Major Inconvenience or Minor Irritation? Canadian Perspectives on Electronic Commerce, Globalisation and Taxation

Abstract

This article argues that, far from constituting an element of uncontrollable globalisation, the challenges posed by ‘borderless’ e-commerce have been largely overstated, specifically finding a major impact on Canadian tax revenue, hence also on tax policy, unlikely. Three reasons are offered. First, Canada's federal and provincial tax structures differ considerably from those found at the substate level in the US and at the state level in the European Union. Second, e-commerce appears to have had only a marginal impact on sales tax collection in Canada, with the appeal of foreign suppliers remaining quite modest. Third, the overall tax burden in Canada is relatively low by OECD standards. Therefore, there may be room to increase taxes in various areas to compensate for any potential losses in tax revenue resulting from e-commerce. Negatively, these findings are at odds with current perceptions of global e-commerce as a threat. Positively, they underline the point that tax system design matters.

Acknowledgements

The author would like to thank the anonymous reviewers assigned to this manuscript and the editor for their helpful and constructive feedback. Their dedication to professionalism and rigour is truly appreciated.

Notes

Since the 1990s, internet penetration rates and B2C and B2B e-commerce have been increasing significantly in the European Union and the United States (see National Audit Office, 2006; OECD, 2007). For information on the increasing importance of consumption taxes in the OECD see, Messere et al. (2003).

Though, there would appear to be positive relationship between increases in the value of the Canadian dollar vis-à-vis the US dollar and increases in internet purchases from non-Canadian websites.

It should be noted that while Ligthart (2004) and Bird (2003) recognise that e-commerce is not currently a problem, they also suggest that it could become problematic in the future. Bird's article in particular – ‘A revolution in the making?’ – suggests that e-commerce is likely to pose a range of challenges for Canada's taxing authorities. Bird makes a number of legitimate points. However, from a tax policy standpoint there is no reason to believe that e-commerce will necessarily have a ‘revolutionary’ effect on tax collection or Canada's tax system in general. In addition, based on the existing evidence, and contrary to Bird's recommendations, there still does not appear to be any justifiable reason to alter any aspect of Canada's current tax system to address the issue of e-commerce.

Policy coordination at the international level can be difficult. However, there are signs that this is precisely what is happening in the OECD. The Organisation's Ottawa Taxation Framework Conditions, for example, have set ‘out a number of principles that governments should adopt in their approach to’ internet taxation (OECD, 2003: 3). In addition, the European Commission established an electronic commerce Council Directive in July 2003 for the purpose of implementing many of the recommendations made in the OTFC.

For instance, buying and selling goods and services electronically, advertising items over the internet, gaming, electronic funds transfers, credit and debit cards transactions, and so on.

Alberta is the exception here. It is the only province that does not levy a provincial sales tax.

In 1998, Statistics Canada's National Accounts branch undertook a large revision of all ‘revenue and expenditure’ data back to 1989. While there are some discrepancies in the overlapping revenue totals listed in the 1997, and 2006 and 2008 CANSIM matrices, every effort has been made to present the categories under examination in a methodologically consistent fashion. In particular, the ‘Canadian tax trends as a percentage of total taxation’ figures remain accurate and consistent with the data presented in the OECD's (2006) revenue statistics series. For more information on Statistics Canada's revised ‘revenue and expenditures’ survey consult Industry Canada (1999).

Mexico's fiscal balance heavily favours the central government and it remains one of the most highly centralised federal regimes in the OECD (OECD, 2006: 28).

Author's own calculation based on 2007 B2C e-commerce sales and total personal expenditure figures provided by Statistics Canada's The Daily (2008b) and the Canadian Economic Observer Historical statistical supplement 2007/08. Available at http://www.statcan.gc.ca/pub/11-210-x/00007/t_html/5213807-eng.htm (accessed 15 December 2008).

Author's own calculation(s) based on combined federal and provincial sales tax rates (14 per cent) for 2007. In 2007, the national Goods and Services tax was set at 6 per cent.

Author's own calculation.

The idea of electoral politics having some bearing on tax policy decisions is particularly relevant in Canada's case – although not unique to Canadian politics. For example, it could be argued that the federal Conservative party used classic ‘tax cutting’ rhetoric – in the lead-up to the 2006 and 2008 elections – to shore up greater support for the party's overall policy agenda. In 1997, Jean Chrétien's federal Liberal party also campaigned on the promise of abolishing the country's much maligned Goods and Services tax.