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Coming soon to a television near you: “Netflix Tax”

Joe Harpaz  Managing Director, Tax & Accounting Corporate Segment, Thomson Reuters

Joe Harpaz  Managing Director, Tax & Accounting Corporate Segment, Thomson Reuters

Don't just watch movies. Be on the lookout for how BEPS could impact your bottom line

Streaming video is becoming very big business. Netflix, arguably the leader in this space, saw its stock price grow 20% in a single night last month after reporting third quarter earnings that were double analysts’ estimates.

The company’s quarterly sales grew to over $2 billion as legions of customers around the world line-up for its mix of digital on-demand movies, television shows and – increasingly – original programming. As a whole, the streaming video industry is projected to earn just under $7 billion this year.

The trend has everyone watching

Recently, rumors even surfaced that Disney is considering buying Netflix. Competitors, such as Hulu, Amazon Video, and Verizon are all actively pushing new content and scrambling to form partnerships and alliances that let them bypass traditional broadcast distribution channels to stream their content “over-the-top” to customers viewing on smart TVs, mobile devices, video game consoles, and pretty much anything else that connects to the Internet. Even AT&T’s recent $85.4 billion acquisition of Time Warner is said to be driven by a plan to launch a new streaming service through DirectTV.

Media companies aren’t the only ones looking to cash in on this phenomenon. Tax authorities around the world are very much aware of the growth of streaming video because it is both a tremendous opportunity for new revenue and – if they are too slow to enact new legislation – a huge revenue loss.

Ultimately, if the world shifts away from traditional broadcast distribution of video content, which has an elaborate mix of hefty telecommunications taxes associated with it, the tax authorities that receive these taxes could see their share of the pie decrease measurably.

Seeing this tide shift coming, some regional and municipal tax authorities have worked quickly to push through so-called “Netflix taxes,” which have not been received so well.

The most famous of these was in Chicago, where irate residents recently sued the city arguing that it did not have the authority to tax the cloud. Pasadena, CA city officials are also reportedly considering a streaming video tax that will use existing municipal utility tax codes that were initially designed for cable television subscriptions.

Others have taken a more calculated approach by appealing to an unlikely ally: The Organisation for Economic Development and Cooperation (OECD). The OECD is an intergovernmental economic group made up of 35 member countries that proposes global trade and tax standards. Regular readers of my column will recognize the group as the architect of the controversial Base Erosion and Profit Shifting (BEPS) project, which calls for a far-reaching list of recommended changes to tax policy and taxpayer reporting requirements that will modernize global tax.

BEPS has become a catch-all for many of the most aggressive tax policy moves to hit multinational corporations in recent history. The recent move to require companies to publicly report their country-by-country income tax filing information – BEPS. The UK diverted profits tax – BEPS. The decision by Amazon to change its revenue recognition policy in Europe – BEPS. And now, tax authorities around the world are finding the ammunition they need to start taxing streaming video and other electronic services delivered via the cloud in BEPS.

Until now, all of these initiatives, as significant as they may be, have really been the domain of tax wonks and multinational tax and finance chiefs, but haven’t really registered on the radar of consumers. Now that BEPS is coming to their living rooms, that may change.

The specific portion of BEPS that facilitates the taxation of streaming video is called Action 1 and it is focused on “addressing the challenges of the digital economy.” In a nutshell, that means that tax authorities around the world now have an agreed upon playbook for implementing specific taxes on cross-border and direct-to-consumer digital transactions.

In practice, the interpretation of that guidance is coming down to an increasing number of tax authorities implementing changes to their tax codes that allow them to tax providers of broadcasting and electronic services based on the location of their customers, as opposed to the location of the provider.

So, if you’re sitting in London, streaming Netflix content that originated in California and is now bouncing off a server in Ireland, the tax on that transmission is due in the UK.

The UK officially adopted that stance as part of its “change in place-of-supply VAT (value-added tax) rates)” policy in September of this year. It was directly attributable to the BEPS initiative.

A similar action was taken this past month in New Zealand with its Taxation Act 2016, which carves out a specific goods and services tax (GST) on online purchases of services and intangibles. Similar legislation is set to take effect in Russia and Switzerland in January of 2017 and in Australia in July of 2017.

Notable holdouts on implementing specific tax legislation for digital services include the U.S., Canada and Argentina, which have indicated that they broadly support BEPS Action 1, but have not introduced any specific legislation to implement it; and Brazil and Hong Kong, which have yet to indicate whether they will implement any legislation specific to the Action. Most other developed nations have already implemented legislation along these lines or are in the process of doing so.

So, what’s this all mean to end-user customers of streaming video services?

If they aren’t already, they should soon expect to start seeing the types of taxes they’ve grown accustomed to on their cable and cell phone bills on their Netflix and Hulu purchases as well. More broadly, consumers and businesses around the world should be watching out for how BEPS – once a back-office concept mired in the intricacies of global tax policy – will soon impact their bottom lines in very tangible ways.

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