Facebook and Netflix and the real Canadian tax loophole!

With Heritage Minister Mélanie Joly's announcement this week regarding Netflix's $500 million (kind of) injection in Canadian content (sort of) the government inadvertently shone a spotlight on a much more troubling trend in the Canadian media industry. Anyone watching Radio Canada's Tout-le-monde en parle Sunday night saw a flustered Minister Joly having a very difficult time defending her government's position on an oft-avoided loophole afforded to American on-line media firms in this country at the expense of their Canadian competitors. Revenues from on-line media and content streaming services not only bypass Canadian ownership and content guidelines, but they do not charge sales tax.

 

"OK", you may say, "no big deal. No-one likes to pay sales tax, so chalk one up for the consumer." Hold on one second. Let's put some perspective on this. When I say no one is charging sales tax, I'm not talking about a few basement downloads here. We are seeing the sustained disappearance since 2011 of hundreds of millions in industry and government revenues. Advertisers are switching hundreds of millions of dollars traditionally put into television, billboard or print campaigns (normally purchased through Canadian held media companies and on which GST and PST are dutifully paid) and funnelling them, sales-tax-free, into Silicon Valley's coffers at an exponentially growing rate. The Canadian economy takes a double hit and it is significant. Canadian media firms revenues are dropping and taxes collected both federally and provincially are as well.

 

When it comes to corporate media spending, the negative impact is at least partially offset by the fact that media agencies (when they are used) will subsequently charge sales taxes on the media purchased on their clients' behalf. (Albeit on dollars that have left the country.) So domestic ad agencies come to the rescue and play the role of tax collector for one segment, but how many smaller advertisers use an agency middleman to purchase media? Most advertise on-line and buy their Facebook ads or Adwords campaigns themselves. Facebook leaves it to them to self-impose sales taxes on top of its billing. How often do you think that occurs?

 

Back to Netflix and its content streaming cousin, iTunes. Content charged directly to the consumer bipasses the retail middle-man on which our governments' rely to collect their sales taxes. It is estimated that Netflix will be directly charging Canadian credit cards upwards of $806 million by 2020 (see table below by Statista.com). My quick math puts the projected sales tax opportunity for Netflix at somewhere around $120 million per year. Between 2011 and today, there will have been roughly $393 million in uncollected federal and provincial sales taxes left on the table by Netflix. Add in other players currently getting a pass, like Google, Facebook and iTunes and we quickly see amounts that reach a billion dollars in untapped tax revenues so far. And it is not as though the government cannot find a tax collecting precedent in on-line services. Amazon may be putting Canadian retailers out of business, but it at least collects its share of sales taxes. It seems illogical that Canadian media companies be made to collect taxes while their American competitors are given a free pass.

 

Netflix forecasted Canadian revenues to 2020 - Statista.com

 

In an article published by the Huffington Post, a spokesperson for Finance Minister Bill Morneau was quoted, saying that applying sales tax to Netflix "is not part of our plan." "Our tax fairness measures are focused on looking at the tax system to ensure it better supports the middle-class – including increasing taxes on the wealthiest Canadians so we could cut them for the middle-class," the spokesperson said in an email, adding that the remarks reflect Heritage Canada's position as well.

 

  • Huffington Post, "Canada Moves Closer to Taxing Netflix and Other Streaming Services", December 2017

If the Trudeau Government really is looking to make taxation fair in this country, and would like to tap into a new revenue stream to pay back a deficit or two, then maybe it would better off spending its time enforcing existing sales tax rules with American tax avoiders like Google, Facebook, iTunes and Netflix, rather than chasing down small business owners, farmers and doctors.

 

Based in Montreal, Dan Nielsen is the President of Attitude Marketing and is a coach and investor in start-up companies.