[World Tax News] Canada Implements Digital Service Tax & Global Minimum Tax and More

Editorial Team – [2024] 163 taxmann.com 763 (Article)

World Tax News provides a weekly snippet of tax news from around the globe. Here is a glimpse of the tax happening in the world this week.

1. Canada implements Digital Service Tax & Global Minimum Tax

On June 20, 2024, Canada’s Department of Finance announced that the Fall Economic Statement Implementation Act, 2023 (Bill C-59) and the Budget Implementation Act, 2024, No. 1 (Bill C-69) received royal assent.

The 2023 Fall Economic Statement emphasises measures to enhance affordability, expand housing availability, and ensure equitable economic growth nationwide.

Bill C-69 reflects the federal government’s commitment to building a Canada that benefits all generations.

Bill C-69 includes the Global Minimum Tax Act, which enacted a 15% global minimum tax under Pillar Two for qualifying multinational enterprise groups (MNEs) starting from December 31, 2023.

Key provisions of the Fall Economic Statement Implementation Act 2023 include:

Introduction of a 3% digital services tax (DST) under the Digital Services Tax Act, pending implementation date to be determined by the Governor in Council, not before January 1, 2024.
Implementing earnings-stripping rules following BEPS Action 4 guidelines, limiting the deduction of net interest expenses to a fixed ratio of tax EBITDA. Initially set at 40% for fiscal years beginning October 1, 2023, and then reduced to 30% for fiscal years starting January 1, 2024.
Enforcement of hybrid mismatch rules under BEPS Action Two guidelines to address discrepancies in deduction and non-inclusion.
Denying the dividend received deduction for dividends received by Canadian financial institutions on certain shares held as mark-to-market property.
Implementing a number of amendments to the general anti-avoidance rule (GAAR) as well as introducing a new penalty applicable to transactions subject to the GAAR and extending the normal reassessment period for the GAAR by three years in certain circumstances.

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2. Minimum effective taxation standard for ultra-high-net-worth individuals; Report by Brazilian G20 presidency

In February 2024, the Brazilian G20 Presidency invited Professor Gabriel Zucman to speak to assembled G20 Finance Ministers in Sao Paulo. His objective was to advocate for a reform to ensure global tax progressivity. During his address, Zucman proposed implementing a coordinated minimum taxation standard for billionaires, building upon previous international cooperation efforts to address the wealthiest individuals’ low effective taxation rates. Subsequently, the Brazilian G20 Presidency commissioned a report to assess the practicality of this proposal.

On June 25, 2024, Gabriel Zucman published a report on a coordinated minimum effective taxation standard for ultra-high-net-worth individuals.

This report presents a proposal for an internationally coordinated standard ensuring the effective taxation of ultra-high-net-worth individuals. In the baseline proposal, individuals with more than $1 billion in wealth would be required to pay a minimum tax annually equal to 2% of their wealth.

This standard could be flexibly implemented by participating countries through various domestic instruments, including a presumptive income tax, an income tax on a broad notion of income, or a wealth tax.

The reports draw the following main conclusion:

Leveraging recent advancements in international tax cooperation, such a unified standard has now become technically viable.
It could be effectively enforced, even without universal adoption, through strengthened exit taxes and the implementation of “tax collector of last resort” mechanisms, akin to the coordinated minimum tax applied to multinational corporations.
Introducing a 2% minimum tax on billionaires’ wealth would generate approximately $200-$250 billion annually globally from around 3,000 taxpayers. Extending this tax to cent millionaires would add an additional $100-$140 billion.
This global standard would effectively mitigate the regressive elements found in current tax systems among the wealthiest individuals.
Rather than replacing them, it would complement domestic progressive tax policies by enhancing transparency regarding high-end wealth, reducing incentives for tax avoidance, and preventing a competitive downward spiral in tax rates.
Its economic implications should be evaluated in light of the observed average annual pre-tax return on wealth for ultra-high-net-worth individuals, which has been 7.5% over the past four decades (adjusted for inflation), and the current effective tax rate on billionaires, amounting to 0.3% of their wealth.

Source: A Blueprint Ultra-High-Net-Worth For A Coordinated Taxation Standard For Individuals