Thursday, September 3, 2015
More Countries Jump On 'Netflix Tax' Bandwagon
Joe Harpaz (Opinions expressed by Forbes Contributors are their own). For the original article click here.
Tax authorities around the world are quickly coming to the realization that if they want to continue to capture tax revenues on the goods and services their residents consume, they better start looking to the cloud.
It’s a trend I first reported on in October of 2014 when the European Union was finalizing its plan to apply value-added tax (VAT), also known in some parts of the world as a goods and services tax (GST), to providers of broadcasting and electronic services based on the location of their customers, as opposed to the location of the provider. This shift to customer location-based taxation was revolutionary because it upended the decades-old approach of tax law rooted in physical supply chains.
That meant distributors of digital content could no longer charge their customers a single VAT rate based on the location of their servers, but now had to charge each individual customer a different rate depending on where they consumed the content. This could be a low tax regime like Luxembourg (15% VAT) or a higher tax location such as Sweden (25% VAT). It’s created a major administrative headache for content providers and regional tax authorities, but it’s also ensured that much-needed tax revenue won’t get lost as modes of content distribution and consumption change.
Now, the concept is rapidly being adopted around the globe. This latest country to announce plans to implement a consumption-based tax on digital services is New Zealand. In a new discussion paper released in August, the country’s revenue minister Todd McClay outlined the plan, which could be implemented as soon as the end of this year. Explaining that the proposed tax would address a wide range of “cross-border services,” such as digital downloads, streaming services, e-books and even professional services like legal and accounting services that are supplied remotely, McClay laid out the scope of what he hopes the new tax will generate:
“Current estimates put the amount of GST foregone on these purchases at approximately $180 million a year, and growing at around 10 per cent each year.”
McClay’s projected growth figure is really the key here. Tech news site Digital Trends recently suggested that Nextflix is poised to become the biggest TV network in the world with 65 million subscribers and counting. In North America, where it is the most heavily entrenched, Netflix streaming accounted for a record 36.5% of all Internet bandwidth at peak hours in the month of May 2015, according to research firm Sandvine. Streaming media is increasingly becoming the primary means of entertainment consumption around the world and tax authorities need to figure out how to tap that spigot or they risk having their models of taxation disrupted by new technologies.
The New Zealand announcement followed closely on the heels of an even more sweeping piece of digital tax legislation that was proposed for Australia this past May. The Australian proposal, which is projected to raise $350 million over four years, includes core consumer digital services, such as Netflix and music streaming, but can also be extended to cover consulting and professional services that are provided electronically.
That same logic has driven Japan to implement an 8% “consumption tax on electronic services by offshore providers” effective October 1, 2015. The new rule is very similar to the one we saw rolled out across the European Union earlier this year, with separate ways of collecting tax based on whether the services are business-to-businesses or business-to-consumer oriented. For consumer-facing businesses, offshore service providers will need to collect the tax from Japan-based consumers. For business-to-business services, the Japanese purchaser of services would be required to pay the tax to Japan’s National Tax Agency. So far, just six non-resident companies have registered with the National Tax Agency to collect the consumption tax, despite the looming deadline.
South Korea has also gotten in on the digital tax trend, applying a 10% VAT to all digital content purchased by Korean residents as of July of this year.
According to Anil Kuruvilla, senior manager for tax research at Thomson Reuters, these are just the latest in a long line of country-specific taxes designed to capture revenue from transactions that occur in the cloud:
“Every country is dealing with the challenges of taxation around the digital economy and they are all coming up with slightly different approaches to taxation that will scale with the development of new technologies. The challenge for the businesses who provide these services is that there is very little consistency from one country to the next as to how, exactly, those taxes function. So, you have a scenario where digital companies that had very little global tax variation now need to manage tax across hundreds of different jurisdictions.”
Aside from each country’s desire to capture as much tax revenue as possible from all commerce that occurs in their borders, the approach is also being driven by the Organization for Economic Co-Operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) initiative, which lists “addressing the challenges of the digital economy” as its first action item. Clearly, tax authorities around the world believe that BEPS will drive considerable changes in the way digital transactions are taxed and many of them are taking steps now to get out in front of the initiative.
For the tech companies operating in this environment, the only constant will be change. Virtually every major country around the globe is in play right now with some type of digital tax plan in the works. The key will be keeping track of all of those changes and accurately capturing the right tax from the right customer, wherever they may live.
About Joe Harpaz:
Joe is the head of the Corporate Market for the Tax & Accounting business at Thomson Reuters. "We build the corporate tax software used by many of the world's largest multinationals, as well as the Big 4 accounting firms. I work closely with global business leaders to set up their tax technology, so I have visibility into how they handle financial reporting and the challenges they face. I also serve on the board of a growing medical technology startup. In this blog, I analyze the connections between economics and business opportunities, highlighting examples of where tax helps or hinders growth."
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