{"id":8968,"date":"2023-08-10T18:12:12","date_gmt":"2023-08-10T18:12:12","guid":{"rendered":"https:\/\/mysourcefunding.com\/tax-preparation\/a-canadian-tax-that-americans-will-love-to-hate\/"},"modified":"2023-08-10T18:12:13","modified_gmt":"2023-08-10T18:12:13","slug":"a-canadian-tax-that-americans-will-love-to-hate","status":"publish","type":"post","link":"https:\/\/mysourcefunding.com\/?p=8968","title":{"rendered":"A Canadian Tax That Americans Will Love To Hate"},"content":{"rendered":"
\n

As a kid growing up in suburban Detroit, it was frequently noted that our town \u201clooked down\u201d on Canada . . . literally. It was a bad joke based on a geographical quirk. We lived in the only part of the United States that was due north of Canadian soil.<\/p>\n

We soon learned that it wasn\u2019t nice to poke fun at our neighbors. I\u2019ve been atoning for my indiscretions ever since. To that end, I\u2019ll take this opportunity to comment favorably on a recent development in Canadian tax law.<\/p>\n

Canada is getting serious about a digital services tax. Americans should be fine with that \u2014 despite the hostile reactions in Washington. A bit of context will explain why Canada\u2019s DST proposal is nothing to get worked up about.<\/p>\n

The Next Big Thing<\/strong><\/p>\n

DSTs are all the rage. A DST is a gross receipts tax imposed at a low rate on a narrow category of economic activity. By contrast, the corporate income tax is a net-basis tax imposed at much higher rates on a broader range of economic activity. A decade ago, nobody had a DST. Today, a few dozen countries have enacted some version of it, and many others are considering it.<\/p>\n

<\/fbs-ad><\/p>\n

A DST is that rarest of birds \u2014 a new tax that\u2019s generally popular with citizens and politicians alike. That\u2019s probably because the tax is perceived as a way to export the local tax burden to nonresident corporations \u2014 the same ones that are raking in huge profits and often don\u2019t pay much income tax in the places where they have legions of users.<\/p>\n

DSTs are sometimes described as a \u201cbackstop\u201d to the conventional corporate income tax, although the description does them a disservice. It\u2019s widely acknowledged that gross receipts are a poor proxy for a company\u2019s profitability. In substance, the DST is closer to a supplemental VAT. It targets the local consumption of digital services, not the profitability that arises from them.<\/p>\n

It\u2019s true that DSTs are a unilateral assertion of taxing rights. So what if they are?<\/p>\n

A unilateral tax might feel misplaced in an area that\u2019s regularly influenced by bilateral or multilateral cooperation. However, a distinguishing characteristic of DSTs is that they are a destination-based tax \u2014 unlike income taxes. No country requires permission from anybody else to enact a destination-based tax. There\u2019s nothing offensive about the unilateral nature of the DST \u2014 just as there\u2019s nothing offensive about the unilateral nature of VAT.<\/p>\n

Back in 2021 the Canadian Department of Finance started to lay the groundwork for a DST that would be imposed from January 2024, with retroactive effect from January 2022. The United States immediately complained that Canada\u2019s DST proposal was discriminatory because so many of the affected firms were U.S.-based companies. U.S. officials threatened Canada with a retaliatory trade response, as they did to other countries with DSTs.<\/p>\n

Two aspects of the U.S. response were flawed.<\/p>\n

First, there is nothing about DSTs that\u2019s inherently discriminatory, strictly speaking. If the tax seems discriminatory in effect, that\u2019s because U.S. firms dominate the global tech sector. If Spotify (Sweden), Movistar (Spain), SAP (Germany), or Tencent (China) become big enough, they too will be subject to DSTs. Objectively, nobody who takes a serious look at DSTs would conclude that they\u2019re discriminatory.<\/p>\n

Second, the hostile U.S. reaction to DSTs ignores the near certainty that the economic burden of the tax would be passed along to the end users of digital services provided in Canada . . . which is to say, Canadians. Every company that does business in a foreign consumer market is well acquainted with VAT. Those firms possess a lot of expertise in passing the VAT burden on to final consumers. They\u2019ll do the same for DSTs. This process of pricing adjustments has already occurred in other jurisdictions with DSTs. It will happen in Canada, as well.<\/p>\n

Bottom line: It should not bother the U.S. government that a foreign government wants to enact a tax that will predominantly be paid by foreign consumers.<\/p>\n

The Cool Kids Aren\u2019t Waiting<\/strong><\/p>\n

January 2024 is just around the corner. The world wants to know whether Canada will voluntarily delay its DST. Many other nations are doing just that, adhering to an OECD-brokered agreement.<\/p>\n

The idea is that no country involved in the OECD\u2019s inclusive framework (which consists of about 140 nations) would apply its DST until the earlier of January 2025 or the entry into force of a multilateral convention on the OECD\u2019s pillar 1 reform proposal. Conceptually, pillar 1 and DSTs scratch the same itch. The governments of the world have agreed to eliminate their DST regimes if pillar 1 becomes a reality.<\/p>\n

Many countries have signed off on the delay. Sure, they\u2019re keen to implement their DSTs, but they don\u2019t want to disrupt the significant progress to date on pillar 1. Canada, however, has not agreed to delay a thing. It recently published revised legislation that makes clear that progress toward DST implementation is not slowing \u2014 not even for the demands of its close neighbor and largest trade partner. If you think about it, there\u2019s wisdom in Canada\u2019s approach.<\/p>\n

The solution here is simple. Canada should apply its DST from January 2024, as planned, subject to one important caveat: All revenue collected under the DST (initially paid almost entirely by U.S.-based tech firms) shall be fully refunded if pillar 1 eventually takes effect \u2014 as evidenced by the successful implementation of a multilateral convention that is scheduled to be unveiled toward the end of 2023.<\/p>\n

That\u2019s a fair resolution for both Canada and the United States. It means that Canada would be obliged to return every penny of DST revenue to the U.S. companies that paid it . . . but only if pillar 1 succeeds. If pillar 1 fails for any reason, Canada would retain the DST proceeds. This creates an incentive for the United States to not defeat or indefinitely delay the multilateral convention.<\/p>\n

This is the same approach that\u2019s being taken in the United Kingdom and France, which already have DSTs on the books. Basically, Canada is seeking to do the same. When you consider the full picture of what\u2019s happening globally, there\u2019s no reason to look down on that.<\/p>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

As a kid growing up in suburban Detroit, it was frequently noted that our town \u201clooked down\u201d on Canada . . . literally. It was a bad joke based on a geographical quirk. We lived in the only part of the United States that was due north of Canadian soil. We soon learned that it […]<\/p>\n","protected":false},"author":1,"featured_media":8969,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"content-type":"","footnotes":""},"categories":[79],"tags":[],"class_list":{"0":"post-8968","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-tax-preparation"},"yoast_head":"\nA Canadian Tax That Americans Will Love To Hate | Brandiary<\/title>\n<meta name=\"description\" content=\"As a kid growing up in suburban Detroit, it was frequently noted that our town \u201clooked down\u201d on Canada . . . literally. 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