2024-1029901E5 DSTA s. 14 Cdn online marketplace services revenue

Principal Issues:

Whether revenue earned by a taxpayer from facilitating the online booking of various domestic and international airplane flights is included in the taxpayer's Canadian online marketplace services revenue for purposes of the digital services tax (DST).

Position:

1) Yes for revenue in respect of a flight that both departs from and lands in Canada. 2) Yes for revenue in respect of a flight that either departs from Canada or lands in Canada. 3) No for revenue in respect of a flight that departs from one foreign country and lands either in that country or in another foreign country.

Reasons:

In assessing whether a service is "physically performed and received" in Canada or in the same country for purposes of Variables A and B of the s. 14 determination of Canadian online marketplace services revenue, it is a point in time test. The legislation is intended to capture online marketplace services revenue in respect of the physical delivery of a service that has a direct physical impact in Canada. Therefore, the service must be both physically performed in and physically received in Canada at a point in time for purposes of Variable A, or in the same country for purposes of the exclusion in Variable B, at any particular point in time during the performance of the service.

Author: Kippen, Ann
Section: DSTA 2, 13, 14

XXXXXXXXXX                                                                   2024-102990
                                                                                          Ann Kippen

December 5, 2024

Dear XXXXXXXXXX,

Re: Canadian online marketplace services revenue in respect of international commercial airplane flights booked through an online marketplace

We are writing in response to your July 26, 2024 letter in which you asked whether certain online marketplace services revenue earned by a taxpayer would be included in the taxpayer’s “Canadian online marketplace services revenue” as determined under section 14 of the Digital Services Tax Act. Specifically, you asked whether online marketplace services revenue in respect of a commercial flight that departs from one foreign country (e.g., the United States) and that lands in that same foreign country or in a different foreign country (e.g., France) would be excluded from the computation of the taxpayer’s Canadian online marketplace services revenue pursuant to the exclusion in Variable B of the section 14 determination of Canadian online marketplace services revenue.

This technical interpretation provides general comments about the provisions of the Digital Services Tax Act (the “DSTA”). It does not confirm the digital services tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. All section references herein are to the DSTA.

Analysis and Our Views

In your letter, you noted that your question pertains to a situation where an intermediary online marketplace facilitates the booking of air travel between airlines and passengers (i.e., between users of the online marketplace), as opposed to a situation where an airline sells its own flights to passengers through its own website. For purposes of the digital services tax (DST), this scenario of an intermediary online booking site is the appropriate and relevant context, given the definition “online marketplace” and “user” in section 2. An online marketplace is a digital interface that allows users to interact with other users and which facilitates the supply of property or services between those users, but does not include a digital interface that has a single supplier of the property or service. The definition “user” excludes a person that operates the digital interface. Consequently, in the scenario where an airline exclusively sells its own flights directly to passengers through its website, the website would not be an online marketplace, nor would the airline be a user.

Instead, the relevant taxpayer for purposes of the DST in this scenario would be the operator of the intermediary online marketplace facilitating the booking of flights, not the airline. For this taxpayer, the definition “online marketplace services revenue” in subsection 13(1), and the sourcing of that revenue to Canada through the determination of “Canadian online marketplace services revenue” in section 14, would apply.

Pursuant to paragraph 13(1)(b), the online marketplace services revenue of a taxpayer operating an online marketplace includes commissions or other fees earned from facilitating the supply of a service between the users of its online marketplace (e.g., revenue earned in respect of booking air travel between an airline and a passenger). Section 14 then applies to that online marketplace services revenue to determine the amount of the taxpayer’s Canadian online marketplace services revenue. This revenue is determined by the formula A + B + C in section 14, where Variables A and B deal with the sourcing of revenue to Canada that is traceable to specific transactions, whereas Variable C deals with non-transactional revenue. Since the commissions or fees earned by the operator of an online marketplace from facilitating the booking of air travel would be traceable to specific transactions, Variables A and B are relevant in determining that operator’s Canadian online marketplace services revenue in respect of such bookings.

Paragraph (a) of Variable A includes revenue that is in respect of a supply, between users of the online marketplace, of a service that is physically performed and received in Canada. As noted by the Explanatory Notes to the DSTA that were released in July 2024, Variable A is intended to capture online marketplace services revenue earned from the facilitation of services that have a direct physical impact in Canada. The Explanatory Notes further clarify that even when only a part of the service is physically performed and received in Canada, with another part being physically performed and received outside Canada, the revenue in respect of the entire service would be considered to be revenue in respect of a service physically performed and received in Canada. Therefore, in the context of air travel, Variable A would include commissions or fees earned by the operator of the facilitating online marketplace in respect of a flight that is either entirely domestic within Canada or which involves a Canadian arrival or departure.

Variable B of section 14 indicates, as a result of the reading rule that is applicable to the physical delivery of a service such as a commercial flight, that Canadian online marketplace services revenue excludes revenue earned in respect of the supply of service that is physically performed and received in the “same country”. The intent of this language is twofold:

1. to exclude from a taxpayer’s Canadian online marketplace services revenue any revenues earned from the facilitation of services that have a direct physical impact in a country other than Canada, as noted in the Explanatory Notes; and

2. to ensure that any revenues earned from the facilitation of services that have a direct physical impact in Canada are not double counted by being included in both Variable A and Variable B.

The physically performed and received “in Canada” in respect of Variable A, or “in the same country” in respect of Variable B, is a two-part test that is applied at any point in time during the service. Specifically, the service must be both being physically performed and physically received either “in Canada” (for Variable A) or “in the same country” (for the exclusion in Variable B) at any point in time during the performance and receipt of the service. The legislative wording in Variables A and B does not require that the service be physically performed and received in Canada or in the same country for the entire duration of the service.

Therefore, in regards to a commercial flight, the service is being both physically performed by the airline and physically received by the passenger in the same country at the time the plane takes off and again at the time the plane lands. Consequently, it is our view that the online marketplace services revenue of the taxpayer that operates the intermediary online marketplace in respect of a flight that departs from a foreign country and lands in that same country or in a different foreign country, without an intervening arrival or departure in Canada, is excluded from the computation of the taxpayer’s Canadian online marketplace services revenue pursuant to the exclusion in Variable B in section 14 of the DSTA.

We trust the comments above will be of assistance.

Yours truly,

James Atkinson
Manager, DST and Global Tax Section
Specialty Tax Division
Income Tax Rulings Directorate
Canada Revenue Agency

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