The federal Conservatives and industry groups representing Canada’s small businesses and technology sector are calling for changes to the tax system that for years allowed Amazon.com Inc. AMZN-Q to book its Canadian retail profits in the U.S., minimizing its exposure to corporate taxation here.
The Globe and Mail revealed this tax strategy last week as part of an investigation into Amazon’s activities and influence in Canada, drawing on documents that governed employee behaviour during the company’s climb to the top of the country’s digital retail sector.
While warehouse operations were run by a Canadian-registered company, the documents describe a system in which staff at Amazon’s Seattle headquarters oversaw this country’s retail operations, with strict rules to limit travel and discussion of Amazon business.
Amazon described the information in the documents as an “outdated portrayal” of its corporate structure in an e-mail to The Globe this month, but did not deny having previously used the strategy. The company said it pays all taxes required by Canadian governments. Nothing in the documents counselled Amazon, its subsidiaries or employees to engage in anything illegal, such as tax evasion, nor do the documents contain any evidence of illegal behaviour.
Tax-minimization strategies are common in the corporate world, but the findings revealed the extent to which large multinationals can minimize the taxation of their profit in countries where they operate but are not headquartered. This has helped create what the Conservative critic for National Revenue and Canadian industry groups say is an uneven playing field – one that disproportionately favours multinationals with headquarters elsewhere and greater means to structure their operations in ways that can minimize corporate-profit taxation.
“The Canada Revenue Agency continues to aggressively go after small businesses, while ignoring major American tech companies like Amazon,” Jake Stewart, Conservative MP for Miramichi – Grand Lake, N.B., said in an e-mailed statement. “The government and CRA should take immediate steps to address this gap in the tax system and work with our international partners to crack down,” he added.
Dan Kelly, the president and chief executive officer of the Canadian Federation of Independent Business (CFIB), said his group has many of the same concerns. The CFIB represents more than 95,000 Canadian small and medium-sized businesses.
“For years, small, independent businesses have worried that large multinationals can use complex corporate structures to minimize their taxes in Canada,” he said. “Without vigilance from Ottawa, these giant companies can have an unfair advantage over smaller firms.”
Justin Trudeau’s Liberal government warmly welcomed the giants of American technology to Canada, particularly during his first term, much to the frustration of many high-growth Canadian tech firms. Mr. Trudeau often met with high-profile chief executives such as Apple Inc.’s Tim Cook, former Alphabet Inc. chairman Eric Schmidt and, in 2018, Amazon founder Jeff Bezos.
Though the government has since distanced itself from the giants of Big Tech, domestic industry groups such as the Council of Canadian Innovators have long expressed frustration at what they see as preferable treatment of foreign multinationals at the expense of domestic economic development.
“This case represents an extreme example, and one that should be studied by policy-makers,” said Benjamin Bergen, the council’s president, in an e-mail. “It’s troubling that Canada’s tax system provides more favourable treatment of the foreign company profits than for domestic companies.”
The Amazon documents recommended restrictions on corporate travel for retail employees, who were instructed not to spend more than two consecutive weeks or more than 182 days a year in Canada, or else profit from Amazon’s retail operations in this country might be taxed here. The company also instructed staff not to have dedicated workspace in Canada, or to ask anyone here to order an Amazon product or sign up for its services while those employees were on Canadian soil.
“As Amazon continues to invest in Canada, we make changes to our corporate structure to ensure we are in the best position to serve our local customers and selling partners, including our close to 40,000 Canadian employees and the almost 40,000 Canadian third-party sellers that sell their products in Amazon stores,” company spokesperson Kristin Gable told The Globe by e-mail this month. “This is a common practice for businesses of all sizes. Our tax payments reflect our investments in Canada.”
Asked on the weekend if the federal government would take new action over multinational profit taxation, Adrienne Vaupshas, a spokesperson for Finance Minister Chrystia Freeland, listed a variety of initiatives that Ottawa had already announced. These included funding for Canada Revenue Agency to “to expand audits of larger entities and non-residents engaged in aggressive tax planning” and launching a public, searchable beneficial ownership registry by the end of 2023.
“Canada strongly supports international efforts to end the corporate race to the bottom and to ensure that all corporations, including the world’s largest corporations, pay their fair share,” Ms. Vaupshas said.
A spokesperson for National Revenue Minister Diane Lebouthillier did not respond to a request for comment on the weekend. The Canada Revenue Agency (CRA) declined a request for an interview, instead e-mailing a statement Sunday evening that reiterated its past comments to The Globe on the taxation of Amazon and other multinational tech companies. The CRA said it is bound by law to keep information about individual taxpayers secret. It also maintains all resident corporations must file an annual return if they have carried on business in this country, had a taxable capital gain or sold taxable Canadian property, even if they don’t owe anything to the agency.
Governments around the world have long sought to find a way for profits of multinationals to be taxed in the markets where they operate. The Organization for Economic Co-operation and Development has spent nearly a decade trying to develop a uniform global corporate tax system. While the government said it supports these measures, the details are not finalized and have already faced criticisms. Even the OECD has said that Amazon’s retail margins are likely too low to qualify it for the system as currently proposed.
It is, however, possible for individual countries to try to force multinationals to pay back taxes after investigating their corporate structures. In 2009, tax authorities in Japan ordered Amazon to pay the equivalent of US$119-million in back taxes from 2003 through 2005 for sales in the country that flowed through a U.S. subsidiary.
It is not clear if Amazon paid that amount – the company did not respond when asked by The Globe if it did – but the company was later reported by Japanese media to be paying nearly US$140-million in annual tax there late last decade.
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