‘Netflix tax’ enforcement may be tough

Collecting tax from Netflix may not be as easy as the Australian government believes, written by Jared Lynch at the Australia Financial Review following an interview with Anil Kuruvilla, senior manager of tax research and content for Thomson Reuters ONESOURCE Indirect Tax determination and compliance technology solutions.

April 27, 2015
Grace Harvey

Articles can be read at Australian Financial Review and Sydney Morning Herald. Netflix, Inc. NFLX

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Netflix is Joe Hockey’s lightning rod to collect more tax from overseas technology giants.

But has the Treasurer bitten off more than he can chew?

Thomson Reuters senior taxation expert Anil Kuruvilla says drafting law to broaden the goods and services tax (GST) to overseas digital companies, such as Netflix, was easy. The challenge, he said, will be collecting the cash.

“A lot of people are going to focus on what the legislation and laws are but … at the end of the day if a company collects all the money and they’re holding it in your bank account and there is no way to get it to you and there is no way to file a return, then you fail,” Mr Kuruvilla said.

“Who wins there?”

Mr Hockey suggested earlier this month collecting GST from overseas companies that sell movie and music downloads and streaming services as well as the lowering the current sub-$1000 exemption for goods bought offshore, saying it could boost government coffers by billions of dollars.

Netflix, which sells its Australian service from $8.99 – $1 less than its local rivals – said it would comply with any tax rule change. But it’s not yet known if it would lift its prices, unveiled in March, as a result.

‘NOVEL’ IDEA

Mr Kuruvilla said collecting consumption taxes from technology companies was still “novel”, with the biggest change happening earlier this year when European Union overhauled its value-added taxes – and it is creating headaches.

The EU started applying its value-added taxes (VAT) to providers of broadcasting and electronic services based on the location of their customers, not where the company set up their head office.

Mr Kuruvilla said these changes involved a company collecting VAT and paying the tax at its home jurisdiction. The local tax authority would then distribute the payment to other countries on the company’s behalf.

It is designed to stop corporations of basing themselves in low tax jurisdictions such as Luxembourg but involves tight bookkeeping on behalf of the company and the local tax authority.

“Let’s say you’re based in the UK where the VAT rate is 20 per cent and a customer lives in Hungary where they charge 27 per cent VAT. You still pay the UK tax authority and the UK would send the money to the different country.

“That started on January 1. It’s April right now. The first returns are just being filed for this system and there has been a huge outcry in Europe because a lot of small businesses are getting caught up in this.”

But the Australian government doesn’t have to follow the European path. South Africa and Norway have also taken on global technology companies under a system, which requires them to register to pay tax. The company charges customers the equivalent of GST and then pays that to the government.

“There hasn’t been much complaining about the system in Norway”, Mr Kuruvilla said.

“But Norway is a relatively small place. In South Africa it’s still early days.”

But under the registration system, Mr Kuruvilla said, companies could expose themselves to that country’s laws.

“All of a sudden if you are a UK company you don’t want to become entangled in Romania, Hungary, Bulgaria or Denmark.”

ENFORCEMENT DIFFICULT

He said enforcing the registration scheme was also difficult, with governments facing few options but to complain in the media if companies fail to pay their taxes.

“There is a real open question about how you enforce this. If I’m sitting in America and I decide not to pay the GST, what exactly is your recourse against me?

“Complaining to the press is pretty much all you can do. But that could be quite effective. The biggest companies in the world do not want bad press.”

Mr Hockey is expected to unveil the so called “Netflix tax” as part of several “tax integrity” measures in next month’s federal budget.

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