Netflix Tax

How the 'Netflix Tax' Law Will Affect Australian Consumers

In mid-February, Treasurer Scott Morrison introduced a new draft of a law that would require overseas producers of digital products to collect and remit the Goods and Services Tax when those e-books, movies, online games, music subscriptions and apps are purchased by Australian consumers.

The ‘Netflix tax’ is expected to raise $350 million over four years from July 2017, with funds ultimately trickling through to the general welfare via government spending. It would be welcomed by Australian competitors who must already charge GST. Consumers, however, may find themselves digging deeper into their pockets for popular software subscription services. If enacted, the Netflix tax is also likely to have an international ripple effect, possibly triggering the adoption of similar laws in Japan, Norway, South Korea and Switzerland.

This is a complicated puzzle.

KEY FETAURES

KEY FETAURES

The proposed Bill would amend the Goods and Services Tax Act 1999 to impose the tax on the sale of intangible goods and services to Australian consumers regardless of those products’ country of origin.

It would not affect the sale of tangible goods, although other proposed legislation may.

The key features of the ‘Netflix tax’ are as follows:

It will be imposed on intangible supplies such as digital content, games and software, and will also extend to consultancy and professional services performed offshore for customers in Australia;

The liability for the GST will rest either with the supplier or with the operator of an electronic distribution service;

The tax will be imposed at a rate of 10 per cent on the value of the supply, but

business-to-business transactions will be exempt

The Australian Tax Office will require companies that sell more than $75,000 worth of products into Australia to register their products for GST collection. The same applies to not-for-profits selling $150,000 worth of goods. Where sales are made through electronic marketplaces like eBay or Amazon, the platform operator will hold liability for GST rather than the product vendor.

COMPLEX ADMINISTRATION

AND OPEN ISSUESEstablishing the bureaucratic structure to administer the Netflix tax is expected to cost the ATO as much as $1.5 million and the issues are likely to be complex. As tax experts recognize, drafting a tax law is the easy part; the challenge is collecting the cash.

Although the recent Exposure Draft of the Bill clarifies some issues, many remain open, likely to be resolved through regulation.

For overseas businesses, the first practical matter is likely whether the supplier or operator of the distribution service is responsible for collecting and remitting the tax. Other thorny issues include:

• how remittances are to be made and how frequently;• how registration requirements can be enforced against overseas businesses, which in some cases may have no physical presence in Australia;• what effect these changes will have on the offshore gambling sector;• whether there should be a de minimus exception for very low value or occasional sales;• how to define the operation of a business and sources; and • how to exclude digital supplies related to education and health services.

SEMI-GOOD NEWS FOR

LESS ROSY FOR

AND OPEN ISSUES

SEMI-GOOD NEWS FOR

AUSTRALIA BUSINESSES

LESS ROSY FOR

AUSTRALIA BUSINESSES

Netflix competitors and Australian retailers have hailed the move as an equalizer. As Australian Treasurer Joe Hockey put it, "It is plainly unfair that a supplier of digital products into Australia is not charging the GST whilst someone locally has to charge the GST.”

On the other hand, the imposition of an Australian Netflix tax is unlikely to reshape a global marketplace dominated by established offshore multinational giants like Netflix or Google. Whether the tax will change buying behavior is anyone’s guess, at this point.

The ATO projects Netflix tax revenues of up to $150 million in the first year, $200 million in the second and up to $350 million by the fourth. Some of the increase is likely to be consumed by the cost of administering the expanded scheme, but the longer range plan includes revenue sharing with the States and Territories. That is good news for consumers, too, at least in abstract terms.

Nonetheless, consumer watchdogs remain cool. Overseas suppliers will likely pass increased costs on to the user, hitting those with less disposable income hardest. Consumers, themselves, widely expect digital services to cost more, including:

• Netflix streaming TV and movies;• Amazon ebooks;• Kobo ebooks;• Tidal music streaming;• Adobe subscription software

• Microsoft Windows apps;• BlackBerry apps;• Steam online games;• UberX car service; and• Google advertising.

Although some suppliers have announced that they will shoulder the tax themselves to preserve market share, this position is probably unsustainable in the long run, especially if other countries adopt similar Netflix taxes of their own.

INTERNATIONAL RIPPLES

The debate in Australia is happening in an international context, as taxing authorities take increased notice of the GST base erosion problem caused by global digital commerce. In 1998, when Australia’s GST law was introduced, no country was effectively collecting GST/-VAT on imported digital products, but when the volume of such commerce was small, it hardly mattered. Not so now.

The Organization for Economic Cooperation and Development’s draft guidelines for imposing GST on sales of services and intangibles to consumers embrace two basic principles:• Taxing digital products at the place of consumption means that tax is due where the consum-er is resident; and• The most effective way to collect the tax in cross-border business-to-consumer transactions is to collect it from the foreign supplier.

Non-EU businesses have been required to collect VAT on supplies of electronic services to EU consumers since 2003. Since 2015 all cross-border supplies of electronic services to EU con-sumers have been required to be taxed in the state of residence, even when supplied from other EU countries. South Africa introduced rules to tax some inbound digital services in 2014. Both Canada and New Zealand, are considering changes to their GSTs. Many countries in Africa have had versions of the EU rules in place for years.

CONTACT US

Australia’s adoption of a Netflix tax would be part of a consistent international trend and might, in fact, accelerate change in other countries’ taxing schemes, as well.

If enacted, the Netflix tax could have wide ranging implications for consumers, Australian businesses and international commerce.

If you have questions about how the Netflix tax may affect you, please call us at 1800 780 770 to schedule a

consultation. This is a big, current and unfolding issue.

We look forward to meeting with you.

1800 770 780

OHL @OWENHODGE.COM.AU