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Standing Committee on Public Accounts: Office of the Auditor General Audit on Taxation of E-Commerce ()
Audit-specific
Document navigation for "PACP: OAG Audit on Taxation of E-Commerce (December 3, 2020)"
Office of the Auditor General Audit Report
Background
The audit speaks to the changing retail landscape in Canada. More people are making purchases online. The increase in e-commerce creates challenges for assessing and collecting the goods and services tax (GST) and the harmonized sales tax (HST). This is particularly true for physical products and digital products and services—such as music and videos—that consumers in Canada purchase from foreign vendors.
E-Commerce includes:
- physical products purchased online
- digital products and services purchased and delivered online, such as video streaming
- supplies purchased online, such as accommodation sharing (also known as short-term home rentals) and ride sharing
The volume of low-value shipments imported by courier into Canada offers some insight into the growth of e-commerce. In the 2017 to 2018 fiscal year, there were 46 million low-value shipments sent by courier from abroad and received in Canada compared with 35 million just five years earlier.
Statistics Canada reported that for the 12 months ending in , the total annual spending by Canadians on music and video downloads and streaming services was $2 billion. It also reported that in 2018, accommodation sharing in Canada generated an estimated $2.8 billion in revenues.
Roles and responsibilities
Canada Border Services Agency. The Canada Border Services Agency facilitates and oversees trade across Canada's border. The Agency is responsible for validating and collecting the sales taxes owed to the Government of Canada on imported low-value shipments sent by courier.
Canada Revenue Agency. The Canada Revenue Agency administers the GST for the Government of Canada and the HST for provinces where applicable. The Agency is responsible for adapting its compliance strategies to detect non-compliance and to enforce deterring measures for e-retailers who should remit the GST/HST under the Excise Tax Act.
Department of Finance Canada. The Department of Finance Canada helps the Government of Canada develop and implement tax policies and programs. The Department is responsible for providing advice on measures to enhance the fairness, neutrality, competitiveness, and efficiency of Canada's sales tax system.
Focus of the audit
This audit focused on whether, according to their respective roles and responsibilities, the Canada Revenue Agency, the Canada Border Services Agency, and the Department of Finance Canada ensured that the sales tax system for e-commerce was neutral (treated all vendors equally with regard to the GST/HST) and that the GST/HST tax base (everything that is taxable) was protected.
The OAG did not examine the Canada Border Services Agency's compliance activities related to commercial and postal imports, nor did we audit the corporate income tax of businesses involved in e-commerce. Moreover, we did not examine the Canada Revenue Agency's collections processes.
Overall message
Overall, the OAG found that the Canadian sales tax system did not keep pace with the rapidly evolving digital marketplace. On the basis of publicly available data, we estimated losses of $169 million in the GST on foreign digital products and services sold in Canada in 2017. In addition, the federal government could not assess and collect all sales taxes on e-commerce transactions.
The OAG found that existing legislation, combined with the Canada Border Services Agency's poor data management of low-value shipments imported into Canada by courier companies, placed Canadian businesses at an unfair disadvantage in relation to foreign vendors. According to the Department of Finance Canada, the situation could have encouraged domestic vendors to move their operations abroad and could have discouraged foreign investment in Canada.
The Canada Border Services Agency was aware that some courier companies were likely not remitting all sales taxes on low-value shipments into Canada. However, the OAG found that the Agency did not step in, despite a significant increase in the volume of shipments declared as low value coming into the country.
In addition, the OAG found that the Canada Revenue Agency undertook few activities to ensure that e-commerce vendors—including accommodation sharing vendors—registered for, collected, and remitted sales taxes when required. The Agency could not follow Quebec's and British Columbia's initiatives to reach out to prominent e-commerce platforms to ask them to voluntarily collect and remit the GST/HST on behalf of vendors on their platforms.
Related link:
2019 Spring Reports of the Auditor General of Canada: Report 3—Taxation of E-Commerce
Management Response Action Plan
This is the CBSA detailed action plan to the recommendations of the OAG Audit of Taxation of E-Commerce of the Spring 2019 Reports of the Auditor General of Canada.
