The Liberal Party’s plan to levy a new tax on some digital technology companies is running into skepticism from economists and trade experts who say it might not generate the promised amount of revenue and risks creating new trade frictions with the United States.
The Liberals said on Sunday that if re-elected, they would levy a 3-per-cent value-added tax on the revenue of companies that sell digital advertising and user data, such as Facebook Inc. and Alphabet Inc.'s Google division. The tax would apply to companies with revenues of more than $1-billion globally and $40-million within Canada.
The Office of the Parliamentary Budget Officer (PBO) estimated the measure, which is modelled after a similar move by France, could generate $540-million in revenue next fiscal year. But the PBO cautioned that the number was highly uncertain because it had to make a series of estimates about the size of those businesses in Canada.
But BMO economist Doug Porter suggested the revenue estimate could be overly optimistic.
“From a revenue standpoint, it seems that the starting assumption should be very minimal, since this is quite a new and untested tax – really only attempted by France, with limited evidence so far," he said.
Don Drummond, a former Toronto-Dominion Bank chief economist who spent more than two decades in the federal Finance Department, said the government could have trouble collecting on an “aspirational tax policy” without a wide-scale agreement on taxation of big global technology companies by members of the Organization for Economic Co-operation and Development.
The OECD, a club of 36 countries, has been discussing a multilateral approach to taxing multinationals. Unwilling to wait for a deal, the French government announced a 3-per-cent tax on digital companies. U.S. President Donald Trump threatened to slap retaliatory tariffs on French wines and his administration ordered an investigation to determine if the tax amounts to an unfair trade practice. During Group of Seven meetings in late August, the two countries reached a compromise that will see France refund the difference between its own tax and anything the OECD agrees upon later.
A new technology tax from Ottawa could inflame U.S.-Canada economic relations, which have been fraught ever since Mr. Trump won the White House with a promise to renegotiate the North American free-trade agreement. A new trade accord was reached a year ago, but has yet to be ratified by the U.S. Congress.
“I don’t know if we want to fight the Americans on this,” said tax expert Jack Mintz, a fellow with the University of Calgary’s School of Public Policy. “I’m sure they will react. They’re not happy with what the Europeans have been doing and the U.S. government has been willing to fight for [U.S. tech companies] on corporate tax issues.”
“Given the United States’ reaction to the French proposal I think that we can expect a strong response from the U.S. if this ever manifests itself into policy” in Canada, said trade lawyer Daniel Ujczo with Columbus, Ohio-based Dickinson Wright LLP.
“It cuts against the argument we’ve been making to companies across the U.S. that the digital chapter of the [renegotiated NAFTA] is a good thing because it prevents what happened in France from happening here. If it doesn’t violate the letter” of the trade deal, the Liberal proposal “violates the spirit in which that digital chapter was negotiated," he said.
Liberal Leader Justin Trudeau said Monday “we are aligning ourselves with an international approach that has been worked out between the U.S. and France … and we are continually going to make sure that everyone pays their fair share.” But the Liberal pledge appears to be based on the pre-compromise French policy, based on the PBO analysis.
“It’s striking that you would model [the proposal] after something that France has already said they’re going to start tweaking and rolling back,” Mr. Ujczo said. In addition, tech companies could simply pass on added taxes to customers, as Amazon.com Inc. said it would do in France.
Conservative Leader Andrew Scheer said Monday his party will also announce measures in the coming days that would ensure foreign tech giants “pay their fair share [of taxes] just like any other Canadian company would.” But he gave no details.
The New Democrats said in a statement that their policy is to "make sure that Netflix, Facebook, Google, and other digital media companies play by the same rules. That means paying corporate taxes.”
Matthew Schruers, chief operating officer with U.S.-based Computer and Communications Industry Association, which represents U.S. tech giants, said the Liberal proposal threatens to undermine the work of OECD with a “go-it-alone” approach.
Mr. Drummond said “you’d have to put a bit of a question mark given the French experience of whether [the Liberal proposal] can come painlessly. … It would be a lot simpler if we had an OECD-led protocol.”
With a report from Marieke Walsh
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Sean Silcoff