The Netflix Tax: Lawmakers Increasingly Take Aim at Streaming Giants to Fund Local Priorities

Etan Vlessing and Scott Roxborough
Updated ·10 min read
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In the early days of the streaming revolution, Netflix seemed to exemplify the Silicon Valley credo to “move fast and break things.” With its move from DVDs-by-mail to streaming in 2007, the company quickly upended all the rules of television distribution (online not over-the-air), consumption (on-demand not scheduled), and production (straight-to-series not pilots). Its global expansion — Netflix launched its service in Canada in 2010 — has proven equally disruptive. The service changed not only how the world watches TV but also, by financing local programming, from Britain’s The Crown to Spain’s Money Heist to Squid Game in Korea, often with budgets beyond the reach of national networks, what it watches as well.

Now lawmakers have had enough disruption. In the U.S. and around the world, governments both local and national are rushing to try to impose new rules and new taxes on digital players. For the streamers, already dealing with slowing subscriber growth, rising production costs and the looming prospect of recession, these regulators could hardly have come at a worse time.

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In Canada, where politicians have for years looked to foreign digital platforms as a source of free cash to help local producers compete against Hollywood, new legislation will compel foreign Internet platforms to directly subsidize local content. “The Canadian government sees big tech companies as a policy ATM, where they’re looking to draw from for some of their policy objectives,” Michael Geist, a professor of Internet and e-commerce law at the University of Ottawa, tells The Hollywood Reporter.

Non-national digital services for a time avoided direct taxation in Canada by not hiring local employees and running Canadian operations out of the U.S. As Netflix, Facebook and others began setting up headquarters in Toronto, however, they begun to comply with local tax laws, including adding Canada’s goods and services tax, routinely paid by consumers at the point of sale, to their subscription fees and sending the proceeds to Ottawa.

Since then, many U.S.-owned streamers have grown to be as big, or bigger, than many local players, prompting calls to regulate the American companies as if they were home-grown channels. Several new laws are aiming to do just that.

Bill C-11, which will shortly become law, will compel foreign streamers and social media platforms to subsidize and promote local Canadian content. The CRTC, Canada’s TV and telecom watchdog, will shortly begin a new round of hearings and lobbying to determine how deep non-national streamers will need to dip into their pockets to support local film, TV and music content production.

The process is tricky, especially determining what counts as Canadian content — there are different rules for television than there are for music, for example — and how the rules should apply to user-generated content on YouTube, TikTok and other global platforms.

Canadian lawmakers aren’t alone. Governments on both sides of the Atlantic are rolling out proposals for their own new taxes and regulations aimed squarely at the global streamers. In March, New York lawmakers even floated the idea of introducing a new 4 percent state sales tax on streaming services to avoid hiking New York City subway fares, a move the New York State assembly projected could raise over $100 million a year.

One streaming exec, speaking with THR, dismissed the New York proposal as nothing more than “a trial balloon.” But the proposed subway tax is just the latest in efforts by cash-strapped towns and cities, starved of revenues from conventional tax programs amid the COVID-19 pandemic, trying to get streamers to foot some of the bill. Local municipalities, including Maple Heights, Ohio; Reno, Nevada; and New Boston, Texas have pushed to have online platforms pay fees — traditionally reserved for cable companies to use public rights-of-way to lay their lines — for taking advantage of public infrastructure.

In lawsuits challenging the taxes, the streamers have argued, mostly successfully, that they do not use public wires, cables or facilities and so should not be forced to pay fees for them.

The cities followed the lead of Chicago, which in 2015 enacted an “amusement tax” that included a 9 percent fee on the subscription cost of streaming services in what’s widely regarded as the first tax specifically targeting streamers. City officials reinterpreted a long-standing tax program extending its tax on tickets for recreational activities and concerts to “amusements that are delivered electronically.”

Chicago collected more than $30 million from users of streaming services in 2021, according to a Bloomberg Tax analysis. Apple challenged the tax, claiming it discriminated against streamers compared to live performances, which are taxed at a lower rate, but last year settled the suit after an appeals court rejected those arguments.

But the idea that global streamers should be regulated like local networks is catching on.

In the U.K., a draft media bill, published March 29, would force online services to follow the code of conduct set out by national regulator Ofcom, whose rules around harmful material have applied to the national broadcasters for decades, or face fines of up to £250,000 ($312,000) if they break them.

Across Europe, national governments are busy implementing the Audiovisual Media Services Directive (AVMSD), legislation that aims to create a unified regulatory system for all media content, from over-the-air live TV to streaming video on-demand. One of the law’s stipulations is that any streamer operating in Europe needs to have at least 30 percent European content on their platform (a quota Netflix currently meets, though that’s not the case for Amazon and Disney+). Added to that, a patchwork of nationally-tailored amendments to the AVMSD require streamers to directly re-invest a percentage of their local revenues in European films and series. These rules vary widely. France requires a re-investment of up to 25 percent of national revenues. Spain 5 percent. Poland 1.5 percent.