Recommendation
Report reference number: Report 3, paragraph 3.73
As soon as possible, the Canada Border Services Agency should review the Courier Low Value Shipment Program to improve the validation and collection of GST, HST, and PST. As part of the review, it should:
- Identify the program variables that should be fully reflected in their systems and forms, such as provincial sales taxes
- Ensure it receives shipment data electronically in advance of the goods arriving at the border to facilitate compliance activities
- Implement a comprehensive E-Commerce Strategy to make informed risk assessment and improved revenue collection and report publicly on its progress
Departmental response (to be included in the report)
Agreed. The Canada Border Services Agency will review processes within the Courier Low Value Shipment (CLVS) Program to improve the validation of taxes collected. The Agency will participate in the World Customs Organization Working Group to identify revenue collection models and evaluate other countries' best practices by .
The Agency will also further refine its E-Commerce Strategy to be finalized in 2019 and commit to securing an approved business plan before the end of 2019 to 2020 with implementation timelines. This strategy will focus on trade facilitation, safety and security as well as revenue collection.
In addition, the CBSA will seek authority and funding to regulate shipment data in advance and develop a reconciliation process by .
Finally, the Agency will renew its focus on compliance activities in the CLVS program by proposing an approach on conducting statistically valid courier compliance activities based on courier data to ensure revenue-related requirements are met by and examine options to further automate the CLVS Program including the ability to receive, process and analyze customs data by .
Description of final expected outcome/result
To improve the CLVS Program, the CBSA will:
- Develop a business case with the objective of obtaining incremental funds to invest in process changes and technology
- Align practices, where possible with international agreements for express operators and WCO guidelines
- The CBSA will have effective mechanisms in place to monitor and assess Courier Low Value Shipment Program compliance
Expected final completion date
Fiscal year 2022 to 2023
Key interim milestones (description/dates)
The CBSA will work, in consultation with internal/external partners and stakeholders, to enhance the Courier Low Value Shipment Program by:
- Reviewing and updating the means by which goods are accounted for so as to ensure that taxes (including provincial sales taxes) are fully reflected. ()
- Developing and approving a business plan for the e-commerce strategy focusing on trade facilitation, safety and security as well as revenue collection. ()
- Participating in the World Customs Organization Working Group to identify revenue collection models and evaluate other countries best practices. ()
- Seeking authority and funding to regulate shipment data in advance and developing a reconciliation process. ()
- Examining options to further automate the CLVS Program including the ability to receive, process and analyze customs data (Fiscal year 2022 to 2023)
- Renewing focus on compliance activities in the CLVS program by proposing an approach on conducting statistically valid courier compliance activities based on courier data to ensure revenue and security related requirements are met ()
Responsible organization/ Point of contact
Canada Border Services Agency
Peter Hill
Vice-President
Commercial and Trade Branch
613-952-2531
E-Commerce Strategy
Speaking points
In , the CBSA approved internally an end-to-end integrated e-commerce Customs Framework and Strategy.
The strategy highlights the Agency's plan to adapt itself to increasing volumes of low-value packages processed at the border, driven by direct-to-consumer e-commerce. This situation has been exacerbated by the COVID-19 pandemic.
In order to address these challenges effectively, the Agency will advance the four key pillars of this strategy:
- Strengthen legal and regulatory authorities
- Transform the CBSA operations
- Strategically expand and leverage partnerships
- Build the Agency's capacity in the area of infrastructure and IT enhancement
The investments made as a result of this strategy will enable the Agency to better utilize innovative technology and tools.
The strategy will address issues specifically related to the assessment and collection of duties and taxes on e-commerce packages. This is in direct response to the audit recommendation review and improve the CLVS program and the collection of taxes owed.
To frame the progress that the Agency has made so far, we are working on strengthening and modernizing the legal and regulatory frameworks. The work underway includes amending regulations for advance electronic data requirements for low value goods. This will allow the Agency to identify goods that are non-compliant regarding the duties and taxes owed earlier in the process.
The CBSA is developing and testing a new enhanced risk assessment system and adding tools to support our officers to better identify risks and revenue collection gaps.
The strategy is informed by and aligned with our B5 partners (Australia, New Zealand, the United Kingdom and the United States) and the World Customs Organization, to ensure that we draw strength from international standards and best practices. We are also engaging industry stakeholders to provide us with data that our officers can use to make better decisions faster.
The CBSA will continue to explore and adopt the use of data and image analytics. In particular, artificial intelligence, x-ray imaging technology, and non-intrusive inspection tools are key to expand our risk assessment capabilities.
The strategy, once fully implemented, will further strengthen our revenue collection mandate while enhancing our capabilities to protect the health and safety of Canadians.
