Internal document raises possibility of taxing Netflix and other digital services

With the federal budget just weeks away, a document has surfaced showing the Liberal government has been studying whether to enforce sales taxes on foreign firms that sell digital services through the web to Canadians.

Liberal government mulling whether to enforce sales taxes on foreign digital vendors such as Netflix

A briefing note for Mélanie Joly, minister of Canadian Heritage, weighs the pros and cons of enforcing a sales tax on the digital services of foreign companies such as Netflix. (Sean Kilpatrick/CP)

The Liberal government is reviewing whether to enforce a so-called Netflix tax on the digital services Canadians buy from foreign-based firms over the internet.

A high-profile example is U.S.-based Netflix, which does not apply federal or provincial sales taxes to monthly billings sent to Canadian customers for its streaming service.

At the same time, Canadian firms selling digital services within the country are compelled to collect and remit federal and provincial sales taxes — such as BCE Inc.'s Bell, which has a service called CraveTV.

The lack of sales-tax collection "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," says a briefing note for Canadian Heritage Minister Mélanie Joly.

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

'Destination principle'

Canada has already formally endorsed the so-called "destination principle," set out by the Organization for Economic Co-operation and Economic Development (OECD) in November 2015, which says suppliers of digital goods and services should remit sales taxes in the jurisdiction where the final customer resides.

Netflix says it collects and remits tax 'wherever we are legally obligated to do so.' (The Associated Press)

But the endorsement carries no obligation to actually enforce such a sales-tax regime, though the briefing note shows the issue is being studied within the Liberal government.

CBC News obtained a copy of the June 23, 2016, document under the Access to Information Act.

The tax issue is separate from a now-rejected Canadian-content "levy" on Netflix and other foreign suppliers of digital content, intended specifically to help fund Canadian productions. (The CBC and private broadcasters are among those who have argued that Netflix should contribute to a fund that supports the creation of Canadian content.)

Rather, sales taxes collected on foreign-based digital services would go to general revenues in Ottawa and the provinces. The collection issue has become more urgent as many more services, including professional and business services, are delivered digitally in a borderless web environment.

We are committed to ensuring that Canada's tax system is fair ...- spokeswoman for Finance Minister Bill Morneau, when asked about the possibility of enforcing sales taxes on foreign digital vendors 

Asked about a so-called Netflix tax, a spokeswoman for federal Finance Minister Bill Morneau was quick to dismiss the idea of a content levy — but did not dismiss the idea of a sales tax, referring to fairness and efficiency.

"Our government has said there will be no Canadian-content levy on Netflix," Annie Donolo said in an email.

"At the same time, we are committed to ensuring that Canada's tax system is fair and supports the objective of an economy that works for everyone. In that vein, Finance Canada regularly assesses the tax system to ensure it is fair, efficient and fiscally responsible."

In a November submission to the federal government, BCE Inc. called on the Liberals to implement sales taxes on foreign suppliers of digital content, such as Netflix, "or remove the obligation to charge sales tax for Canadian owned and controlled … services to allow for competitive parity."

Asked for comment, Netflix provided CBC News a short statement through its Toronto-based public-relations firm, Environics: "Netflix collects and remits tax wherever we are legally obligated to do so."

Federal bureaucrats point out that Netflix is not collecting and remitting Canadian sales taxes. 1:26

The Joly briefing says several countries have begun efforts to collect sales tax from firms such as Amazon, iTunes, Google and Netflix — among them Australia, which last year introduced legislation imposing new rules. Other examples cited include New Zealand, Japan, South Korea and South Africa, most of them doing so within the last two years.

At the same time, the note warns that actual collection of the money can be fraught.

"Beyond voluntary compliance, little can be done to enforce a sales tax regime, even when a foreign-based company has registered with the relevant tax authority.

"Tax authorities have very little recourse in cases where a foreign-based supplier does not remit any sales tax or where there is a dispute over the amount of tax remitted. They also have a very limited ability to enforce audits beyond their national jurisdiction and to send auditors abroad."

BCE Inc., owner of Bell, has asked to federal government to either enforce sales taxes on foreign vendors of digital entertainment or remove the sales tax on Canadian forms offering similar service domestically. (Ryan Remiorz/Canadian Press)

Previous consultations

Another hurdle, it advises, is the lack of any treaty or agreement with the United States, where many global digital suppliers reside.

"The United States … does not have a federal sales tax and it is, therefore, unlikely that the American government would enter into an agreement to co-operate on international sales tax issues regarding companies based in the U.S."

The federal Finance Department previously held a public consultation on taxes in 2014, where it raised the prospect of implementing a sales-tax regime on foreign-based digital vendors. At the time, Canadian digital communications giant Rogers Communications urged Ottawa to require taxes be charged and remitted by the billing agencies hired by foreign suppliers.

The federal budget is expected in late February or March.

During the 2015 election campaign, then-prime minister Stephen Harper said a Conservative government would not regulate or tax digital services such as Netflix.

"We will never tax Netflix or other online streaming services" Harper said in August that year.

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About the Author

Dean Beeby

Senior reporter, Parliamentary Bureau

Dean Beeby is a CBC journalist, author and specialist in freedom-of-information laws. Follow him on Twitter: @DeanBeeby