The federal government released the draft Digital Services Tax Act (DST Act) on Dec. 14, 2021. The proposed DST Act would implement the DST announced in the 2020 Fall Economic Statement, further details of which were presented in Budget 2021.
The DST was proposed from the outset as an interim measure, to apply until an acceptable multilateral approach comes into effect. The DST would not be imposed earlier than Jan. 1, 2024, and only if the treaty implementing the Pillar One tax regime under the multilateral approach has not come into force. In that event, the DST would be payable as of the year that it comes into force in respect of revenues earned as of Jan. 1, 2022. The government hopes that the timely implementation of the new international system will make this unnecessary.
The DST would apply to large businesses, both foreign and domestic, that meet both of two revenue thresholds. If a taxpayer is a member of a consolidated group, these thresholds would be calculated on a group basis.
- Total revenue threshold – at least €750 million in a fiscal year of the taxpayer or group that ends in the immediately preceding calendar year; and
- Canadian in-scope revenue threshold – at least $20 million of Canadian digital services revenue.
Given the group-level threshold calculations and group-wide sharing of the $20 million deduction, members of consolidated groups would be allowed to designate an entity in the group to fulfill their filing obligations, pay the DST liability and otherwise comply with the administrative requirements of the Act.
The DST will be a 3% tax on Canadian-source revenue relating to digital services more than $20 million earned by an individual entity or consolidated group with at least €750 million in global revenue.
Canadian digital services revenue is defined as revenue from four categories of activities (the “in-scope revenue”), which consist of:
- Online marketplaces that help match sellers of goods and services with potential buyers, whether or not the platform facilitates completion of the sale, with certain exceptions;
- Social media that facilitates interaction between users or between users and user-generated content;
- Online advertising that targets based on data gathered from users of an online interface. This includes online interfaces such as online marketplaces, social media platforms, internet search engines, digital content streaming services and online communications services; and
- The sale or licensing of data gathered from users of an online interface.
Treatment for income tax purposes
The DST liability of an entity would be deductible in computing taxable income for Canadian income tax purposes based on general principles – e.g., whether it is incurred to earn the entity’s income. DST liability would not be eligible for a credit against Canadian income tax payable.
Any taxpayer that has Canadian digital services revenue in a calendar year or is part of a consolidated group that in a year or any prior calendar year as of 2022 (i) meets the €750 million global revenue requirement and (ii) earns at least $10 million (rather than the $20 million thresholds for tax liability) of Canadian digital services revenue will have to register under the DST.
Taxpayers that meet the total revenue threshold and the Canadian in-scope revenue threshold in a calendar year should file a tax return under the DST Act and pay any taxes owing on or before June 30 of the following year. This deadline is different from the deadline for filing corporate tax returns in Canada which is six months after the taxation year-end.
The Minister of National Revenue may assess any constituent member of a consolidated group for a tax liability of any other constituent member of the group, under which each such member becomes jointly and severally liable for the tax liability.
The general reassessment limitation period for a calendar year is seven years after the required return for the period is filed. The general retention period for keeping necessary records is eight years.
The draft legislation includes an interesting rule that where a taxpayer has initiated an appeal to the Tax Court of Canada, the government can also apply to the court to award an additional amount of up to 10% of any amount in dispute if the court determines:
- in respect of that amount, “there were no reasonable grounds for the appeal”, and
- the purpose of the appeal was to defer payment of any amount owing under the DST Act.
Multinationals should review their online revenue streams
The proposed legislation reiterates the government’s commitment to international tax reform. It is now critical for multinational enterprises to review their online presence and revenue streams to identify potential compliance and tax exposures.