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Netflix and fill – our coffers: Canada mulls taxing vid streaming giant 5% of subs cash

Stream that money our way, says America's Hat

By Kieren McCarthy, 30 Nov 2016

The Canadian government will consider a new digital tax that would see Netflix required to set aside five per cent of its gross revenues.

A consultation enthusiastically opened by heritage minister Melanie Joly and titled "Canadian content in a digital world" closed last week, but may not have produced the results she was looking for.

The intent was to come up with new ideas for how the country can encourage the creation and export of Canadian content in the modern digital world. But in what appears to be a coordinated response, the Canadian content industry has asked for existing taxes to be simply extended to cover Netflix.

Under current rules (see Appendix 6), any video-on-demand company operating in Canada that has more than 2,000 subscribers is obliged to set aside five per cent of their gross revenues into a special fund that is then used to produce Canadian content.

Among those who think the same rules should apply to Netflix are: the Writers Guild of Canada; Directors Guild; Media Producers Association; and Alliance of Canadian Cinema, Television and Radio Artists (ACTRA).

That is very far from the fresh thinking that Joly promised and could have serious repercussions. As part of the consultation, Netflix highlighted the money it spends each year on producing original content in Canada. But a requirement to set aside five per cent of its revenues is not going to go down well with the US-based company and would likely see it simply cut Canada off from its service altogether.

Likewise the increasingly important streaming content companies, most of which are also based in the US, such as Hulu, HBO Now, and DirectTV Now.

State side

Meanwhile in the US, efforts to introduce a Netflix tax at both the city and state levels have focused more on a per-user tax. In the city of Chicago, a nine per cent "amusement tax" is levied on all electronically delivered media – including video, music and games. And the state of Pennsylvania has extended its six per cent sales tax to cover the same (with the exception of newspapers and magazines).

An effort to impose a cable service tax on Netflix failed in Kentucky, however, when it was decided that since the company does not own the infrastructure over which the video passes, it could not be held to be a cable service. While in California, over 40 cities are considering taxing Netflix (and other streaming services) as OTT (over the top) services, with rates varying from 4.5 to 11 percent. Those rates would basically add a dollar to the commonly $10 per month fee for a streaming service.

Canada tends to introduce rules on a much broader country-wide level and is less a fan of the small extra taxes that are constantly levied in the US on everything from phones to cable subscriptions.

But in the digital world where Canadian citizens can easily and readily access services from anywhere on the globe through their internet connection, a flat-rate tax on gross revenues seems wildly out of date. Not to mention the difficulty of actually applying the law.

In the Writers Guild submission [PDF], it does broach the fact that Netflix "has no offices or employees in this country" despite being the largest streaming video provider in the country, and notes that the company is likely to argue it cannot therefore be subject to Canadian law.

But, it argues, this "should not be treated as an insurmountable barrier" and quotes a legal opinion that "there are a number of steps that can be taken to enforce such requirements if deemed appropriate" on foreign companies.

Joly must be hoping that in among the many other submissions to her consultation, someone has come up with a better idea than simply expanding old taxes on new offerings, otherwise her digital future may be one where Canadian citizens are cut off from, rather than promoted by, the new media landscape. ®

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