Thank you for inviting me to appear before the committee to discuss the application of Canada's national sales tax, the goods and services tax/harmonized sales tax, well known as the GST/HST, to supplies of digital products.
As the chairman said, I'm Sean Keenan. I'm the director of the sales tax division in the tax policy branch at the Department of Finance. Among my responsibilities, I oversee the policy and design elements for the GST/HST system.
The GST/HST is a broad-based tax intended to apply to most goods and services that are consumed in Canada. The broad tax base ensures that the GST/HST is fair, efficient, and simple.
Vendors who supply taxable goods and services are generally required to register and collect the GST/HST from their customers and then remit the tax collected to the Canada Revenue Agency. The tax is also generally levied on imported goods and services in the same manner as it is levied on domestic purchases. This helps to ensure that imported goods and services do not have a competitive advantage over goods and services sold in Canada.
The GST, or the federal component of the HST, is currently levied at a rate of 5% across Canada. The Provinces of Ontario, New Brunswick, Nova Scotia, Prince Edward Island, and Newfoundland and Labrador have elected to harmonize their provincial sales taxes with the federal GST. In these five provinces, the GST is levied as part of the HST at a joint federal-provincial rate of 13% or 15%, depending on the particular province.
E-commerce and Internet sales are an emerging and rapidly growing aspect of consumption in Canada. Under the GST/HST, Canadian businesses, as well as foreign companies that carry on business in Canada, are generally required to register and collect tax on their Internet sales of goods and services to Canadians where the items are to be used in Canada.
E-commerce sales by foreign-based companies can present a challenge for proper sales tax collection. Foreign-based Internet vendors' businesses with no physical presence in Canada are generally not required to collect GST/HST on their sales. Instead, in the case of physical goods that are purchased online and shipped to Canada by post or courier, the applicable customs duties and GST/HST would generally be collected by the Canada Border Services Agency at the time the goods are imported.
In cases other than the importation of physical goods, the GST/HST legislation imposes a general requirement to self-assess the tax. For businesses that would be entitled to recover any tax payable by claiming input tax credits, there is generally no requirement to self-assess tax on such imports.
The challenges related to the proper collection of sales tax on digital supplies by foreign-based vendors are not unique to Canada. It's a difficult issue for all jurisdictions with a sales tax. In this regard, the issue was examined as part of the recent initiative of the G20 and the Organisation for Economic Co-operation and Development to address what is known as “base erosion and profit shifting”, or BEPS.
In the context of that international initiative, budget 2014 invited input from stakeholders on what actions the government should take to ensure the effective collection of sales tax on e-commerce sales by foreign-based vendors. Specific feedback was solicited on whether foreign vendors should be required to register with the Canada Revenue Agency and charge the GST/HST on digital sales to residents of Canada. The feedback from these consultations helped shape Canada's input and participation in the G20 OECD BEPS project.
The final reports of the BEPS project were issued by the OECD on October 5, 2015, including “Addressing the Tax Challenges of the Digital Economy, Action 1”. The Action 1 report examined issues related to the effective collection of sales tax on cross-border digital supplies and services and recommended that where countries decide to institute a regime for taxing foreign suppliers of digital content, the regime should follow the principles of the OECD's international value-added tax/GST guidelines for these supplies. These guidelines indicate that, at the present time, the most effective and efficient approach to ensure the appropriate collection of VAT/GST on cross-border business-to-consumer supplies is to require the non-resident supplier to register and account for VAT/GST in the jurisdiction of the consumer—essentially, the usual residence of the customer.
Following up on the BEPS Action 1 report, the OECD's Working Party No. 9 on Consumption Taxes is developing a report on mechanisms for the collection of VAT/GST on digital supplies and services by foreign vendors. The report will examine and identify the best practices of jurisdictions that have required non-resident digital suppliers to register and collect tax on sales in their jurisdictions, in order to assist those that are considering doing so. Canadian officials are participating in the development of this OECD report.
Those are my opening remarks. I'd be happy to answer any questions that you have.