The Department of Finance recently announced that Canada has joined forces with 136 countries through the Organisation for Economic Co-operation and Development (OECD) to create international tax reform based on two objectives (i.e., a multilateral “two-pillar” treaty):
- Ensuring that large, profitable organizations, including those in the digital services industry, pay their fair share of taxes in the jurisdictions where their customers and users are located; and
- Subjecting multinational businesses to a 15% minimum tax no matter where their profits are earned.
At the same time, it was announced that the legislation for the enactment of a Digital Services Tax (DST) in Canada will be finalized and put in place by January 1, 2022, as announced in the 2021 federal budget. However, once enacted, the proposed international tax reform will make the DST unnecessary. As a result, while the DST will have an official effective date of January 1, 2022, it will not be imposed on taxpayers until January 1, 2024, and even then, only if the international tax reform (i.e., two-pillar treaty) has not come into force as expected.
In essence, Canada is keeping the DST in its back pocket in case the corresponding international tax reform measures are not put into force. Where the Department of Finance deems the DST to be necessary, it will first become payable on January 1, 2024, and will be levied on qualifying revenues from January 1, 2022.
The proposed DST was to apply at a rate of 3% on revenue derived from certain digital services that rely on data and content harnessed from Canadian users. The DST was expected to target revenue from the following sources:
- Online marketplaces (e.g., Amazon);
- Social media (e.g., Facebook and Twitter);
- Online advertising and the facilitation of online advertising placement; and
- User data, including the sale or licensing of data, even where it has been aggregated or otherwise preserves anonymity.
This is good news for businesses that could potentially be subject to the DST, as there are less than three months before it was to come into effect and, to date, no specific rules for its application have been released, despite numerous concerns about its implementation. With this new development, the DST may never come into effect and, at the very least, taxpayers will now have an additional two years to prepare for the potential implementation of a DST in Canada.
The full Department of Finance Canada announcement can be found at the link below:
Statement by the Deputy Prime Minister on new international tax reform agreement