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The Rise Of The Netflix Tax

By Editorial
April 27, 2017

This special feature discusses the emergence of so-called "Netflix taxes," so named as governments attempt to expand the scope of consumption tax regimes to cover cross-border supplies of electronic services and goods purchased from online market places.

Background – The Ottawa Tax Framework And BEPS

The OECD set out its recommendations for the taxation of e-commerce back in 1998 in its report Electronic Commerce: Taxation Framework Conditions. This report observed – sagely as it has transpired – that electronic commerce has the potential to spur growth and employment in industrialized, emerging and developing countries, and that revenue authorities "have a role to play in realizing this potential."

"Governments must provide a fiscal climate within which electronic commerce can flourish, weighed against the obligation to operate a fair and predictable taxation system that provides the revenue required to meet the legitimate expectations of citizens for publicly provided services," the report said.

Significantly, with regards to the consumption taxation of cross-border trade, the report recommends that taxation should take place in the jurisdiction where consumption takes place, and that an international consensus should be sought on the circumstances under which supplies are held to be consumed in a jurisdiction. Where business and other organizations within a country acquire services and intangible property from suppliers outside the country, countries should examine the use of reverse charge, self-assessment or other equivalent mechanisms where this would give immediate protection of their revenue base and of the competitiveness of domestic suppliers, the report added.

However, it has only been in the last few years that countries have begun to cooperate to address the issue of digital supplies and consumption taxes, as part of the OECD's wider work to tackle tax avoidance on a global scale, the base erosion and profit shifting (BEPS) project.

The observed in its final recommendations on countering BEPS in 2015 that the digital economy is fast becoming the economy itself, and therefore member governments have accorded a high priority to tackling the tax challenges associated with digital economy. The OECD acknowledges that the digital economy does not of itself give rise to unique BEPS issues. But key features of digital businesses do exacerbate BEPS risks, it said.

One way in which the tax bases of countries can be eroded is if value-added taxes (VATs), goods and services taxes (GSTs), and other types of consumption taxes on cross border trade of intangibles go uncollected. Such intangibles include consultancy, accountancy and legal services; financial and insurance services; telecommunication and broadcasting services; online supplies of software and software maintenance; online supplies of digital content (movies, TV shows, music, etc.); digital data storage; and online gaming.

The Destination Principle

As mentioned, VAT systems operate on the "destination" principle, whereby VAT on cross-border supplies is levied in the jurisdiction of final consumption. This is designed to maintain VAT "neutrality" in the international trading system. Implementing the destination principle for cross-border supplies of goods has become relatively easy. This is because in most countries, there are well established border control mechanisms in place to track the origin and the destination of the goods in question. It is much more difficult to apply the destination principle with respect to international trade in services and intangibles since they cannot be subject to border controls in the same way as goods. Consequently, tax authorities lack the ability to collect potentially substantial amounts of revenue on the growing demand for digitally-consumed goods.

The key question is, how do countries go about closing this digital VAT "loophole" without imposing undue compliance costs on either foreign suppliers or consumers themselves?

Making The Destination Principle Work

The European Union, where the destination principle has been in place on supplies of broadcasting, telecommunications and electronic services since January 2015, has attempted to mitigate the compliance burden inherent with accounting for VAT in up to 28 member states by introducing a central portal for reporting and paying VAT on intra-EU supplies, known as the mini one stop shop.

However, in the absence of such a facility on a worldwide scale, suppliers of digital services are faced with the possibility that they will have to register and account for VAT in multiple jurisdictions and the increased compliance load that is inherent in such a situation, as well as the risk that businesses may find themselves on the receiving end of enforcement action if they do not follow the necessary requirements to the letter. This challenge was noted by the OECD in its final report on BEPS Action 1, in which it observed that: "According to the traditional approach, the non-resident supplier is required to register in the jurisdiction of taxation and charge, collect and remit any tax due there. It is recognized, however, that it can often be complex and burdensome for non-resident suppliers to comply with such obligations in jurisdictions where they have no business presence, and equally difficult for tax administrations to enforce and administer them."

One solution is for countries to apply the reverse charge mechanism, whereby the responsibility for collecting and remitting VAT falls on the buyer of taxable supplies, rather than the supplier. This would be less problematic for business-to-business supplies, as the party receiving the supplies is likely to have the necessary VAT accounting systems in place. But the OECD surmised that the reverse charge would be much less effective for cross border business-to-consumer supplies, "since private consumers have little incentive to declare and pay the tax due, at least in the absence of meaningful sanctions for failing to comply with such an obligation."

