Executive Summary – How Do Digital Multinationals Legally Avoid Tax in Canada?

(Disponible en français : Résumé – Comment les multinationales du numérique échappent-elles légalement à l’impôt au Canada?)

According to the Organisation for Economic Co-operation and Development (OECD), multinational enterprises are using increasingly aggressive practices to reduce the amount of tax they have to pay, and some of them are creating off-shore subsidiaries or shell companies. This trend has recently been exacerbated by the rapid growth of the digital economy.

In 2015, the OECD estimated that the revenue losses generated by these practices could amount to as much as US$240 billion annually worldwide, or 10% of total corporate income tax revenues. The Parliamentary Budget Officer estimates that Canada could collect $540 million in tax revenue in 2021 and double that amount by 2028 if it imposed a 3% tax on certain types of revenue generated by digital multinationals in Canada.

In a rapidly digitizing economy, governments, including the Government of Canada, are concerned that outdated international tax rules could lead to increasing tax revenue losses. These losses could prevent them from providing services to their citizens and create an unfair tax system for businesses that have to pay their taxes in the country where they generate their revenues. Many believe that international tax rules should be changed without delay, because they are based on principles established almost a century ago, when commerce required a physical presence.

In response to these concerns and at the request of the G20, the OECD, in July 2013, developed the Action Plan on Base Erosion and Profit Shifting, which listed 15 actions to reform international tax rules to curb tax avoidance by multinational companies.

In October 2019, noting that a growing number of countries no longer want to wait for an international agreement to be reached and are taking unilateral measures to tax certain multinationals, including those in the digital economy, the Secretary-General of the OECD proposed a unified approach to taxing multinationals. He hoped to restart negotiations between countries so that an international agreement could be reached by the end of 2020.

In Canada, the federal government will have to decide whether to quickly implement its own tax on multinational digital companies, often referred to as “FAANGs” in reference to Facebook, Amazon, Apple, Netflix and Google or whether to wait for the conclusion of an international agreement, which is anticipated in 2020, but is likely to be later, based on previous delays involving multilateral negotiations.

Read the full text of the Background Paper: How Do Digital Multinationals Legally Avoid Tax in Canada?

Author: Sylvain Fleury, Library of Parliament