Anticipated questions and answers
1. How does the E-Commerce Strategy help with the collection of sales and provincial taxes?
The E-Commerce Strategy lays down the building blocks of what the CBSA needs to carry out its mandate more efficiently in response to the growth of cross-border.
- It seeks new authorities to mandate the transmission of advance electronic data on e-commerce shipments to get the right data at the right time from the right party
- It gives officers increased access to data that will allow for enhanced capabilities to review transactions and identify instances of non-compliance
- It seeks a collaborative approach to international standards, as well as partnerships with an industry stakeholders who are often eager to do more to make sure that shipments travel smoothly
- It brings in new technologies and methods, this will allow the CBSA to have a better understanding of the e-commerce landscape, and address specific challenges linked to compliance and revenue collection
In sum, the strategy will allow the CBSA to ensure all appropriate taxes are collected.
2. How does the E-Commerce Strategy position Canada compared to other countries?
The implementation of this strategy will further enable the CBSA to work closely with international partners in gathering lessons learned and best practices. The CBSA will seek to work with our partners to develop benchmarking exercises related to risk assessment and revenue collected in e-commerce streams.
The implementation of the E-Commerce Customs Strategy will also align Canada's requirements for courier shipments and capacity concerning in the realm of revenue collection with its B5 partners (Australia, New Zealand, the United Kingdom and the United States).
The Agency is also implementing new technologies that will augment the Agency's capacity to leverage artificial intelligence. This would position Canada to become a world leader and would provide us with the opportunity to assist other countries in their efforts in the field.
3. How does the E-Commerce Strategy support an enhanced compliance regime?
The strategy will allow the CBSA to receive advance data electronically on low value shipments. It will help the Agency to acquire the technological means to process this information. This would provide officers with a better analysis of trends and patterns within the low value shipment streams and improve compliance.
4. What are the next steps in establishing the strategy?
The CBSA is currently working on developing an implementation roadmap to support the delivery of the E-Commerce Customs Strategy. A specific example is the work underway to deploy and develop systems aiming to gather, centralize and process data. Once systems have been tested and piloted, our industry partners will be further consulted on modernizing the regulations related to low value shipments.
5. How do you anticipate industry will respond to this new regime? Have consultations on this strategy happened?
The Agency has begun consultations with the industry and there is a consensus that the CBSA's Courier and Low Value Shipments program needs modernization and digitization.
So far, the feedback we have received is positive and enthusiastic toward the modernization of the CBSA's courier program, as it will help clarify liabilities, and will make officers' decisions more focused on higher risk shipments.
The CBSA will continue to engage with our industry partners we continue to deliver on the E-Commerce Customs Strategy.
Key statistics
E-Commerce drivers
The rise of e-commerce has led to major increases in postal and courier volumes be processed by CBSA. The mail volume at the Vancouver International Mail centre increased over 300% in the last 5 years. The volume has risen 95% nationally across all three international postal centres (Toronto, Montreal and Vancouver).
During the same period, there has been a 40% increase nationally in CLVS volumes (from 40+ million to 56+ million). Practical example - CBSA Hamilton office has seen a 528% growth in the CLVS volume over the last 5 years. Number of officers and capacity to process these volumes has largely remained unchanged.
Background information
E-Commerce presents the Agency with unprecedented pressures in our efforts to:
- identify and interdict high-risks goods, such as opioids
- detect guns and gun parts
- ensure all duties and taxes owed to the Government of Canada and provincial and territorial governments are properly assessed and collected
The Auditor General in his Spring 2019 Report on the Taxation of E-Commerce observed:
- Poor data management of the Courier Low Value Shipment Program
- Warning signs related to incomplete declarations of sales taxes
- Accuracy of provincial sales taxes was not validated
In response, the CBSA has committed to:
Implement a comprehensive E-Commerce Strategy to make informed risk assessments and improved revenue collection, and report publicly on its progress.
The CBSA is currently working on developing an implementation roadmap to support the delivery of the E-Commerce Customs Strategy. The Agency has already started to deliver on this strategy, by developing and testing an automated system that will ingest courier data received electronically from the couriers. This will bring significant benefits to the CBSA and industry as the current business processes are manual. Concurrently, the Agency is pursuing development of a comprehensive low-value shipment information platform for use by . (see "Automation of CLVS" tab for more information)
The CBSA will continue to engage industry participants as it delivers on the E-Commerce Customs Strategy.
Document navigation for PACP: OAG Audit on Taxation of E-Commerce (December 3, 2020)"
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