Taxes and the Global Digital Economy
By: Megan Wilson
What do Spain,[1] the UK,[2] France,[3] Russia,[4] South Korea,[5] Portugal,[6] Poland,[7] Vietnam,[8] Kenya,[9] Ukraine,[10] India,[11] Chile,[12] Zimbabwe,[13] and Argentina[14] have in common? They have all either introduced or have plans to introduce a so-called “Netflix tax” or are starting to crack down on digital giants for evading taxes.[15] With the rise of digital services in general and streaming services more specifically, governments of all sizes are looking to capitalize on this potential source of income. Though this is sometimes referred to as the “Netflix tax,” it certainly does not only apply to Netflix.
It is undeniable that governments need money to function, and that revenue is typically raised through taxes of one form or another. In general, as the popularity of digital services rises more revenue can be generated through taxing them. This is especially important during a global pandemic that has caused people all around the world to stay home and businesses to close. Spending is down and is not likely to recover for several years.[16] More notably, for the purpose of taxes, however, spending patterns are shifting.[17] Prior to the global pandemic, people were already trending towards online shopping and using digital services like Amazon, Hulu, and Netflix.[18] In fact, a Netflix subscription was reportedly a top item on Christmas lists.[19] Additionally, more and more media companies have tried to start their own streaming services. Cable is becoming obsolete – especially in light of services like Hulu Live. Governments would be remiss to not take advantage of this potential new income source in order to maintain the revenue needed to fulfil basic duties and obligations.
Why is this a problem? Why is it not as straightforward as simply imposing a tax? Part of the answer lies in the commonly used criteria for taxation. Historically, taxation was based on physical presence. If a potential taxpayer was located in the jurisdiction physically, it could be taxed. This used to be fairly easy to determine, but with the rise of ecommerce it has become more difficult.
With companies that are primarily digital, this can be difficult. If Amazon is not physically located in a country (say its servers are elsewhere), there is no physical presence and therefore it fails the test for taxation. Recently, the Vietnamese government accused Netflix of attempting to avoid tax responsibilities in Vietnam.[20] Netflix responded by pointing out that it does not have servers in Vietnam, nor any plans to put servers there.[21]
But is a physical location required to pay taxes? No. Until recently, when Netflix received payment for subscriptions in the United Kingdom, it recorded that revenue as being earned by its Dutch entity – thereby subjecting it to Dutch taxes.[22] Starting on January 1, 2021, it announced that that revenue would be attributed to the UK entity.[23] It is not the first company to make this change—over the last half decade more and more companies have begun to shift where they “receive” their money.[24]
Though the idea and practice of taxing digital services is spreading, it is not identical in all jurisdictions. Some countries are structuring it as VAT (value added tax), which is, by definition, passed on to the consumer. Others, like India, are utilizing an “equalization levy,” which may or may not be passed to the customer.[25] Though VAT is easier to monitor and enforce, it places the burden on the consumer. So, while it still results in increased tax revenue, it does not hold companies responsible.
It is impossible to predict which tax regimes will win out and how much multinational corporations will cooperate with new tax systems, but that only means that it will be all that more interesting to watch the developments over the coming years.
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[1] William Hoke, Spanish Parliament Approves Digital and Financial Services Taxes, Tax Notes, Oct. 8, 2020, https://www.taxnotes.com/tax-notes-today-global/electronic-commerce-taxation/spanish-parliament-approves-digital-and-financial-services-taxes/2020/10/08/2d1jh.
[2] Stephanie Soong Johnston, U.K. Denies Government U-Turn on Digital Services Tax, Tax Notes, Aug. 25, 2020, https://www.taxnotes.com/tax-notes-today-global/digital-economy/uk-denies-government-u-turn-digital-services-tax/2020/08/25/2cw9h.
[3] Stephanie Soong Johnston, France Expects News of Biden’s Digital Tax Stance by March, Tax Notes, Dec. 1, 2020, https://www.taxnotes.com/tax-notes-today-global/digital-economy/france-expects-news-bidens-digital-tax-stance-march-2021/2020/12/01/2d85c.
