At the end of March, Finance Minister Bill Morneau visited the Chamber of Commerce of Metropolitan Montreal. He gave a speech and then took eight questions from Michel Leblanc, the chamber’s president.
The first two — When will you balance the budget? Is it fair that some rich people pay tax rates in excess of 50 per cent? — probably didn’t surprise the minister. But the next query felt novel, if only because of how high it came in the order. Leblanc wanted to know why a Netflix subscription is exempt from the Goods and Services Tax, while domestic providers of digital content are forced to collect it?
Good question. Why does the government stick to this policy of reverse protectionism, tilting the scales in favour of the barbarians at the gate instead of helping to repel the siege? Prime Minister Justin Trudeau broke promises to overhaul the voting system and to balance the budget by the final year of his mandate, so he’s shown he’s willing to reverse course. But he won’t budge on his pledge to treat the offerings of Netflix Inc. and other international providers of digital content and services like broccoli when it comes to the GST.
“We think we need to do that in concert with our main trading partners,” Morneau told Leblanc five months ago.
That’s still the position. “Our government is committed to ensuring that Canada’s tax system is fair and supports a strong middle class,” Pierre-Olivier Herbert, Morneau’s spokesman, said by email on Wednesday after I got in touch for an update. “This issue of how to appropriately ensure web giants pay their fair share is not a uniquely Canadian problem — it is a global issue.”
There’s no denying that last part. Big international companies have been hiding in plain sight from tax collectors for years, exploiting the disunity of global tax law to their full advantage. Statistics Canada published a paper in June that estimates a fifth of Canadian investment abroad “may not be attracted by real economic factors,” based on the amount of money companies have deployed in small countries that have tiny markets but big tax incentives.
Profit shifting is an old issue that has been made acute by the ease with which the masters of the digital economy can move around the globe.
Their most valuable assets are intangible ones, such patents, which can be assigned to affiliates anywhere. Profits then find their way home through an accounting method called transfer pricing. These perfectly legal tax dodges have helped companies such as Alphabet Inc. and Facebook Inc. become global monopolists that destroy competition, shrink national tax bases, and exacerbate income inequality and populist frustration. Governments have been helping these companies eat the world, when they should have been trying to slow them down.
“When we look at the evidence of many academics, what we can see is that the distribution of income and the widening of the distribution of income can be explained, in part, by some small group of firms getting a greater share of the spoils of economic activity,” Carolyn Wilkins, the senior deputy governor at the Bank of Canada, said in an interview earlier this year. “The question that I have is: At what point do these firms actually become a barrier to productivity gains as opposed to a contributor to them?”
There have been some developments since the spring. The Group of 20 can’t agree on trade policy, but it did endorse the Organisation for Economic Co-operation and Development’s push to come up with the common approach to taxing digital firms by the end of next year. Trudeau and the other leaders of the Group of Seven countries said at the end of their summit this week in Biarritz, France that they are committed to “reaching in 2020 an agreement to simplify regulatory barriers and modernize international taxation within the framework of the OECD.”
Still, it is getting harder to explain the need to wait. Quebec has been collecting provincial sales tax from digital companies since the start of the year, implying that the only thing stopping the Trudeau government from doing the same is political will. More than 100 companies that sell digital content and services to Quebec residents had registered with Revenue Quebec as of Aug. 26, according to the agency’s website.
Saskatchewan also requires out-of-province streaming services to charge the provincial sales tax. But the biggest challenge to the Trudeau government’s approach comes from France, which in March decided to apply a three-per-cent tax on the French revenue of a few dozen of the biggest web-based companies.
The OECD asked the G20 to pick up the pace because it worries about too many countries going it alone, which could create new opportunities for tax arbitrage, not to mention trade spats. The Trump administration saw France’s digital tax as an attack on Silicon Valley and threatened to retaliate with tariffs on French wine. The two countries defused the situation at the G7, where the U.S. accepted a promise to return taxes that exceed what would have been collected under whatever the OECD process eventually produces.
An aggressive approach could be better than Canada’s passive one. It sends a loud signal that the government is serious about rebalancing the scales.
It also should stop further erosion of the tax base, if that happens to be a priority. For evidence of how quickly that can become a problem, consider the Montreal chamber’s new approach to the special treatment Netflix and others receive. The group’s list of pre-election demands says the next government should “systematically remove sales taxes on products and services purchased online, including digital content.”
See what the Montreal chamber did there? E-commerce currently accounts for about three per cent of retail trade, but online sales surged 30 per cent in June from a year earlier, Statistics Canada reported last week. Digital sales will eventually dominate. A request to remove the sales tax from those purchases is a pitch to kill the GST.
That’s probably not a debate that Trudeau and Morneau want to have. If so, tough. They created the conditions for it.
•Email: kcarmichael@postmedia.com | CarmichaelKevin
