The CBC’s report that the Canadian government is considering extending goods and services sales taxes to foreign-based digital services has sparked yet another round of articles and coverage of a possible “Netflix tax.” Some Conservative MPs were quick to pounce with claims the Liberals are pursuing a Netflix tax, yet the reality is a bit more complicated. At issue is not the culture contributions payment that is often called a Netflix tax. Despite calls for that form of Netflix tax, Canadian Heritage Minister Melanie Joly has been consistent in saying that the government will not extend mandatory Cancon contributions to Netflix.

In fact, this proposal is not targeted specifically at Netflix at all. Rather, it envisions the possibility of extending GST/HST to foreign-based digital services that are currently exempt from collecting and remitting sales taxes. While the law technically requires Canadian consumers to self-declare the sales tax they owe on those purchases, few are aware of the requirement and presumably even fewer actually do it.

The prospect of extending GST/HST emerged as an issue in 2014 when the Conservative government raised the idea in its budget and launched a public consultation on the issue.  Moreover, the Canadian government is not alone in exploring the possibility of extending sales taxes to the digital world. With many governments fearing increasing lost tax revenue due to online sales and domestic companies expressing frustration with being placed at a competitive disadvantage (Netflix does not collect and remit sales tax, but CraveTV does), the extension of sales taxes to foreign digital providers appears to be a question of when, not if. The “when” depends largely on developing international standards on the issue. The OECD has been actively working on it, recognizing that common standards and a reasonable exemption amount is needed (asking small foreign businesses to collect and remit for a few hundred dollars makes little sense).

The digital sales tax issue was discussed in some detail last month at a Standing Committee on Canadian Heritage hearing that did not attract much attention. Sean Keenan, the director of the sales tax division with the Department of Finance’s Tax Policy Branch told the committee:

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.

The discussion that followed is worth reading as the witnesses explained the complexity behind developing policy in the area and patiently tried to address MP questions that had nothing to do with digital sales taxes. The takeaway was that extending GST/HST to foreign based digital service providers seems inevitable, but is unlikely to happen in Canada until global standards are adopted at the OECD.