Taxing the tech giants: Canadian consumers and businesses will pay the price

MONTREAL, Jan. 22, 2020 /CNW Telbec/ - During the last federal election campaign, all parties promised to raise taxes on the digital giants. Although this is on ice awaiting the conclusion of OECD discussions on the matter, the idea is still present in the public debate, and may end up being adopted one way or another. A publication launched today by the MEI shows, however, that the so-called GAFA companies have been taxed at a level similar to or higher than large Canadian corporations, and that it will be consumers and the Canadian economy in general that would pay for such a measure.

"We sometimes hear that the GAFA enjoy more favourable tax treatment than large Canadian companies, but that's not true," says Peter St. Onge, co-author of the publication. Far from escaping taxation, they are taxed substantially, at an average annual rate of 24% over the past ten years. The figures show that it is Canadian companies that were favoured compared to the American companies in the recent past.

Recall that the Liberal Party's October 2019 electoral commitment was to impose a 3% tax on the revenues of the digital giants earned in Canada, notably those of Google, Amazon, Facebook, and Apple.

It is Canadian consumers and businesses that will foot the bill, points out Peter St. Onge. The big global players can pass on the bulk of the cost of such a tax to their clients and their commercial partners. "In France, where a similar tax was imposed in 2019, a study showed that just 5% of the total burden related to the new tax will be shouldered by the big digital companies. More than half (55%) will be paid by consumers, and 40% by the companies using digital platforms," he explains.

Indeed, since October 1^st of last year, Amazon has increased its commissions in France in order to compensate for the cost of the French digital tax. We can therefore expect the American companies to adapt their services and their prices in response to a possible Canadian tax.

Furthermore, taxing a company's revenues is a bad idea, according to most economists. "Taxes on revenues are calculated on all of a company's activities, whether these are profitable or not. Such a tax could thus push a company into the red," says Gaël Campan, who collaborated on the study.

In 2016, thirteen Canadian companies active in the digital sector had annual revenues above $1 billion, the threshold at which the tax would be applied, while 46 others have revenues between $500 million and $1 billion, according to a recent federal government report. These companies could eventually be subject to the tax and see their profitability reduced or eliminated.

Moreover, the recent tax cut in the United States has eliminated the advantage that Canadian companies had. The issue for Canada is thus not the adoption of a tax to offset the supposed tax advantage of certain companies, but rather to maintain the competitiveness of its economy. "Indeed, the question is why Europe and Canada have failed to generate their share of large digital players. The lack of response from Ottawa to the U.S. tax cuts shows that certain lessons have not been learned," adds Gaël Campan.

"Raising taxes on internet giants may lead to consequences whose scope is hard to measure. In the form currently proposed, it will be an additional levy on taxpayers, which will do little to change the general situation. It could even entail a reduction in the quality of the services that millions of consumers appreciate and that they consume voluntarily," concludes Peter St. Onge.

The research paper entitled Taxing the Tech Giants ? Why Canada Should Not Follow the French Example was prepared by Nicolas Marques and Peter St. Onge, with the collaboration of Gaël Campan. Mr. Marques is an Associate Researcher at the MEI, and Mr. St. Onge and Mr. Campan are Senior Economists at the MEI. This publication is available on our website.

The MEI is an independent public policy think tank with offices in Montreal, Calgary, and Paris. Through its publications, media appearances, and advisory services to policy-makers, the MEI stimulates public policy debate and reforms based on sound economics and entrepreneurship.

SOURCE Montreal Economic Institute