Canada has resolved to delay its implementation of the upcoming Digital Services Tax from January 2022 to January 2024 as it awaits a new tax system proposed by the Organization for Economic Cooperation and Development (OECD) that will see the application of a minimum cross-border tax of 15% on large multinational entities (MNEs).
The new deal was struck following the agreement of 136 of the 140 of the Inclusive Framework to participate in this two-pillar plan set to take effect from 2023. The first pillar involves having MNEs with global sales of 20 billion euro and profitability of over 10% reallocate 25% of their profit above the 10% threshold to market jurisdictions. As part of the multilateral convention (MLC) to be developed and signed by countries in 2022, this plan will commence in 2023 and have the individual countries shelve Digital Services Taxes.
Pillar two of the plan seeks to have a 15% minimum global corporate tax rate for MNEs instituted for companies with global revenues that exceed 750 million euros. This tax rate will be applied from 2023 with plans to bring this arrangement in line with domestic legislation during 2022. This plan will see MNEs pay taxes in countries they operate, even without a physical presence.
In line with pillar two, Canada has agreed to postpone the implementation of its planned digital services tax that was engineered to target tech giants like Amazon and Google that have been operating in their online marketplaces. These companies have reportedly made substantial revenues and profits from such activities as online advertising. Other tech companies, like Airbnb and Uber, are also expected to be targeted, if they meet the minimum revenue criteria.
The postponement however comes with terms. The DST has been deferred until January 2024. If by that time the OECD agreement is not implemented, the DST will go into effect retroactively. This means that qualifying MNEs will be expected to pay taxes on revenues earned from January 2022. By signing on to the OECD agreement, Canada and the other nations will not be able to impose any new DST until the end of 2023. Tech giants have expressed support for the OECD arrangement as opposed to the broader and varying DST regime.
The deal is expected to stop MNEs from avoiding taxes by booking profits in countries with low corporate tax rates. Some developing nations have however voiced opposition, stating that opting for the prescribed 15% tax rate rather than anything higher was mainly of benefit to richer nations.
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