Large cost for little upside: Why the government’s digital services tax is not worth the trouble

Other authors on these pages have recently set out arguments in favour and against the Online News Act. But it’s not the only policy proposal from the Trudeau government concerning online commerce. It also has plans to impose a tax on digital services. The case for the targeted tax is weak. The consequences could be significant.

This new tax, which was first articulated in the 2020 Fall Economic Statement and further advanced in the 2021 Budget, would be a 3-percent levy on the total revenues of companies in the online services field such as social media, online sales, online advertising, etc. Under the government’s proposal, it would enact enabling legislation for the new tax but then delay implementation to see if other countries adopt their own version of the digital services tax.

Some countries have already moved in this direction. The Trudeau government’s proposal, for instance, takes its inspiration from France, which adopted just such a 3 percent tax on digital services in 2019.

What were the result? Research finds a direct increase of 2-3 percent in the prices paid by consumers of these services, depending on the company. Instead of it affecting their profits, in other words, the companies downloaded the cost to their customers.

What about government revenues? The Canadian government estimates that its digital services tax would generate $3.4 billion in revenues over a five-year period, but the French experience suggests that such revenue gains are unlikely to materialize. When France enacted its tax, the government estimated that it would collect 400 million euros in annual revenues. Instead, it only collected 277 million euros, or 30 percent less than initially projected.

Herein lies the big problem with the digital services tax: It overestimates the gains for the government and underestimates the costs that we’ll have to pay.

We also need to consider the impact that the tax would have on Canadian companies. In 2021, they brought in $398 billion thanks to online sales according to Statistics Canada. This same study found that one in five wants to increase its online sales capacity permanently after the pandemic. Adding on a new tax on revenues from online sales would therefore affect a large proportion of Canadian companies.

At the moment, the government is proposing to impose this tax on all companies with domestic revenues of $20 million from online sales. This threshold is lower than it might seem, considering that large Canadian companies declared an average of $79 million in revenues from online sales. This gives a good idea of the scope of this tax.

If it were adopted, many of our most successful companies would thus be overtaxed, which is to say penalized, for having dared to innovate and improve access to their businesses. This is exactly what happened in France. This digital services tax extended its tentacles so as to impact French technology firms due to the expansive definitions used by legislators.

Separate and apart from these high consequences of the government’s tax proposal, the case in its favour is weak. Readers will recall that the OECD/G-20 has notionally agreed to a minimum corporate tax regime of 15 percent. Yet, over the past 10 years, the largest digital companies (such as Google, Amazon, Facebook, and Apple) have paid a tax rate of 24 percent on average. It should come as no surprise therefore that they actively support this agreement, since they already pay more than the proposed minimum threshold.

When you scratch beneath the surface of slogans like “fair share” and “make the multinationals pay,” it becomes clear the costs and consequences of the government’s proposal for a new digital services tax could be significant and its upsides are weak.

Olivier Rancourt is an Economist at the MEI. The views reflected in this opinion piece are his own.