Canada is introducing a new digital services tax starting this year, which will see foreign tech giants like Apple and Google receive tax demands for income earned in Canada but not currently taxed there.
This follows the example of several European countries, including France, Italy, and the UK – and is designed to address tax avoidance …
Tax avoidance on physical and digital products
Apple used to have a corporate structure designed to ensure it paid almost no taxes on hardware sales in many of the countries in which it operates. In European countries, for example, it worked like this:
- Apple Inc. in the US sold Apple Ireland a license to make and sell iPhones in Europe.
- Apple Ireland then sold iPhones to Apple France, Apple Italy, etc.
- It charged those European companies almost the full retail price of the iPhone.
- That means none of the Apple Stores in Europe made a profit, so paid no corporation tax.
- All the profit was booked in Ireland, and a sweetheart deal meant it paid very little tax there.
Apple stopped using this scheme in Europe after it became public and provoked widespread outrage. However, concerns remain about how digital revenue is accounted for and taxed.
Enter the digital services tax
France decided back in 2020 to introduce a ‘digital services tax’ (DST) which imposed a flat-rate 3% tax on the GAFA companies: Google, Apple, Facebook, and Amazon. This was intended to recoup some of the tax revenues lost to tax avoidance schemes on the sale of digital products.
For Apple, this includes apps and subscription services like iCloud, Apple Music, Apple TV+, and so on.
Several other European countries followed this example, including Italy and the UK.
Canada launching a DST this year
Reuters reports that Canada is introducing its own DST, starting with the 2024/2025 tax year.
Canada will press ahead with introduction of a digital services tax on large technology companies, which would raise C$5.9 billion ($4.3 billion) over the five years starting fiscal 2024/25, the federal budget showed on Tuesday.
While Apple is not specifically mentioned in the report, it is likely to be included, as it is in other countries where DST has been levied.
A global deal still hasn’t been agreed
The long-term solution to the problem is expected to be a global deal for large companies to pay tax in each of the countries in which they operate. Apple CEO Tim Cook is on record as favoring this approach.
There is agreement in principle on this from the 137 OECD countries, but little progress has been made in negotiations due to disagreements about the appropriate minimum tax percentage to be paid. The US has been a notable standout, favoring a lower percentage than most other companies – likely because US companies would be most affected.
Photo by Aditya Chinchure on Unsplash
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