Tax Insights: The new international tax framework and Canada’s digital services tax

October 18, 2021

Issue 2021-25

In brief

On October 8, 2021, the Organisation for Economic Co-operation and Development (OECD) announced that 136 countries, including Canada, had committed to fundamental changes to the international corporate tax system that support the OECD Inclusive Framework’s “Tax Challenges Arising from Digitalisation” project. The changes would provide new taxing rights that reallocate some portion of the profits of large multinational enterprises (MNEs) to countries where the MNE’s customers are located (“Pillar One”), and adopt a global minimum effective tax rate of 15% (“Pillar Two”). These two pillars are to generally come into effect in 2023.

Following the OECD’s announcement, Deputy Prime Minister and Minister of Finance, Chrystia Freeland, confirmed Canada’s commitment to this international agreement, and announced that Canada still intends to move ahead with legislation finalizing a digital services tax (DST) by January 1, 2022 (as announced in the federal government’s 2021 budget). However, the DST would only be imposed if the multilateral convention implementing Pillar One has not come into force by December 31, 2023. In that event, the DST would be payable as of 2024 in respect of revenues earned since January 1, 2022.

On October 13, 2021, the G20 Finance Ministers met in Washington, D.C. In their communique, the Finance Ministers endorsed the Inclusive Framework agreement and called on the OECD/G20 Inclusive Framework members to ensure that the new rules come into effect at the global level in 2023.

In detail

Base erosion and profit shifting (BEPS) – Pillar One and Pillar Two

The OECD’s October 2021 statement,1 which was agreed to by 136 out of 140 member jurisdictions in the OECD/G20 Inclusive Framework on BEPS, supports a two‑pillar solution to address the tax challenges arising from the digitalization of the economy.

The main element of Pillar One is to allocate a formulaic share of the consolidated profit of certain MNEs to the market jurisdictions where revenue is earned. Pillar One would apply to MNEs with global consolidated revenues exceeding EURO 20 billion and profitability thresholds greater than 10%; Pillar One would not apply to regulated financial services and extractive industries. The profit to be reallocated to markets would be 25% of an MNE’s profit before tax that exceeds 10% of revenue.

Under Pillar Two, the member jurisdictions have agreed to enact a minimum effective tax rate of 15% on profits earned by MNEs in each jurisdiction. This minimum tax would apply to MNEs with global consolidated revenues exceeding EURO 750 million.

The OECD expects these changes will generally come into effect in 2023. Pillar One will require a multilateral convention to be developed and signed by the member jurisdictions in 2022 and then implemented by each member before 2023. Pillar Two will be implemented through enactment or amendment of domestic tax rules by the participating jurisdictions with effect for 2023.

For more information, see our Tax Policy Alert 136 countries reach political agreement on a new international corporate tax framework”.

PwC observes

Given the complexity in developing a multilateral convention that would be agreeable to member jurisdictions, there is uncertainty as to whether this convention can be successfully developed and implemented by 2023. The Inclusive Framework represents a political agreement, which may or may not survive the development of the multilateral convention, and there are still many technical issues that need to be fully considered and addressed (e.g. determining the “surrendering entities”). This uncertainty is evident in the approach Canada is taking with respect to its proposed DST (see below).

Pillar Two is arguably more robust in that it effectively relies on a critical mass of jurisdictions implementing similar domestic rules. However, some jurisdictions view Pillars One and Two as being part of a package that requires the implementation of both pillars.

Digital services tax (DST)


In Canada, the federal government’s November 30, 2020 Fall Economic Statement proposed to implement a Canadian DST, effective January 1, 2022, which would apply until an acceptable multilateral approach is implemented by members of the OECD and the G20. In its 2021 budget, the federal government provided more details on the proposed DST, which would target large global businesses earning revenue from certain digital services reliant on the engagement, data and content contributions of Canadian users. The DST would be a 3% non-income tax that would apply to revenues earned from online marketplaces, social media, online advertising and user data by entities (or members of a business group) with:

  • global revenue from all sources of EURO 750 million or more in the previous calendar year (the same threshold used for country-by-country reporting under an OECD standard), and
  • in-scope revenue associated with Canadian users of more than $20 million in the particular calendar year

Even though the federal government had committed to releasing draft legislative proposals in summer 2021, no draft legislation has yet been released (presumably because of the federal election in August/September).

OECD’s statement

The OECD’s October 2021 statement indicated that the multilateral convention to implement Pillar One would remove existing DSTs and “relevant similar measures” for all companies. It also stated that signatory countries agree not to impose any newly enacted DSTs from October 8, 2021 until the earlier of December 31, 2023 or the coming into force of a Pillar One multilateral convention.

Deputy Prime Minister’s statement

The Deputy Prime Minister’s October 2021 statement committed to finalizing legislation to enact the DST by January 1, 2022, but would only impose it if the multilateral convention implementing Pillar One (see above) has not come into force by December 31, 2023. In that event, Canada would start imposing the DST on January 1, 2024, in respect of in-scope revenues earned since January 1, 2022.

PwC observes

There is some question as to whether the Canadian government’s proposed approach is consistent with the OECD’s statement that “no newly enacted Digital Services Taxes or other relevant similar measures will be imposed on any company from 8 October 2021 and until the earlier of 31 December 2023 or the coming into force of the [multilateral convention]” given that the Canadian DST would (if it comes into effect) apply to revenues earned from January 1, 2022 onwards. As well, there are important differences between Pillar One and the Canadian DST that taxpayers will need to take into account.

In particular, the taxes would apply to different groups of entities because of the applicable revenue thresholds. Pillar One, initially, would apply only to MNEs with global revenue exceeding EURO 20 billion, while the Canadian DST would apply to MNEs with global revenue of EURO 750 million or more. As a result, MNEs who would be subject to the Canadian DST, but who would not be caught by Pillar One (less than 100 MNEs are expected to be subject to Pillar One), will have to deal with significant uncertainty over the next two years and will need to prepare for a tax that may or may not come into effect.

The takeaway

The implementation of Pillars One and Two will introduce significant changes to the international corporate tax system. Taxpayers should keep abreast of ongoing developments in Canada (and globally) and understand how these changes could impact them. Given the challenges of developing the multilateral convention required to implement Pillar One, it is uncertain whether the proposed timelines will be met. If such timelines are not met by December 31, 2023, an MNE earning revenue from certain digital services in Canada could be subject to the Canadian DST on the MNE’s revenues as of January 1, 2022, although it would not be payable until 2024.  


1. OECD/G20 Base Erosion and Profit Shifting Project, “Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy” (October 8, 2021).



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Ken Buttenham

Ken Buttenham

National International Tax Leader, PwC Canada

Tel: +1 416 509 5203

Ian Bradley

Ian Bradley

Partner, PwC Law LLP

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Dean Landry

Dean Landry

National Tax Leader, PwC Canada

Tel: +1 416 815 5090