Opinion piece

Opinion: Harsh reality of imposing digital tax

There’s a big idea afoot after the recent G7 summit, an idea that is supposed to make the digital economy of the future just and fair.

A global minimum tax is being touted as a tempting solution to so many problems – inequality, middle-class erosion, greedy corporations, and tech behemoths that have rolled all over us. And if all goes as planned, the United States will stop threatening other countries over how they treat Big Tech.

But there’s the idea, and then there’s reality.

Proposals for a global minimum tax have been lurking in the corridors of international organizations for years, but rose to the top of the pile suddenly this year when U.S. Treasury Secretary Janet Yellen championed the concept.

Her pitch was directed partly to a domestic economy, but the idea is also in the world’s, and Canada’s, better interests. In theory, a global minimum tax would ensure companies around the world are all paying at least 15 per cent on their profits. If a tax haven doesn’t want to raise its rate to 15 per cent, then the home country could collect the difference – putting pressure on everyone to participate.

International organizations estimate that governments are missing out on hundreds of billions of dollars in revenue every year because of the proliferation of tax havens.

Canada has been tearing its hair out over this for years. Budget after budget has earmarked funds to chase down Canadian companies and individuals that are skirting their tax bills, either legally or illegally, with mediocre results. So it’s intriguing for Canada to participate robustly in a global plan to shut down tax havens.

The inequality-middle-class pitch also sits well with the Liberals, since that’s so often their own rationale for economic policy. Of course, the impact of the windfall would depend on how the newly enriched governments would spend that money. And since some developing countries have built their entire economies around the concept of being low-tax jurisdictions for foreign investors, they would end up on the losing side of the equation – exacerbating inequality at the global scale.

But there’s also the connection to the web giants which is enticing to Canada.

There’s a cross-partisan interest to force the likes of Facebook, Google, Netflix and Amazon to pay tax on the money they make in Canada. Consumers will start paying GST on services from those companies starting in July. But if the federal government has its way, the companies themselves would also pay taxes on revenues made in Canada starting next January. However, the Americans consider that move to be aggressive and an attack on their sovereignty.

A global deal on how to tax web giants would help Canada avoid a showdown, and that’s where the global minimum tax could come in. A global minimum tax could envelop painstaking talks that have dragged on at the Organization for Economic Cooperation and Development – with the added benefit of bringing the United States onside. That’s the idea, and it’s worth hoping for. But it’s not worth waiting for.

Making a global minimum tax is far more complicated and fraught with highly charged politics than the idea itself. Yellen and Biden need to steer the idea through an unreceptive Congress. The European Union would have to deal with tax havens in their midst. And auditors and tax collectors would have to stay one step ahead of multinational corporations. This is not impossible. But hard and time-consuming.

It would be premature for Canada to back away from its other ongoing plans to hold Big Tech to account, or to relinquish efforts to crack down on Canadian companies sheltering their profits in low-tax jurisdictions.

France long ago decided not to wait for the OECD and has been collecting a digital tax for about three years in spite of U.S. retaliation, but other countries have now joined France. Washington has served notice to Austria, Britain, India, Italy, Spain and Turkey, and has let Canada know they’re not happy. But we’d be in good company if we persisted with the plan to impose a digital tax starting next year.

Imposing a digital tax and risking the wrath of the United States is our most practical path at this point. But our hopes should lie in co-ordinated global action.

Heather Scoffield is a National Affairs writer.