In order to ensure the effective collection of VAT on cross-border supplies of services and intangibles, the OECD said that an appropriate balance must be struck between ensuring suppliers do not faces prohibitive compliance burdens when attempting to collect and remit VAT in a foreign jurisdiction, and the needs of tax authorities to safeguard revenues.

Based on work carried out by the OECD itself, as well as other international organizations, the report concluded therefore that the most "effective and efficient approach" to ensure the appropriate collection of VAT on cross-border B2C supplies is to require the non-resident supplier to register and account for the VAT in the jurisdiction of taxation. However, the report stressed that it was incumbent on tax authorities to make these procedures as simple as possible for taxpayers.

Jurisdictional Developments: Australia – Striking A Balance?

So far, only a relative handful of the countries outside of the EU have legislated for, or are in the process of putting place, destination-based VAT rules for the consumption of digital services, and for low-value goods bought by consumers from the likes of Ebay and other online market places. However, judging by the reaction of taxpayer groups and companies, it would appear that the Australian Government has yet to find the appropriate balance between tax base protection and efficiency.

Legislation currently working its way through the Australian parliament will require overseas vendors, electronic distribution platforms, and goods forwarders with an Australian turnover of AUD75,000 (USD56,500) or more to register for, collect, and remit GST for low-value goods supplied to consumers in Australia. Currently, low-value goods – that is, goods with a customs value of AUD1,000 or less – are generally not subject to GST when imported directly into Australia by the recipient.

The proposals have, however, come in for a barrage of criticism in recent weeks, both from within Australia, and from abroad. In separate submissions to the Senate inquiry into the proposes GST changes, the Australian Taxpayers Alliance and two economists from RMIT University in Melbourne warned lawmakers and the Government that the proposals will drive up prices for consumers, and could lead shoppers towards using less reputable sites when purchasing goods and services online. In addition, a group of 16 taxpayer organizations from around the world have also criticized the GST amendments in a recently published open letter. Describing the measure as "a thinly veiled attempt to tax the Internet," the coalition, said that the legislation "will seriously damage Australia's international standing and the Australian economy."

Meanwhile, Ebay has warned that the proposal may force the company "to prevent Australians from buying from foreign sellers." According to Ebay's submission to the Senate Economics Legislation Committee, this "appears to be the most likely outcome at present." The submission described the proposed legislation as "complex, inconsistent, [and] unworkable," and said that were Ebay to take this step, "no tax would be paid to Australia and none would be owed," while Australians would be denied choice and price competition would be lessened.

The legislation was introduced to parliament on February 16. On March 23, it was referred to the Senate Economics Legislation Committee, which is due to report by May 9. If the legislation is passed, its provisions will enter into force on July 1. However, it remains to be seen if legislators and the Government listen to taxpayers' concerns over the proposed law.

Other Country Developments

The following sections summarize similar measures proposed or introduced in other countries.


In April 2017, it emerged that over 100 foreign providers of electronically supplied goods and services to Russian consumers had registered to pay VAT on their supplies at 18 percent. The levy – dubbed the "Google tax" – came into force at the beginning of 2017 and is payable on a quarterly basis.

Affected providers include Apple, Google, Netflix, Microsoft, Facebook, various online publications, gaming firms, and payment providers. A number of these firms have reportedly increased their prices in Russia to pass on the tax burden to consumers.


On December 28, 2016, Taiwan's President Tsai Ing-wen signed into law the amendment to the Value-Added and Non-Value-Added Business Tax Act to impose tax on foreign online sellers' supplies to Taiwanese consumers. The amendment is intended to raise additional revenues and level the playing field for Taiwanese "bricks-and-mortar" retail and service businesses.

The Ministry of Finance said at the time that it would draw up the required tax regulations and procedures. In addition, it said that it would establish a website for simplified business registration and for filing VAT returns and paying VAT.

Under the amended legislation, foreign online suppliers selling cross-border goods and electronic services to end consumers must register for tax in Taiwan through a permanent establishment, or appoint a VAT or non-VAT tax representative. The permanent establishment or agent is required to file the necessary bimonthly tax returns. Significant penalties exist for non-compliance.


In December 2016, the Brazilian Senate approved a Bill for subscription internet streaming services to pay Imposto sobre Serviços (ISS) tax at a rate of two percent to the municipalities where their customers are based. President Michael Temer will have the final decision on the legislation. If approved, the levy would be effective 90 days after its publication in the Federal Register.

