BUSINESS

'Netflix Tax' Inevitable, Say Experts

08/06/2015 05:38 EDT | Updated 08/06/2016 05:59 EDT
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TORONTO — The three major federal political parties have rejected the idea of a so-called Netflix tax, but some experts say it may be inevitable as Canadians conduct more and more of their business online.

Michael Geist, a law professor at the University of Ottawa, says future governments will look at a levy on digital services to fill their coffers in an always-online world.

"As digital services become an increasingly important part of the economy, governments will look to the lost revenue and find a way to recoup it," he said.

Many online services based outside of Canada, including Netflix, do not charge a tax to Canadian customers.

But Canadian companies such as Rogers and BCE as well as foreign companies with Canadian operations such as Apple must charge federal and provincial taxes on their digital services.

In theory, Geist said, Canadians are supposed to report their tax-free online purchases to the government, but in practice almost nobody does.

In January, the European Union put new rules into effect aimed at increasing its member countries' tax revenues from digital transactions, which are now subject to local sales taxes.

Closing that loophole will be very attractive for future governments looking to level the playing field and gain a new source of revenue, Geist said.

"Frankly, given the trends around the world, it's something that seems reasonably likely at some point in time," he said.

The federal government said in its 2014 budget that it was seeking input on "ensuring the effective collection of sales tax on e-commerce sales to Canadians by foreign-based vendors." But Conservative Leader Stephen Harper said this week he would not impose a "Netflix tax," as have the federal NDP and Liberals.

Canada's retail e-commerce sales amounted to $25.37 billion in 2014 and are projected to reach $43.95 billion by 2018, according to research group eMarketer.

Former CRTC vice-chairman Michel Arpin said Canada is likely to impose a tax on services such as Netflix if it is successful elsewhere.

"In the long run, as Netflix starts to pay taxes in Europe, Revenue Canada will hope to do the same," Arpin said.

The phrase "Netflix tax" has also been used to refer to a potential CRTC levy on foreign streaming services meant to support Canadian content.

Canadian producers and distributors are required to support local production through avenues such as the Canadian Media Fund as part of their conditions of licence from the broadcast regulator.

The CRTC has refused to regulate online services, first issuing an exemption for digital media in 1999.

The prospect of a tax on streaming services grabbed headlines in September 2014 during the CRTC's hearings on the future of Canadian television. Several respondents suggested a Canadian content levy, including the Ontario government, the CBC and the Director's Guild of Canada.

Arpin said such a levy is unlikely to come into effect because Canada's laws governing broadcasting and telecommunications, which haven't been substantially updated in more than 20 years, mean treating Netflix like a broadcaster is next to impossible.

Broadcasting licences can only be issued to Canadian-owned companies, he said, and carry with them numerous restrictions such as Canadian content regulations that would make licensing and policing the huge number of online streaming services prohibitively expensive.

"If you licence Netflix, where does it go?" he said.

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