Hint in Budget: More GST/HST on the Digital Economy?

In an otherwise general call for consultations on aggressive tax planning, the 2014 budget asked for comments on one specific issue: methods to ensure effective collection of GST/HST on e-commerce sales into Canada by non-resident vendors. If recent history is any guide (for example, the trusts and estates consultations in the 2013 budget), this specificity could imply the government’s intent to act. Canada would be joining the recent example of other jurisdictions if it introduces changes—but any solution that is not multilateral may not be entirely effective.

As a destination-basis tax, GST/HST is intended to be levied on the supply of goods and services consumed in Canada, regardless of where they originate. E-commerce poses a difficult challenge for collecting GST/HST on sales by non-resident vendors because, unlike the cross-border movement of goods (which is subject to customs clearance), there is no fiscal frontier for services or for intangibles “entering” Canada (software, music, e-books, cloud services, etc.). There is particular concern for business-to-consumer transactions, because relying on individual consumers to self-report and remit GST/HST on online purchases from unregistered non-residents is widely regarded as unrealistic. This raises concerns about tax revenue loss and also competitive inequity between domestic and non-registered foreign vendors. (Business-to-business transactions are less of an issue because tax is refunded through input tax credits if paid for taxable activities and, otherwise, is subject to a comprehensive self-assessment regime and audit.)

An alternative approach is to require registration for GST/HST by non-residents who sell to Canadian consumers (which is currently the rule for non-residents who carry on business in Canada). The budget points to South Africa as a precedent, presumably because of its broad requirements for registration. Effective June 1, 2014, non-resident vendors above a sales threshold who sell to purchasers resident in South Africa, or who receive payment through a South African bank, are expected to be required to register, collect, and remit sales tax. Another precedent cited in the budget is the European Union. Effective January 1, 2015, the EU will implement a registration scheme for non-EU vendors called the “mini one-stop shop.” This regime allows a non-EU vendor to register in a single EU member state and to remit applicable VAT on all its EU sales in a single return, rather than requiring registrations in multiple states. Canadian GST/HST rules already permit one registration to cover multiple provinces, so it is not clear why the budget cites this EU precedent.

Still, simply passing laws to require registration or facilitate compliance may not entirely solve the problem. Finance’s invitation to consult on effective GST/HST collection highlights that the issue is really a practical one of enforcement, particularly where a non-resident has no physical presence, assets, or books and records in Canada. Reputational costs of non-compliance may not be enough incentive. Not all e-commerce vendors have sufficient public profile to be concerned, and many consumers may not regard the tax avoidance as a negative—they obtain a direct, immediate (and visible, in the case of tax-extra GST/HST) economic benefit from not paying sales tax.

A more effective solution may lie in multilateral coordination, not in unilateral efforts by any single jurisdiction like Canada. A starting point could be bilateral agreements with key trade partners, as suggested by the EU Commission’s Expert Group on Taxation of the Digital Economy, Working Paper on VAT Issues (January 2014). Such agreements could include tax information exchange, assistance in recovery of taxes owing, and simultaneous audits. Further, wider arrangements such as the new Convention on Mutual Administrative Assistance in Tax Matters, which was primarily developed to address income tax enforcement, could find application to GST/HST and VAT.

Simon Thang
KPMG Law LLP, Toronto
[email protected]

Alicia Malone
KPMG LLP, Toronto
[email protected]

Canadian Tax Focus
Volume 4, Number 2, May 2014
©2014, Canadian Tax Foundation