OECD Recommendations for Collecting Sales Tax on E-Commerce

An earlier article discussed the background to the government’s call for submissions on the effective collection of GST/HST on e-commerce sales by non-resident vendors (see “Hint in Budget: More GST/HST on the Digital Economy?” Canadian Tax Focus, May 2014). On December 18, 2014, the OECD released a draft discussion paper outlining its recommendations for addressing the issue.

The OECD draft endorses the mandatory registration of non-residents that make e-commerce sales to consumers as the most effective way of ensuring that tax is collected. To lessen the compliance burden of registration (a particular concern for vendors with obligations in multiple jurisdictions), the OECD recommends a simplified version of registration. This version does not require the same detailed reporting and invoicing as regular registration, but it also does not allow for the recovery of input tax credits (which should not be significant for non-residents that do not incur Canadian-taxable expenses). Earlier OECD drafts had canvassed other approaches, such as a digital transaction withholding tax. According to the OECD, however, experience shows that registration with simplified compliance requirements is a practical and relatively effective way of securing tax revenue and minimizing the competitive inequity between resident and non-resident vendors. A recently enacted provision explicitly allows the CRA to register persons that it believes should be registered by sending a notice of intent (see “CRA To Force GST/HST Registration,” Canadian Tax Focus, August 2014). Although the provision does not appear to have been enacted with the digital economy specifically in mind, it will be interesting to see whether the CRA will attempt to use this power to compel non-resident e-commerce vendors to register.

In order to actually enforce a registration requirement, the OECD recommends reliance on existing tax treaties and agreements to support the identification of potential registrants (tax information exchange agreements and tax conventions) and enforcement (the Convention on Mutual Administrative Assistance in Tax Matters). In principle, this multilateral approach should help to address the practical difficulties faced by any single jurisdiction in attempting to unilaterally enforce non-resident registration. However, this approach may not be entirely effective if the other jurisdiction has a limited incentive to cooperate because, for example, it does not receive sufficient reciprocal benefit. Canada’s largest trading partner, the United States, does not have a broad-based federal VAT: state and local sales and use taxes tend to focus on tangibles and certain services. Therefore, the United States may not suffer tax revenue loss to the same extent as Canada on inbound e-commerce purchases from unregistered non-residents. The benefit may also be one-sided in that the United States is likely to be a net exporter of e-commerce to Canada and therefore less concerned about the competitive inequity posed by unregistered Canadian vendors.

Simon Thang
KPMG Law LLP, Toronto

Alicia Malone
KPMG LLP, Toronto

Canadian Tax Focus
Volume 5, Number 1, February 2015
©2015, Canadian Tax Foundation