Canadian Heritage Minister Steven Guilbeault was recently asked about his plans to mandate licensing of links to news articles on social-media sites such as Facebook. While the policy is often referred to as a link tax, Mr. Guilbeault insisted that it was not a tax, stating “some people think every time the government acts, it’s a tax. What I’m working on has nothing to do with tax.” Instead of a government tax scheme, Mr. Guilbeault explained that he intends to have the Copyright Board of Canada set a fee for the links to articles, backed by government power to levy fines for non-payment.
Leaving aside the semantic debate over what constitutes a government tax, the comments are notable because when it comes to addressing the concerns associated with the large technology companies, Canada should be working on taxation. Mr. Guilbeault has said his top legislative priority is to “get money from web giants,” yet rather than focusing on conventional tax policy, his preference is to entrench cross-subsidy programs that keep the money out of general tax revenues and instead allow for direct support to pet projects and favoured sectors.
The insistence on a cross-subsidy model treats the internet like an ATM with the ability to withdraw cash from one sector and deposit it into another and, perhaps not coincidentally, keeps control over the money within Canadian Heritage rather than the Ministry of Finance.
This approach now seemingly serves as the foundation for the government’s tech policy. Indeed, the plan for mandated payments merely for linking to news articles is the tip of the get-money-from-web-giants iceberg with similar policies in the offing for film and television production (internet streaming services such as Netflix mandated to contribute to funds supporting Canadian content production); music production (online music services such as Spotify required to pay into Canadian funding); and potentially even rural broadband internet access (the recent report on broadcast and telecommunications reform recommended such payments by services such as Skype).
While the allure of free cash may be enticing, there is no such thing as a free lunch. The plan for mandated licensing for links could result in social-media platforms blocking news-article sharing altogether, resulting in reduced traffic and advertising revenues for Canadian media organizations. It would also cede the field to less reputable services, risking increased misinformation and a less informed public.
Regulated payments could have similar negative effects in other sectors. For example, plans to support Canadian content in film and television production could spark a trade war with the prospect of millions in tariffs targeted at sensitive Canadian sectors, while pushing Canada’s biggest backer of television production – Netflix – to rethink its strategy in the country.
None of this is to suggest that the government should not be focused on the major technology companies. A recent U.S. congressional report on the competition issues raised by internet platforms left little doubt that the concerns about marketplace abuses arising from a handful of companies that wield enormous power over digital advertising, electronic commerce and social media are real. A competition law response to ensure a level playing field is a must.
Further, the technology companies should be paying their fair share of taxes. The extension of sales taxes to digital services seems inevitable, but those are paid by consumers and merely collected and remitted by the companies. Far more important are conventional taxes on revenues earned in Canada.
To date, technology companies have unsurprisingly engaged in tax minimization strategies that shift much of their tax liability to low-tax jurisdictions. That strategy is not uncommon for all multinational corporations, but technology companies are particularly adept at it given their ability to actively participate in local markets without the need for a physical presence.
Countries around the world are facing the same issue: how to get a share of the revenue from companies that have a dominant local market impact and limited physical presence, and are structured to pay little tax. Last week, the Organization for Economic Co-operation and Development (OECD) continued negotiations on finding consensus on a multilateral approach to digital tax issues but acknowledged that a deal is unlikely for at least another year.
The challenge is that this is viewed as a zero-sum game with more tax revenue for one country (say Canada) meaning less for another (the U.S.). Despite the hurdles, a global tax model would serve as the best foundation for ensuring that technology companies pay their fair share of tax on the revenues earned in Canada.
Absent a global solution, the government should be prepared to explore a made-in-Canada approach that would allow it to drop the harmful cross-subsidy model that risks increasing costs for consumers in favour of a general tax revenue approach that can be transparently incorporated into Canada’s standard budgeting process.
Michael Geist holds the Canada Research Chair in Internet and E-commerce Law at the University of Ottawa, Faculty of Law.
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