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The Netflix tax debate has emerged as a confusing policy issue in part because the same term can be applied to several forms of taxation.

MIKE CASSESE/REUTERS

Michael Geist holds the Canada Research Chair in internet and e-commerce law at the University of Ottawa, faculty of law.

Four years ago, then-prime minister Stephen Harper used the first week of the 2015 federal election campaign to pledge that, if re-elected, his government would not institute a “Netflix tax.” The Liberals responded with a no-Netflix-tax promise of their own, which became government policy when Justin Trudeau was elected a few months later. Yet as Canada heads toward another election this fall, Canadian Heritage Minister Pablo Rodriguez and his party seem ready to place the spotlight on Netflix taxes once again. Only this time, the government will call out opposition parties that do not commit to new internet taxes.

The Netflix tax debate has emerged as a confusing policy issue in part because the same term can be applied to several forms of taxation. Some are not particularly controversial. For example, applying sales taxes to digital services such as Netflix is widely viewed as inevitable since it would level the playing field with similar domestic services, such as Crave, that already collect and remit sales taxes. Moreover, service providers don’t pay the sales taxes, consumers do. Service providers simply collect from consumers and remit them to the government.

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The Netflix tax that Mr. Rodriguez appears to have in mind would involve mandated payments by digital services in support of Canadian content production. The Liberal government initially rejected the idea as part of its digital cultural strategy, emphasizing enhanced “discoverability” of Canadian content on internet platforms and voluntary agreements to invest in Canada, headlined by the $500-million commitment over five years from Netflix for production in Canada that was announced in 2017.

When those measures failed to stem calls from the cultural sector for more aggressive policies, however, the government convened the Broadcasting and Telecommunications Legislative Review panel to recommend reforms to Canada’s communications laws. The panel report is not due until January, 2020, but that did not stop Mr. Rodriguez from stating in late June that “everyone has to contribute to our culture. That’s why we’ll require web giants to create Canadian content and promote it on their platforms.” In fact, recent reports indicate that his department has already convened seven working groups charged with identifying regulatory reforms for the internet.

The shift toward mandated Canadian content comes despite industry data confirming record-setting financing in Canadian film and television production. The total value of the Canadian film and television production sector exceeded $8-billion last year, over a billion more than has been recorded in any year over the past decade. Spending on Canadian content production hit an all-time high last year at $3.3-billion, rising by 16.1 per cent. Notably, the increased expenditures come primarily from distributors (who see benefits of global markets) and foreign financing (which has grown by almost $200-million in the past four years).

The data may not support new Netflix taxes, but the government appears to believe that the increased fees for digital services will make for good politics this fall.

Yet cultural groups are unlikely to be satisfied with extending the 5-per-cent contribution requirements for broadcast distributors (such as cable companies) to the online video services. In fact, some groups have visions of a 30-per-cent contribution requirement, likening online video services to established broadcasters that enjoy a myriad of regulatory advantages not found online (these include must-carry requirements, copyright retransmission rules and simultaneous substitution benefits). Others want the principle extended to internet service providers and wireless carriers, risking increased consumer costs for basic communications services.

Mandated contributions could also spark a trade battle with the United States. While the new United States-Mexico-Canada Agreement features a cultural exception, it also permits the U.S. to retaliate with measures of “equivalent commercial effect.” In practice, that could mean new levies or fees in the hundreds of millions of dollars against Canadian companies seeking to access the U.S. market.

The Liberal shift toward new internet or Netflix taxes also marks an abandonment of the government’s emphasis on public consultation and expert policy development. By circumventing the broadcast review panel and effectively ignoring the results of a public consultation before the results are even in, the government seems ready to place a big bet on another Netflix tax election, only this one features promises of increased internet costs and new consumer fees.

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