Netflix tax may be coming soon to Canada

  • February 27, 2017
  • Julie Sobowale

PopcornAre your Netflix and chill plans in danger? That’s what’s headlines have been saying in recent weeks with the federal government contemplating levying additional taxes on streaming services. While it’s unknown if and when a tax would be levied, the debate raises issues of digital media, Canadian content and tax reform.

The story of Netflix began in 1997 when the company was sending DVDs by mail to consumers. In 2007 the company launched its streaming services and in 2013 started to release its own original content. Netflix expanded into Canada in 2010 and is now operating in more than 190 countries. Even as other competitors move into the market – including Amazon Prime Video and Bell’s CraveTV – Netflix remains the leader in streaming services. This new market has created issues for Canada on how to deal with online content from foreign companies.

“There seems to be an emerging international consensus that services provided to consumers by means of digital communication technology should be taxed in accordance with the rules of the country in which the consumer resides,” says Bob Tarantino, counsel at Dentons and past chair of the Ontario Bar Association’s Entertainment, Media and Communications Law Section. “At some point that consensus will be translated into binding treaty commitments and alterations to domestic tax collection rules.”

The debate for a “Netflix tax” is actually a story of two possible tax regimes. Canadian content providers have been arguing that foreign streaming services should be required to pay cultural contribution payments. Currently streaming services, including Netflix, are exempt from making payments into the Canadian Media Fund. Supporters of the tax argue that the payments would help fund more Canadian content and even the playing field for Canadian providers, who are required to make the payments. The federal government has rejected this idea and consumer groups such as Open Media have been advocating that no new taxes be added to digital content or the internet.

“This issue is not on the table,” says Michael Geist, Canada Research Chair in Internet and E-commerce Law at the University of Ottawa. “It’s not necessary and not good policy. Netflix is making significant investment in Canada and contributions policy is part of a broader context.”

The other alternative is for the federal government to collect sales tax on foreign streaming services. This would expand the current GST/HST framework to companies like Netflix without imposing a brand new tax regime. While the sales tax would go into Canada’s general revenue, one proposal is to have part of these funds used to support Canadian content.

“It’s a question of fairness,” says Tarantino. “Digital services which are physically located in Canada are required to charge and remit HST payments. Digital services which are not physically located in Canada do not have to charge the tax, even if they specifically target and service Canadian customers. That’s an unfair result and gives the non-Canadian providers a competitive advantage in the Canadian marketplace.”

The federal government hasn’t signalled when it will pass legislation to tax foreign streaming services but it does support the idea. The government endorsed the Destination Principle from the Organisation for Economic Cooperation, which says that suppliers should pay taxes in the jurisdiction where the final consumer resides.

“It would level the playing field between Canadian and non-Canadian digital services,” says Tarantino. “In Ontario, at least, that means that the 13 per cent differential in the fee paid by the consumer which is currently enjoyed by non-Canadian services such as Netflix would be eliminated. If your competitor has a 13 per cent price-point advantage over you which is solely due to the tax regime, that’s inevitably going to affect consumer decisions at some point.”

If the federal government moves forward, Canada would be one of the few countries with a sales tax on foreign streaming services. This year Australia will begin to collect taxes on companies such as Netflix. Meanwhile the European Union is working on creating a uniform tax system for digital media but having problems with the varying sales tax regimes in each country. Even with these issues, perhaps the biggest obstacle is enforcement. Foreign companies would need to register to remit taxes.

“Canada has relatively limited ability to force non-Canadians to comply with Canadian tax laws,” says Tarantino. “To be clear, this is not a challenge which is limited to Canada. All countries which charge VAT taxes face similar challenges, and international standard-setting and cooperation is going to be required in order to implement an ‘airtight’ system.”

A new tax could also affect smaller streaming providers. Expanding GST/HST on digital content providers could mean smaller companies may have difficulty collecting and remitting tax. There’s also a risk of passing on these costs to consumers.

“The Netflix tax will force all digital streaming providers to collect and remit sales tax and it is likely that many of these businesses only accrue small sums of tax revenue,” says Len Glickman, partner at Cassels Brock and former chair of the CBA National Entertainment, Media and Communications Law Section. “This may make the administrative process of collecting tax liabilities generated by a high volume of low volume transactions more costly than the marginal revenues generated by these smaller providers. It will be important for the government and the international community to implement a reasonable exemption amount.”

Will sales tax on streaming services curb the growth in the Canadian market or provide the funding needed for more Canadian content? Stay tuned.

Julie Sobowale is a frequent contributor to CBA PracticeLink.

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