Switzerland, which is not in the EU, last year voted overwhelmingly to introduce it’s own streamer tax-and-quota system based on the European model. In a national referendum in May, a nearly two-thirds majority backed legislation imposing a 30 percent local content quota and a 4 percent re-investment rule.

American streamers increasingly find themselves spanning two industries in Europe, one in which they bring their own original film and TV series across the Atlantic for production, and another where they invest increasing amounts in local content amid growing regulations and laws.

Like other global streamers, Netflix bristles at the idea of national governments dictating how and where they spend their money. The streamer is already the biggest single commissioner of scripted content, according to a report from media research group Ampere Analysis, ahead of major national public broadcasters, and can point to international success stories, from French crime series Lupin and German mystery hit Dark to Danish dystopian drama The Rain. The platform argues it is already investing heavily in home-grown content: not because governments are forcing it to, but because that’s what its customers want to watch.

“It would be a shame if the focus of our creatives and producers became trying to meet the quotas and regulations [imposed by national governments] and not on trying to make the best content for our subscribers,” one streaming executive notes.

For national governments, however, the oversized success of Netflix and other global streamers in an increasingly digital economy is the reason they need to be regulated.

According to figures published in January by the European Audiovisual Observatory, a media research group, Netflix was the second-largest television company in Europe last year, with revenues of just under €7.5 billion ($8.2 billion). That’s behind Comcast, which controls pan-European pay-TV group Sky and booked some €17.1 billion ($18.6 billion) in earnings in 2022.

That also puts Netflix ahead of national TV champions including ARD ($7.5 billion) and RTL ($7.2 billion) in Germany, the BBC ($6.9 billion) in the U.K., and Vivendi-owned Canal+ ($6.3 billion) in France. It doesn’t make sense, governments argue, for one of Europe’s biggest TV companies to pay less tax, and face less regulation, than its smaller national competitors.

There was considerable anger when Netflix accounts for 2021 showed the company paid just £5 million ($6.2 million) in U.K. corporation tax on British revenues of some £1.3 billion ($1.6 billion). The company made use of a legal accounting loophole to transfer £1.24 billion, including around £260 million in pure profit, from its British operations to the Dutch-registered Netflix International BV, and in so doing effectively reduced the U.K. corporate tax rate on its profits from the standard 19 percent to under 2 percent, saving about $60 million. Similar accounting maneuvers in Australia — Ozzie subscribers were being billed through Netflix’s Dutch division, and that revenue taxed at the lower rate — sparked pushback down under.

In Italy last May, Netflix settled a tax-evasion case, agreeing to pay $59 million for the period between Oct. 2015 to 2019. Netflix has since opened an office in Italy and hired Italian staff. In Japan last year, an investigation revealed the company under-reported its taxable income to the tune of ¥1.2 billion ($9 million) over three years through 2019.

Netflix has said it is making changes to its tax structure so that the taxes it pays in individual European countries, including France, the U.K., Italy and Spain, will more closely reflect the revenue it earns on the ground. As part of this shift, some operations have been repurposed to work as local distributors of Netflix services. This makes them subject to national tax authorities, who can demand to see how much the local operation is actually earning and whether it is paying its fair share.

Netflix has made similar changes in Australia, where the company has been billing its customers onshore since January 1, 2022 and where, for the first time this year, it will pay local taxes on those Australian earnings. Australia also plans to introduce local content quotas for Netflix and other streamers, which are set to come into force in mid-2024. In Japan, the company is believed to have settled its outstanding tax bill with the Tokyo government, paying around ¥300 million ($2.25 million).

In Canada, the strength of Netflix and other global streamers is such that Ottawa has agreed to two-tier industry where American companies will be allowed to use fewer local creators than is required from Canadian broadcasters. In return, U.S. media players will be expected to continue flying North to produce movies, TV series and audio content. Since 2017, Netflix alone has brought in some $3 billion in production and production services to Canada, while also investing a share of that in local content.

For governments worldwide, the actual windfall from new taxes and forced-investment regulations on global streamers may fall short of expectations. The global TV industry is slouching towards a recession and streamers have begun to cut costs.

HBO Max shut down the production of original European content across Scandinavia. Netflix and Amazon are ramping up lower-cost non-scripted and reality formats. Local producers complain that the once deep-pocketed streaming giants are now paying the same rates as their local channels.

As in Canada, where a two-tier industry has been allowed to emerge as foreign streamers continue producing originals locally, legislation may bring about a more level playing field elsewhere, but that level is likely to be a lot lower tax take for everyone.

Winston Cho contributed reporting.

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