ARGO Customs Brokers news: Digital tax crackdown.

ARGO Customs Brokers news: Digital tax crackdown.

Canada’s government is considering new tax rules to level the playing field for e-commerce vendors that complain foreign giants such as Inc., Apple Inc. and Netflix Inc. have an unfair edge when selling digital products.

A few short paragraphs in the 2014 federal budget invited input on “ensuring the effective collection of sales tax on e-commerce sales to Canadians by foreign-based vendors,” and whether to enforce mandatory collection, as the European Union and Norway already have.

The consultation has received little public attention, even though it may decide whether Canadian buyers pay tax on millions of digital purchases each year. Consumers could end up paying more for video streaming on Netflix or music from iTunes if foreign-based companies lose the right to sell digital products tax-free in Canada. The potential new rules hinge on issues of competitiveness as well as political sensitivities, and could bring the government tens of millions of dollars in new revenue each year.

Major digital players in Canada and the United States are taking notice. Rogers Communications Inc. is pressing for new regulations on its foreign competitors. And last month, lawyers at Baker & McKenzie LLP registered to lobby the federal government on this issue on behalf of, Netflix and Facebook Inc.

Retail e-commerce sales in Canada totalled $21.6-billion in 2013, up 17.7 per cent from a year earlier, and are projected to double by 2018, according to eMarketer. But a wide swath of those purchases, collectively dubbed “digital supplies,” fall in a sales-tax grey area when sold to Canadians from abroad – including popular purchases such as streaming or downloading music, movies and TV shows, e-books, mobile apps, video games and software, online advertising and cloud computing.

As it stands, businesses with no physical presence in Canada are deemed not to be “carrying on business” in the country, and aren’t required to collect sales tax when they sell digital supplies to Canadians – which creates a 5- to 15-per-cent price gap compared with offerings from domestic retailers…

In theory, when foreign companies don’t charge sales tax, it is up to each consumer to self-report digital purchases from abroad and pay HST or GST, though virtually no one does…

The Organization for Economic Co-operation and Development agrees the best solution is to compel companies to register and collect sales taxes in the countries where they make sales. Such measures are part of a larger OECD tax plan presented to G20 finance ministers in the summer of 2013, aimed at combatting tax-base erosion and profit-shifting.

In Canada, the notion of taxing digital sales from abroad gained traction with the government in the fall of 2013, under then-finance minister Jim Flaherty. But it burst onto the European Union’s agenda more than a decade earlier over fears that companies might move offshore to stay competitive…

The fear, then and now, has been that the burden of handling cross-border taxes might prompt some smaller businesses to decide that selling to a given country is no longer worth the effort.

Nevertheless, the EU changed its legislation in 2003, requiring firms to register and collect taxes on European sales, setting a template for the global digital economy. Large companies have set up systems to comply, which might be tweaked for use in Canada. And the new laws pulled in nearly €800-million ($1.12-billion) in tax revenue across Europe in the first year – a figure that has since grown in step with e-commerce.