% tax introduced as a value-added tax (VAT), targeting advertising and digital intermediation services, and will apply to businesses with worldwide revenues of at least $1 billion and Canadian revenues of more than $40 million.
This assumption is consistent with the cost estimate of the tax on digital services carried out during the last election campaign and is based on article 1 of Law No. 2019-759 passed in France.
The tax base was determined using data from the financial statements of the public companies meeting the criteria set out above. The tax base was then projected using the historical average growth rate in the T2 income tax return data for companies in the technology sectors in question.
The data were adjusted where the breakdown did not specify revenues generated in Canada. An estimate of Canadian revenues was made based on the relative size of the Canadian economy in the available segment. For some companies, the revenue share subject to the tax was estimated from publicly available information. The tax base was also adjusted to account for the behavioural response effect, set at 30%. This assumption is based on the work of the United Kingdom’s Office for Budget Responsibility presented in its Economic and fiscal outlook – October 2018.
The proposed measure acts as a value-added tax. As a result, the effective tax rate of 2.59% was estimated by taking into account variations in the revenues of the businesses subject to the new tax. The decrease in tax revenue owing to variations in business revenues was estimated using the marginal corporate income tax rate and the type of business. The estimate of total revenues was made by multiplying the resulting effective tax rate by the tax base corrected for behavioural response.
Estimating the tax base involves a high degree of uncertainty because of the limited information in the corporate financial statements. As a result, the estimate of the share of revenues generated in Canada that is subject to this tax is based on strong assumptions. In addition, the volatility observed in revenue growth in the major technology sectors also creates uncertainty in the tax base projection. Furthermore, the proposal’s scope depends on companies’ worldwide revenues, information that Canada Revenue Agency did not collect before 2016.[^2] It is also expected that businesses in the targeted sectors will adjust their services and prices in response to the new law. Finally, this analysis does not take into account the fact that the government will have to deploy additional resources to track transactions in Canada since this data is not currently collected.
- Estimates are presented on an accruals basis as would appear in the budget and public accounts.
- Positive numbers subtract from the budgetary balance, negative numbers contribute to the budget balance.
- “-“ = PBO does not expect a financial cost.