Digital services tax

Implementation of a new tax on revenues for companies offering digital services. The tax will take effect January 1, 2022. This measure is temporary and will only apply in the event that Canada does not reach a multilateral agreement on the taxation of digital services.

It will be a 3% tax on revenues collected by online marketplaces, social media, online advertising services, and user data sales and licensing services. This tax will apply to businesses with worldwide revenues of at least €750 million and Canadian revenues of more than $20 million.

This is an update of the note International corporate tax and digitization published on January 28, 2021, which was adjusted to reflect the new parameters outlined in the 2021 budget and 2020 corporate financial statements.

The tax base was determined using data from the financial statements of the public companies meeting the criteria set out above for reference years 2019 and 2020. The tax base was then projected forward using the historical average growth rate of 12% observed in the T2 income tax return data for companies in the relevant technology sectors.

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 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.

L’estimation de l’assiette fiscale comporte un haut niveau d’incertitude étant donné que l’information contenue dans les états financiers des entreprises est limitée. Ainsi, l’estimation de la part des revenus générés au Canada qui est assujettie à cette taxe repose sur des hypothèses fortes.  De plus, la volatilité observée dans la croissance des revenus des principaux secteurs technologiques génère aussi de l’incertitude lors de la projection de cette assiette fiscale. Ensuite, l’application du projet repose sur les revenus mondiaux des entreprises, information qui n’était pas collectée par l’ARC avant 2016[^2]. On s’attend aussi à ce que les entreprises des secteurs ciblés adaptent leurs services et leurs prix en fonction de la nouvelle loi. Ensuite, cette analyse ne prend pas en compte le fait que le gouvernement devra déployer des ressources additionnelles pour faire le suivi des transactions en sol canadien puisque ces données ne sont pas collectées actuellement. Finalement, les services de publicité ciblant les téléviseurs connectés n’ont pas été pris en compte dans l’analyse étant donné la difficulté d’isoler ces données. Toutefois, le DPB estime que ce secteur aurait une incidence marginale sur l’assiette fiscale.

• 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.