New Zealand

Cross-border purchases by New Zealand residents of certain electronically supplied services became subject to goods and services tax (GST) on October 1, 2016. As a result, non-resident businesses may need to register for New Zealand GST and charge GST on their supplies to New Zealand resident customers if they supply online gaming, gambling, video streaming, or music streaming services. The changes were contained in the Taxation (Residential Land Withholding Tax, GST on Online Services and Student Loans) Bill, which was passed in Parliament on May 10, 2016.

At that time, Revenue Minister Michael Woodhouse said: "Collecting GST from the growing volume of online sales across borders has been an issue of growing concern for some time, so the passing of this legislation marks a very important first step. Currently New Zealand providers are at an unfair disadvantage because they must apply GST to their services, whereas overseas providers do not. This creates an unfair playing field which this legislation will eliminate."


Canada's ruling Liberal party is reportedly considering levying a consumption tax on digital services purchased from overseas firms.

Broadcasting company CBC said it had obtained via an Access to Information request a briefing note prepared for Heritage Minister Mélanie Joly. Joly last year launched a consultation on "Canadian content in a digital world."

According to CBC, the briefing warned that the lack of tax collection by such companies "not only represents a significant loss of potential tax revenue for government, but it can also place domestic digital suppliers at an unfair competitive disadvantage."

The briefing added: "Specifically, the requirement to charge customers sales tax can make the goods and services of domestic digital businesses more expensive than those of offshore businesses that do not comply with the appropriate sales tax regime."

The briefing did nevertheless warn that, "beyond voluntary compliance, little can be done to enforce a sales tax regime, even when a foreign-based company has registered with the relevant authority." It cautioned that tax authorities have "little recourse where a foreign-based supplier does not remit any sales tax or where there is a dispute over the amount of tax remitted."

The proposals outlined in the briefing note are separate from those to impose a tax on overseas suppliers to fund Canadian content. The Government has repeatedly rejected the latter policy. A spokeswoman told CBC, "Our Government has said there will be no Canadian-content levy on Netflix."

South Africa

South Africa was one of the first countries to impose a "digital tax" on electronically-supplied services in June 2014 – well over one year before the OECD published its final BEPS recommendations.

Under the previous regime, both taxable and non-taxable persons resident in South Africa were required to account for 14 percent VAT on goods and electronically-supplied services purchased from foreign suppliers under a reverse charge regime, establishing an obligation that they self-assess and remit VAT on online overseas purchases.

Under the new regime, foreign suppliers of electronically-supplied services are required to register for VAT once the value of their sales to South African businesses and consumers exceeds ZAR50,000 (USD3,800) during any twelve-month period. To ease the burden on the cash flow of these companies, foreign suppliers are allowed to account for VAT on a cash basis, enabling them to defer accounting for VAT until a consideration is received in respect of a supply. However, deduction is only permitted once the supplier is paid for inputs.

For the purpose of calculating the value of electronically-supplied services to South African recipients, in view of the fact that customer location is often unknown in the case of e-commerce, a proxy for customer location is used. This proxy has been confirmed in the regulations. VAT will cover supplies of electronic services to a recipient that is a resident of South Africa, or where any payment originates from a bank registered or authorized in terms of the Banks Act, 1990.

The regulations confirm that electronically-supplied services subject to VAT will include: educational services; games and games of chance; information system services; internet-based auction services; maintenance services, set out in regulation 7; and miscellaneous services, set out in regulation 8, where such services are supplied by means of an "electronic agent, electronic communication or the internet for any consideration," as defined in the regulations. Miscellaneous services include the provision of e-books, films, images, music, and software as well as software updates.


"Netflix taxes" affect only a small number of countries so far, but it seems likely that the list will grow in length. And suppliers of goods and services over the internet will have to take account of these new requirements in the course of their business, paying particular attention to registration thresholds – which at present differ from one territory to another – and the scope of the new VAT legislation and regulations to ascertain whether or not they are caught.

Under such circumstances – and given the likelihood that further tax measures of this type will be announced in the months and years ahead – it seems inevitable that the tax compliance burden on international suppliers of digital goods and services will increase, calling into question governments' commitment to ensure that such taxes are neutral, efficient and effective. There is also the possibility, of course, that digital suppliers may choose to simply cease supplying to territories with these tax measures in place, which would contradict the Ottawa Framework's call for governments to provide a fiscal climate conducive to the growth of e-commerce. However, if such tax arrangements become the norm rather than the exception, then perhaps digital suppliers will have little choice but to accept them.


Tags: e-commerce | trade | law | accounting | Russia | internet | sales tax | New Zealand | commerce | Taiwan | Africa | South Africa | regulation | Tax | compliance | BEPS | legislation | business | Australia | services | tax



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