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Ottawa collected $3.6 million in sales tax from foreign-based companies in 2017, including world’s largest tech giants

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Foreign-based tech companies such as Google and Netflix have long contended that they should not have to collect sales tax in Canada. They argue it would be redundant, given that the Canada Revenue Agency (CRA) requires buyers to declare and pay tax when it isn’t collected and paid by the seller. However, new data show that when purchases are made that don’t include sales tax, few people declare and pay it.

Data from the CRA obtained by The Logic indicate that, in 2017, only 120 entities voluntarily registered to pay sales tax on imported taxable supplies, which include ads and other products sold by foreign-based digital companies like Netflix, Facebook and Google. The 120 entities paid a total of $3,618,000 to the CRA in 2017. The CRA’s data do not include tax paid by companies with a GST/HST number, which are able to write off certain expenses, including digital advertising, as business expenses.

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In the last five years, the government has never brought in more than $6 million in sales tax from such foreign vendors through the voluntary registration system, despite these companies having significant revenue in Canada. Facebook and Google sold about $4 billion worth of advertisements in Canada in 2016 alone. Netflix earned an estimated $616 million in revenue that same year, according to Toronto-based media research firm Communications Management Inc.

Talking Point

Foreign-based tech companies including Google and Netflix have long argued that they don’t need to collect and pay sales tax since Canadians can pay that tax to the CRA. New data show Ottawa has never brought in more than $6 million in sales tax a year from those kinds of self-assessments. The news comes two weeks after The Logic reported that Facebook and Instagram would start collecting sales tax on certain purchases made in Canada.

In August, The Logic reported that Facebook will become the first foreign-based digital technology giant to start charging sales tax on advertisements sold through their physical offices in Canada. Other foreign-based tech companies, including Airbnb and Spotify, said they would comply with any changes in the law requiring them to start collecting sales tax, but none plan to follow Facebook’s lead and do so voluntarily.

Facebook will not collect sales tax on ad purchases made directly online. When informed by The Logic that only 120 entities registered to pay sales tax to the CRA in 2017 for products, including those sold by Facebook, its spokesperson Meg Sinclair said, “We don’t have a reaction to share.”

Briefing notes prepared for Finance Minister Bill Morneau and former Heritage Minister Mélanie Joly between 2016 and 2018, obtained via access-to-information requests, show that the government has been quietly studying how to get foreign-based companies to collect sales tax.

A June 2016 note prepared for Joly states that although buyers are supposed to pay sales tax to the CRA when sellers don’t collect it themselves, “few people actually do.”

Government documents also raise questions  over why some of these companies aren’t collecting sales taxes, despite the fact they’ve expanded their presence in Canada significantly in recent years. A December 2017 note prepared for Joly indicates that certain foreign tech companies aren’t required to collect sales tax because they don’t have a physical office in Canada.

“Offshore digital businesses do not always charge their customers the relevant sales tax on their transactions. For example, Netflix does not have any offices in Canada and it does not charge Canadian customers sales tax on their monthly subscriptions.”

Three months before that note was prepared, however, Netflix announced it would be spending $500 million to create and distribute Canadian content and establish its “first permanent production presence outside of the U.S.”

Documents prepared by the CRA, which were obtained via access-to-information requests, say that foreign suppliers that have “a permanent establishment in Canada” must register and collect sales tax in the same way a Canadian company does.

“In certain circumstances, a permanent establishment can include a server in Canada of a foreign supplier if the activity carried on through the server is an essential and significant part of the overall business activity of the supplier.”

Netflix currently has long-term leases for writers’ rooms in Toronto and sound stages in Vancouver. The company also has a production presence in Quebec for projects including Murder Mystery, an upcoming film starring Adam Sandler. A May 2017 briefing note states that Canada is the third-largest location for original productions made by Netflix, after the U.K. and the U.S.

“We currently set up production hubs all over Canada as needed on a production-by-production basis — from Vancouver to Toronto to Prince Edward Island — to meet the needs of individual productions across the provinces. Our definition of production hub doesn’t necessarily always mean a physical studio,” said Bao Nguyen, a Netflix spokesperson, in an email to The Logic.

When asked what, if anything, Netflix does to encourage Canadians to register and pay sales tax to the government, Nguyen declined to comment.

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Some tech giants have had physical presences in Canada for years. Google, for example, employs hundreds across its offices in Toronto, Montreal and Kitchener-Waterloo. When asked why those offices don’t count as the kind of permanent establishment that would require the company to collect sales tax, Google spokesperson Aaron Brindle said that while all of Google’s offices and employees in the country are overseen by Google Canada Corp., the ads are sold by a different company, Google LLC.

“Google LLC, the U.S. company, does not have a permanent establishment in Canada, and therefore is not registered for and does not pay Canadian taxes, pursuant to Canadian law,” said Brindle.

Facebook spokesperson Sinclair—whose company employs about 110 people in offices in Montreal, Toronto, and Vancouver—said, “We take our legal obligations seriously and we pay all taxes required by Canadian law.”

Cam Gordon, a spokesperson for Twitter, which has an office in Toronto with dozens of employees, said, “Confirming we do not currently charge sales tax on our ad products. No additional comments at this time.”

Amazon already collects federal and provincial sales taxes on all goods and services sold on the company’s Canadian site. It also collects estimated duties and taxes on any purchase made on the company’s U.S. site when the purchased product is set to be delivered to Canada. The company also remits tax to the Canada Border Services Agency at the time of importation if needed, according to Amazon spokesperson Kaan Yalkin.

eBay, which is also an e-commerce company and employs 180 people in its Toronto office alone according to its website, does not collect or remit sales tax on products sold on its site. Camille Kowalewski, an eBay spokesperson, said eBay connects buyers and sellers, but doesn’t actually sell the products itself, therefore it doesn’t need to collect sales tax on those transactions.

“eBay has a comprehensive tax policy page that provides direction and resources on collecting sales taxes, and has tax tables built into the seller experience to help facilitate the collection of appropriate sales taxes,” said Kowalewski.

When asked why the offices of tech companies don’t count as a “permanent establishment” in Canada for the purposes of tax collection, the Department of Finance directed those questions to the CRA. The CRA indicated Finance would reply. In the end, neither department did.

Behind the Numbers

The CRA rounded the number of entities who paid sales tax to the nearest 10, and the total amount paid per year to the nearest thousand. Data is based on those who filled out the GST/HST 59 form for imported taxable supplies, which includes digital products and services sold by large tech companies, but also captures services sold by other foreign-based companies. The data does not include sales tax paid by GST/HST registrants, which includes many businesses.

Throughout the briefing notes, there were repeated warnings that even if the law were to change requiring foreign-based companies to charge sales tax, it would be difficult to ensure they were paying the correct amount or to enforce audits.

To get around that problem, the government studied requiring billing agencies to collect and remit sales tax on purchase of digital goods instead of the seller.

“This approach would not be dependent on the compliance of foreign vendors and would help to ensure that sales taxes are more consistently charged on offshore digital purchases,” reads one note.

When asked for a response to the CRA data, whether the government would require foreign-based companies to collect sales tax, or even when a decision on whether those companies would be required to collect sales tax would be announced, Pierre-Olivier Herbert, a spokesperson for Morneau, emailed the same statement provided to The Logic for the August story about Facebook starting to charge tax.