Column: Hey industry! Let’s be clear about the ‘Netflix tax’

With petitions circling and choruses growing louder, Irene Berkowitz says it's critical to be specific about what's being asked of the government.

Irene Berkowitz This week, the chorus of industry voices calling for a “Netflix tax” has grown louder as over 100 members of the Quebec entertainment industry called for the government to require “foreign giants” like Netflix to collect and pay sales tax on their services in the province.

It’s increasingly clear, however, that there’s confusion in the public sphere about what exactly a “Netflix tax” entails. It’s important for everyone in the industry to be specific in what they are asking of the government, because “Netflix tax,” has been used to signify at least three different revenue instruments, each with its own quandaries to consider.

To help clear the air, so to speak, here’s a breakdown of each tax being discussed and what each of them potentially means:

1) Sales Tax 

Quebec’s recent announcement that it will seek a “tax on Netflix” would actually be a sales tax on consumers. Canadian law does not compel Netflix (or Spotify or other digital media services) to collect such a tax. If it did, Netflix’s role would be to administrate and remit this tax to the government. Netflix already does this in jurisdictions around the world, where required by various types of digital goods sales taxes.

Finances Quebec’s position is that collection of GST/HST on Netflix is a fairness issue between Canadian and foreign companies. They also assert the importance of equity between all ecommerce businesses in Quebec and Canada. To implement a provincial sales tax only would require agreement with the federal government.

There are additional confusions about a theoretical Netflix sales tax: 

(1) It should not be assumed that proceeds of a sales tax would be deployed to subsidize Canadian content in Quebec or federally. Cross-subsidy would require a separate negotiation with the Canadian government.

(2) Netflix is in two businesses: content delivery and content creation. The new Netflix Canada studio was approved, per the Investment Canada Act, to spend money creating content. It will not have a sales revenue function and Canadian subscription fees will continue to be paid to the global parent company.

(3) It’s been reported that Netflix was promised it could forgo a sales tax, in return for investing $500 million in Canadian content. Netflix has stressed that there were “no tax deals” connected with its $500 million investment.

2) Revenue Levy

“Netflix Tax” has also implied a levy on revenue, not unlike the way Canadian cable, satellite, and IPTV distributors contribute to the creation of Canadian content through Canada Media Fund.

Four quandaries here: (1) any tax or levy on a foreign supplier would require Canadian legislation (which, again, Canada does not have); (2) targeting only Netflix, among many digital media services, would require rationalization (3) operationalizing would require clarification, such as how financial records would be accessed and assessed; (4) business consequences might need to be considered, such as Canada’s ability to attract investment initiatives, such as a Netflix Canada Studio or Alphabet’s Sidewalk Labs. Regulation in one part of a sector may cause other companies in similar spaces to reconsider investing in Canada.

3) Corporate Tax

“Netflix tax” has also referred to corporate and payroll taxes, which, as a Canadian corporation, Netflix Canada Studio would owe. Netflix has confirmed its Canadian entity will pay all taxes owed. Netflix Canada’s corporate taxes may be minimal (payroll) as the studio will spend/invest in Canadian content, not collect subscription revenue.

Lost in Wonderland, Alice wonders: “If I’m not the same, the next question is ‘Who in the world am I?’ Ah, that’s the great puzzle!” This seems a perfect metaphor for our policy challenge. While we design a bold future for Canada in the 21st century media ecosystem, let’s keep terminology clear.

The above analyses were confirmed with sources from Canada Revenue Agency, Department of Canadian Heritage, Department of Finance Canada, Finances Quebec, and Netflix. 

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Irene S. Berkowitz, PhD (@irenesberkowitz) is FCAD Policy Research Fellow and Instructor in Ted Rogers MBA and RTA School of Media at Ryerson University.