[4] J.P. Finet, Draft Bill to Expand Russian VAT to E-Commerce Raises Doubts, Tax Notes, Apr. 6, 2016, https://www.taxnotes.com/tax-notes-today-international/electronic-commerce-taxation/draft-bill-expand-russian-vat-e-commerce-raises-doubts/2016/04/06/h8w7.
[5] Cho Mu-Hyun, Netflix Investigated Over Alleged Tax Evasion in Korea, ZDNet, Aug. 27, 2020, https://www.zdnet.com/article/netflix-investigated-over-alleged-tax-evasion-in-korea/.
[6] Conceição Gamito & Teresa Teixeira Mota, ‘Netflix Tax’ is Coming to Portugal, International Tax Review, Jan. 21, 2021, https://www.internationaltaxreview.com/article/b1q6h2m7c50xvd/netflix-tax-is-coming-to-portugal.
[7] Michal Salajczyk, Poland to Introduce “Netflix Tax” to Support Local Filmmakers, Lexology, July 1, 2020, https://www.lexology.com/library/detail.aspx?g=e090553b-f313-4855-95d5-95ab6ce4c05a.
[8] Phuong Nguyen, Vietnam Rebukes Netflix, Apple, Over Lack of Tax Payments, Reuters, Nov. 10, 2020, https://www.reuters.com/article/us-vietnam-tax-digital-idUSKBN27R0DM.
[9] Samuel Gebre, Digital Tax Planned to Hit Google and Netflix in Kenya, Bloomberg, June 1, 2020 2:45am, https://bloomberg.com/news/articles/2020-06-01/google-netflix-uber-to-pay-tax-for-kenya-market-in-planned-law.
[10] Sarah Paez, Ukraine Considers Applying VAT to Digital Services, Tax Notes, Oct. 9, 2020, https://www.taxnotes.com/tax-notes-today-international/value-added-tax/ukraine-considers-applying-vat-digital-services/2020/10/09/2d1s9.
[11] Stephanie Soong Johnston, Netflix Won’t Pass on Costs of Indian Equalization Levy for Now, Tax Notes, Nov. 9, 2020, https://www.taxnotes.com/tax-notes-international/digital-economy/netflix-wont-pass-costs-indian-equalization-levy-now/2020/11/09/2d59y [hereinafter Equalization Levy].
[12] Tom Azzopardi, Chile’s New Digital Services Tax to Send Netflix Prices Up, Bloomberg Law, May 12, 2020 5:04pm, https://news.bloombergtax.com/daily-tax-report-international/chiles-new-digital-services-tax-to-send-netflix-prices-up.
[13] Valentine Muhamba, Zim Govt to Collect VAT from Netflix Subscription Fees, TechZim, Feb. 8, 2021, https://www.techzim.co.zw/2021/02/zim-govt-to-collect-vat-from-netflix-subscription-fees/.
[14] Walter C. Keiniger & Sergio D. Vergara, Taxation of Digital Services in Argentina, Tax Notes, Oct. 23, 2020, https://www.taxnotes.com/tax-notes-today-international/digital-economy/taxation-digital-services-argentina/2020/10/23/2czbk.
[15] Supra notes 1-14.
[16] Thomas Mitterling, Nirai Thomass & Kelsey Wu, The Decline and Recovery of Consumer Spending in the US, Brookings Institution (Dec. 14, 2020), https://www.brookings.edu/blog/future-development/2020/12/14/the-decline-and-recovery-of-consumer-spending-in-the-us/.
[17] Tamara Charm, Becca Coffins, Kelsey Robinson & Jamie Wilkie, The Great Consumer Shift: Ten Charts the Show How US Shopping Behavior is Changing, McKinsey (Aug. 4, 2020), https://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/the-great-consumer-shift-ten-charts-that-show-how-us-shopping-behavior-is-changing.
[18] Id.
[19] Gamito, supra note 6. (Portugal)
[20] Nguyen, supra note 8.
[21] Id.
[22] Stephanie Soong Johnston, Netflix Intends to Pay Tax in United Kingdom, France, and Spain, Tax Notes, Dec. 7, 2020, https://www.taxnotes.com/tax-notes-international/corporate-taxation/netflix-intends-pay-tax-united-kingdom-france-and-spain/2020/12/07/2d8cl.
[23] Id.
[24] Id.
[25] Equalization Levy, supra note 11.