Despite mounting opposition, Canada still plans on imposing a new digital services tax beginning in 2024. In this article, we’ll cover the basics of the proposed tax, including unanswered questions and what this tax means for Canadian business owners.
The Proposed Tax
Beginning in 2024, Canada will assess a digital service tax of 3% on revenue earned by large tech companies operating in Canada. Digital giants, like Amazon and Walmart, are among the impacted multinational companies. This tax will go into effect for companies with at least 750 million Euros in worldwide revenue and Canadian revenue in excess of C$20 million.
Canada isn’t the only country in agreement with imposing a digital service tax on large global companies. In fact, more than 140 companies have plans to alter how multinational companies are taxed.
The new tech tax is set to roll out in two different pillars, resulting in the reallocation of taxation rights on nearly $200 billion in profits from the most profitable multinationals. The first pillar is the 3% tax on revenue, while the second pillar is a new international 15% minimum tax.
However, unlike Canada, many of the countries in agreement with new tax policies decided to defer the start date by another year. Canada retains its stance that the country has already waited two years to start imposing additional taxes, with no intention of delaying for another year.
Unanswered Questions
Without the support of the remaining countries, there are dozens of questions still unanswered. Among the most notable include how existing taxes will offset the additional 3% tax, how withholding taxes factor into the tentative tax liability, and what threshold the tax will be imposed at.
Canada’s current stance is that the 3% tax is retroactive to 2022. This means that even though the tax doesn’t go into effect until the start of 2024, multinational companies may need to pay two years of back taxes, resulting in a significant tax liability and the requirement to amend previously filed returns to claim withholding tax paid to Canada.
What This Means for Tech Companies
The good news is that most business owners in Canada won’t be subject to the new tech tax. Only businesses with an excess of C$20 million in revenue will be required to abide by the new 3% tax.
However, not all business owners are out of the woods yet. With the United States opposition to imposing this tax on U.S.-based digital service giants, there may be additional tariffs and taxes imposed on sales made by Canadian companies to the U.S.
This can increase your cost of doing business in the U.S., making it important to watch for updates on the progression and potential backlash of these new regulations.
Summary
Even though the 3% tech tax won’t have direct impacts on many Canadian businesses, there are numerous indirect impacts that you need to be aware of. This is why it’s important to have a trusted accounting team on your side, helping you minimize any negative side effects of the new digital service tax.
Our team at NRK Accounting can do just that and more. Reach out to schedule your free consultation today.