Netflix began the year with a bang when it announced it would come to 130 countries including Russia. Netflix sees is future growth coming from more broadband subscribers around the world.
Russian consumers were initially excited for the arrival of the subscription based web television provider. Netflix projected a huge kickoff based on consumer enthusiasm and high rates of internet use and awareness. The Russian government was surprised at Netflix’s announcement because it was expecting a dialogue between the Ministry of Communications and the company before launching into Russia. As a result, the Ministry of Communication classified Netflix as a Television Broadcasting firm.
A Television Broadcasting Firm has to obtain licensing in order to operate in Russia. For example if NBC wanted to start an operation in Russia it would have to apply for these licenses. One aspect of the licensing process is there to regulate companies which provide Russian language content and censor if necessary. Netflix right now does not have any Russian language content and it does not operate as a traditional broadcaster. It provides its entire catalog over the internet.
Other jurisdictions such as the EU view Netflix as a provider of electronic services and not a broadcaster and require it to charge VAT on sales to consumers. Netflix is under the same obligations in various different countries around the world. However, in Russia it does not have to charge VAT on its subscription services. Right now the Russian VAT law does not even define digital or remote services like Netflix.
Other digital service providers such as Google Play and Apple iTunes do not charge VAT on their sales to Russian consumers because of this gap as well. The gap in taxation legislation has already been identified in cases of digital services provided by foreign firms in Russia and globally.
The Ministry’s classification of Netflix as a Television Broadcaster allows it to get some revenue from the streaming giant but it will be able to have more money if it amends the VAT law in two ways:
- Define digital services
- Change the place of supply rules for B2C transactions to require Netflix to collect VAT on sales
Even with these changes, Netflix will be a niche player in the market for a while because it lacks Russian language content and is significantly more expensive than the local provider. Local competitors charge 25% of Netflix’s price for their offerings but they are very worried about the arrival of Netflix.