Published: December 18, 2023
Introduction: Updates On International Tax Policies
On November 21, 2023, the Government of Canada released the 2023 Fall Economic Statement, outlining Canada’s next steps on international tax reform and digitalization. The announcement claims that in order to maintain Canada’s essential social safety net, it is necessary to ensure that everyone is paying their fair share. The 2023 Fall Economic Statement specifically emphasizes the importance to ensure all business are paying their fair share of taxes. However, research has showed that Canada’s tax competitiveness has been falling since 2015, with increasing personal and corporate income tax rates in Canada.
Despite the falling tax competitiveness, Canada has actively participated in multilateral negotiations and the two-pillar OECD tax reform plan. Canada’s efforts in negotiating a multilateral treaty to implement Pillar One aims to require the largest and most profitable global corporations pay taxes in the jurisdictions where their users and customers are located. The federal government also reaffirmed its intention to move ahead with implementation of the Pillar Two global minimum tax in Canada via legislation, which would subject large multinational corporations to a minimum effective tax rate of 15 percent on their profits wherever they do business.
This article is Part III, and the final part of the Decoding 2023 Fall Economic Statement series, focusing on the proposed outline of Canada’s next steps in international tax reform and digitalization. In addition, this article will also examine tax measures discussed in Tax Measures: Supplementary Information section of the 2023 Fall Economic Statement concerning Canada’s international tax policies.
What Is the Two-Pillar OECD Tax Reform?
The two-pillar OECD tax reform refers to the ongoing efforts by the Organisation for Economic Co-operation and Development (OECD) to address the challenges posed by the digitalization of the economy and to campaign for a global minimum tax for multinational corporations. Each pillar supposedly addresses a different gap in existing rules that allow multinational corporations to avoid paying taxes. The reform is part of the broader effort to address the challenges of taxing digital businesses and preventing tax avoidance strategies used by large and profitable multinational companies.
First, Pillar One applies to the biggest and most profitable multinational corporations, targeting businesses with more than 20 billion Euros (equivalent to approximately 29.2 billion Canadian dollars) in revenue and a profit margin of at least 10 per cent. The goal is to relocate profits of the corporations to countries where they sell products and provide services, namely, where the consumers are. The idea is to give countries the right to tax a share of the profits of multinational enterprises based on where their consumers or users are located, regardless of whether the companies have a physical presence in that jurisdiction. This is particularly relevant for digital businesses that may not have a significant physical presence in the countries where they have a large user base.
Under Pillar Two, the objective is to impose a global minimum tax of 15% on any multinational corporations with over 750 million Euros (equivalent to approximately 1.09 billion Canadian dollars) in annual revenue. Pillar Two aims to address the issue of base erosion and profit shifting (BEPS) by setting a global minimum corporate tax rate. The idea is to ensure that multinational companies pay a minimum level of tax, regardless of where they operate. This is intended to prevent companies from shifting profits to low-tax jurisdictions to avoid paying taxes.
Although the 2023 Fall Economic Statement intended to outline Canada’s next steps on international tax reform and digitalization, the federal government merely provided a very ambiguous announcement on its plan for the Digital Services Tax. The Digital Services Tax aims to impose a 3 per cent tax on Canadian revenue from digital services exceeding 20 million Canadian dollars received by businesses with at least $1.1 billion Canadian dollars in global revenue. In October 2021, Canada agreed to pause the implementation of the Digital Services Tax, until the end of 2023, to give time for negotiations on Pillar One to conclude. In absence of firm dates for any progress, Canada’s proposed next steps on international tax reform and digitalization are essentially the conditions Canada set back in October 2021.
How Will Canada’s Plan Affect Canadian Taxpayers and Corporations?
With the looming recession and the continuous threat of inflation, Canada’s decision to impose the digital services tax is unlikely to help alleviate the economic challenges faced by the country. The implementation of such a tax could potentially exacerbate the strain on businesses and consumers, further hindering economic recovery. In the face of a recession, businesses are already grappling with reduced consumer spending, supply chain disruptions, and increased operational costs. The Digital Services Tax adds an additional layer of financial burden, particularly on tech companies and online platforms, which may, in turn, impede their ability to invest, expand, and create job opportunities. This counterproductive measure may inadvertently contribute to a deeper economic downturn, as businesses may be forced to cut costs, leading to layoffs and reduced economic activity.
Moreover, the continuous threat of inflation compounds the challenges posed by the recession. As prices rise, the purchasing power of consumers diminishes, impacting their ability to meet basic needs and driving a decline in overall economic demand. The imposition of a digital services tax could further amplify this inflationary pressure, as businesses may pass on the additional costs to consumers in the form of higher prices for digital services.
In addition, the decision to implement a digital services tax might strain international trade relations and activities. Such a tax could lead to disputes with other countries, especially those whose tech companies are major players in the global market. This potential friction could result in trade barriers and hinder diplomatic efforts to address broader economic issues.
Pro Tax Tips – Preparing for The Impact Of Digital Services Tax
The impact of the Digital Services Tax on consumers in Canada can be multifaceted, similar to its potential impact on the Canadian economy. Businesses subject to the tax, encompassing a broad spectrum that includes streaming platforms, e-commerce transactions, and digital subscriptions, may find themselves compelled to transfer the burden of the additional costs directly onto consumers. This financial pressure could manifest in the form of increased prices for a variety of digital services, irrespective of whether these services are geared towards personal consumption or are integral to commercial activities. In particular, there can be significant impact on small businesses reliant on digital services provided by large tech companies. If you are being impacted by the Digital Services Tax, please contact our top Toronto tax lawyers for legal advice specific to your case.
What Does The Global Minimum Tax Mean?
The Global Minimum Tax is proposed by the OECD, requiring multinational corporations with over $750 million Euros (equivalent to approximately 1.09 billion Canadian dollars) in annual revenue to pay a minimum 15% tax in any jurisdictions where the corporations provide goods and services. The idea is to ensure that multinational companies pay a minimum level of tax, regardless of where they operate. This is intended to prevent companies from shifting profits to low-tax jurisdictions to avoid paying taxes.
What Types Of Corporations May Be Impacted By The Two-pillar Reform?
The two-pillar international tax reform is primarily directed at addressing the taxation challenges posed by large multinational corporations. More precisely, Pillar One is designed to impact a select group of the world’s largest corporations—those boasting a revenue exceeding 20 billion Euros (equivalent to approximately 29.2 billion Canadian dollars) and maintaining a profit margin of at least 10 percent. In contrast, Pillar Two casts a wider net, affecting a more extensive range of corporations. This is achieved by lowering the threshold of annual revenue to 750 million Euros (equivalent to approximately 1.09 billion Canadian dollars), ensuring a more comprehensive application of the proposed reforms across a broader spectrum of businesses.
Disclaimer: This article provides information of a general nature only. It is only current at the posting date. It is not updated, and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions, you should consult a Canadian tax lawyer.
"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."