Budget 2022: Adapting international tax measures
Canada is one of 137 members of the Organization for Economic Cooperation and Development (OECD) that have joined the two-pillar plan for international tax reform. Budget 2022 reiterates the government’s commitment to address the challenges arising from the digitalization of the economy, and to work towards implementing both Pillar One and Two.
Pillar One is intended to adapt the international income tax system to deal with the largest and most profitable multinational enterprises operating within a digital business model. This adaption will result in the partial reallocation of taxing rights over the profits of these enterprises to align with the physical location of users and customers, rather than the physical presence or permanent establishment of a business.
Pillar Two is intended to reduce the competition between taxation jurisdictions and ensure that the profits of large multinational enterprises are subject to an effective tax rate of at least 15 per cent, regardless of where they are earned.
Pillar One – Digital Services Tax (DST)
The OECD is working with member countries to implement an international tax system designed around the digital business model, specifically through changes to the profit allocation and nexus rules applicable to business profits.
While the OECD is working towards a multilateral agreement, a Digital Services Tax (DST) was introduced by the federal government in its 2020 Fall Economic Statement to accomplish the same objective. The government indicated that while it “strongly favoured” a multilateral approach, it was prepared to act unilaterally if necessary.
Budget 2022 confirms the government’s commitment to act unilaterally if the multilateral approach doesn’t come into force by January 1, 2024. Proposed legislation would impose a 3 per cent tax on Canadian digital services revenues in excess of $20 million earned in 2022, and in later calendar years by an entity or consolidated group with at least €750 million in total revenues. Canadian digital services revenue would generally include revenues from certain online marketplace and advertising services, social media services and the sale or licensing of user data. If the DST comes into force, it will apply retroactively to January 1, 2022.
Pillar Two – Global Minimum Tax
Pillar Two seeks to impose a global minimum tax of 15 per cent on multinational enterprises with annual revenues of €750 million or more. Budget 2022 proposes to implement Pillar Two, along with a domestic minimum top‑up tax that would apply to Canadian entities of multinational enterprises which fall within the scope of Pillar Two. Per Budget 2022, “the government anticipates that draft implementing legislation would be publicly released for consultation and the IIR [Income Inclusion Rule] and domestic minimum top‑up tax would come into effect in 2023 as of a date to be fixed. The UTPR [Undertaxed Profits Rule] would come into effect no earlier than 2024.”
To allow the government to implement Pillar Two in accordance with the timeline, Budget 2022 is launching a public consultation on the implementation of the model rules and a domestic minimum top‑up tax. Interested parties are invited to send written representations to the Department of Finance Canada, Tax Policy Branch, by July 7, 2022.
New rules for digital platforms
Budget 2022 also proposes to implement rules developed by the OECD for reporting by digital platform operators with respect to platform sellers. The rules would apply to reporting platform operators, which are entities that:
- Provide sellers with a platform to connect with other users, or
- Collect compensation for activities facilitated through a platform
These new rules require reporting platform operators to complete certain due diligence procedures, as well as collect and report relevant information in respect of certain defined reportable sellers (including their place of residence for tax purposes). The Canada Revenue Agency (CRA) will share and receive from other participating jurisdictions all pertinent information to ensure revenues are taxed in the jurisdictions they are earned. The new reporting rule would apply to calendar years beginning after 2023, with the initial reporting and bi‑lateral information exchange occurring in early 2025 with respect to the 2024 calendar year.
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Mandeep Gaheer
Hassanatu Timbo
Information is current to April 26, 2022. The information contained in this release is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.