//Jack Mintz: Would the Liberals dare entertain a ‘Netflix tax’ before an election?

Jack Mintz: Would the Liberals dare entertain a ‘Netflix tax’ before an election?

Taxing the internet is creeping up Canada’s political agenda — whether politicians like it or not. Governments around the world are having trouble resisting the urge to grab a piece of the growth in digital services. Already in 2017, the Parliamentary Heritage Committee recommended a five-per-cent tax on streaming services such as Netflix and digital cable to fund production of Canadian television shows. Raising taxes for Cancon TV producers is an idea only Ottawa elites could love; the prime minister was right to reject it.

Digital taxes might not be a major election issue when Canadians go to the polls this fall, but they will be high on the agenda soon enough, as G20 countries pressure one another to get on the Netflix-tax bandwagon this year. Will the Liberal government hop on? It would make sense, but the timing would be terrible.

The way many policymakers see it, if digital services can get out of paying taxes because they are in a different country, serving customers from a cloud, that gives them an advantage over domestically located businesses that comply with the tax system.

And there is lots of money to be made. Such digital service companies as Facebook and Google reap tons of money from the data they gather from users and sell to others. Netflix, Spotify and Amazon are able to sell digital services over the internet without charging sales taxes or paying corporate income taxes to the country in which users reside. Retailers and labour unions say there is no excuse for digital services to be exempt from sales taxes. They have a point: It’s unfair and distortionary.

Sales taxes are least distortionary and most fair when goods and services are taxed regardless of whether they’re purchased at home or from abroad. Starting this year, Quebec is demanding that digital service companies collect the provincial sales tax, and many big companies, such as Netflix and Facebook, have agreed to comply. In Quebec, tax will be added now where a bill is registered to a Quebec address or if the IP address is in Quebec. It’s not a perfect enforcement system, but for the most part, it should work.

But the sales tax issue is much more straightforward than trying to collect corporate tax, which is far more complicated.

The idea with corporate income taxes is to withhold income at the source of production — company headquarters — not where customers live. If a website lives on servers in the Cayman Islands, is the source of production there, or where Facebook owners reside, or where Facebook users live?

This looks like a fundamental shift in how governments think about the corporate tax, seeing it as more of a consumption tax, rather than a production tax.

Given that most of the major digital companies currently operate from the United States, the U.S. government will strongly argue it should be entitled to all the corporate income taxes of such companies as Netflix, Google and Facebook.

But that’s not necessarily true. U.S.-based digital companies would not be able to make the money they do without global users providing them their personalized data, free of charge. These data have a lot of value and can be used at a profit. So, arguably, some of the production actually occurs where users reside, including outside the U.S.

That’s why the European Union and several other countries are looking to shift taxes to where users live, regardless of a company’s home address. This looks like a fundamental shift in how governments think about the corporate tax, seeing it as more of a consumption tax, rather than a production tax. A sensible way to put that into action is for tax collectors to divide profits proportionately — and charge corporate income taxes accordingly — between countries in which the companies are located and those in which the users reside.

U.S.-based digital companies would not be able to make the money they do without global users providing them their personalized data, free of charge. So, arguably, some of the production actually occurs (outside the U.S.).

Europe is (as are some other countries) now trying to block digital-service companies from shifting income to low-tax havens by imposing special digital-services taxes. These are minimum taxes on revenues earned in a country, based on the number of users there, or the ad revenue collected there. The EU is considering a three-per-cent digital-services tax on revenues for companies with global revenues in excess of 750 million euros or local revenues in excess of 50 million euros. Australia has a similar proposal and the U.K. is considering a two-per-cent digital tax — unless a higher, global three-per-cent tax plan comes along first.

And the OECD is right now preparing a proposal for G20 finance ministers to consider when that group meets in Japan in June. But that’s dangerously close to the Canadian election in October. Would the federal Liberals venture to propose a new tax on digital services before the writ drops?

From a policy perspective, it is something the government should do, but it sure makes for bad politics. Millions of Canadians download music, books, films and information from digital services, but they’re already getting fed up with new taxes that have lately been hitting them in their pocketbooks.

There is a solution, of course: The Liberals could put digital taxation issues on the list of items for a long-overdue comprehensive tax reform, aimed at making all income and sales taxes more fair and less distortive. At a minimum, digital services purchased from non-resident suppliers, like your subscription to Netflix, should be subject to federal and provincial sales taxes and Canada should get some share of the corporate tax on digital giants. If that can be done while giving Canadians some much-needed tax relief in other ways, it wouldn’t only make sense, it might even be politically possible.

• Jack Mintz is president’s fellow at the University of Calgary’s School of Public Policy.

Original Source