Why overtaxing Big Tech is such a bad idea

Last fall, the federal government promised to impose a three per cent tax on the revenues large internet companies earn in Canada, as France has done. For the moment, the government has hit pause, saying it will wait for the OECD to complete its work on the issue, which is expected in June.

The government is right to hesitate. The repercussions of a digital tax merit in-depth analysis. The French experience shows that taxing foreign companies causes more problems than it solves and risks hurting Canadian consumers and companies, with negative consequences for the country’s economy as a whole.

A major justification of such taxes is the claim that Google, Amazon, Facebook and Apple (“GAFA”) haven’t been paying their “fair share.” In fact, in research published Wednesday by the Montreal Economic Institute we find that these digital giants have paid the same or even a higher rate of tax than large Canadian companies.

For the past 10 years, GAFA companies’ average effective tax rate was 24 per cent, while the average for TSX 60 companies ranged from 17 per cent to 24 per cent, depending on the method of calculation. If we consider only the corporations that make up the TSX 30, however, the gap grows even larger. They have been paying only two to 11 per cent. Far from dodging taxes, the GAFA have paid significantly more tax than other industries.

Unlike the corporate income tax, which is collected on a company’s profits, a tax on revenues is levied on all its activities, whether profitable or not. A revenue tax can therefore tip a company into unprofitability, completely upsetting its business model. For example, Amazon’s gross profit margin over the past 10 years has averaged 2.5 per cent, which is less than the three per cent tax levied by France and proposed by Canada. Amazon would be forced to pass Ottawa’s new tax directly onto customers. Either that or go out of business.

The tax will similarly disrupt Canadian digital companies trying to compete with the big players. A recent federal government report noted that in 2016, 13 Canadian companies active in the digital sector had annual revenues exceeding the $1-billion threshold at which the Canadian tax would apply, while 46 other Canadian digital companies reported revenues between $500 million and $1 billion. These companies, which the government presumably would like to see grow, could eventually be subject to the tax and see their profitability diminished or even wiped out.

Even from the perspective of public finances, the tax could fail to generate the hoped-for receipts. By reducing profits, the digital tax would reduce profits taxes. In France, this is precisely what happened, forcing the government to revise its revenue projections downward.

As for the wider economy, such a tax both discourages job creation and signals companies to slow their growth, lest they attract the taxman. Or worse, they move their job creation to countries that don’t import every new tax Europeans come up with.

Canada should also look sceptically at the OECD’s digital tax negotiations. In particular, would any additional receipts from taxing the revenues of foreign companies operating here really make up for the reduction in taxes collected from Canadian companies operating abroad?

Taxes rarely end up being paid by the people or entities the government wants to pay them. Because of their resources and size, big global players can pass taxes on to their clients or their commercial partners. It is the relatively smaller players — those Canadian startups hoping to grow — who are more likely to suffer from the tax. That certainly is what is happening in France. Last October, Amazon announced an increase in the commissions it charges resellers using its site. Some of these businesses will be forced to absorb the hike, while those that can will pass it on to their clients. Consumers will likely be the biggest losers.

The U.S. digital giants have followed the tax rules that apply to all businesses, including the rule that taxes on corporate profits be paid in the country of origin. The main difference between the GAFA and multinationals in, say, the transportation and energy sectors, is that their growth has been more explosive and their success more disruptive to established business models. Their recent dominance is by no means guaranteed, however. By stifling the emergence and growth of new players the proposed new digital tax could prove to be a strong barrier to competition.

Peter St. Onge and Gaël Campan are Senior Economists at the MEI. They are the authors of “Taxing the Tech Giants – Why Canada Should Not Follow the French Example” (with Nicolas Marques) and the views reflected in this op-ed are their own.

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