Netflix in Canada: Let No Good Deed Go Unpunished

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From Hugh Stephens Blog:

Let’s say you are Netflix and you have been very successful in promoting your content subscription service, and have succeeded in signing up roughly half the households of a given country. And let’s say that this country is concerned about preserving its means of cultural expression in an audio-visual world largely dominated by major US producers of content. In pursuit of this goal, this country has for years maintained a variety of policies designed to tilt the playing field in favour of its domestic content producers (with limited success, I might add.) One of these policies is the creation of a domestic content production fund into which broadcasters and content distributors (but not online distributors) must pay a percentage of revenues. And let’s say that a number of stakeholders in this country, from the direct competition to domestic producers of content who are subsidized by the content production fund want you, Netflix, to be required to contribute to the fund in order to expand it so as to make yet more domestic content. That’s not all. As an entity outside Canada selling a digital product, you are not required by law to collect sales taxes on your Canadian subscriptions but you are nonetheless being accused by your Canadian competitors of having an unfair advantage.

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In Europe, there are similar issues of local content and production quotas and online taxes to contend with. The solution for Netflix will vary from country to country.

In Canada, in late September Netflix reached an agreement with the Department of Canadian Heritage to establish a local production centre that will involve a spend of $500 million (CAD) over 5 years on original productions. While one would normally think that such an announcement would be good news for the Canadian cultural sector, the vultures could scarcely wait to pounce, and the piling on began immediately. Heritage Minister Melanie Joly must have wondered what hit her.

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[W]ill this money be spent on “Canadian production” or “production in Canada”? There is a difference.

Production in Canada is alive and well. The MPA estimates that US studios spent upwards of $2 billion in film and TV production in Canada in 2015/16, the most recent year for which statistics are available. This represents about 30% of the total spend on film and TV production in the country. But very little of this qualifies as “Canadian production”, which is determined by a variety of factors, such as whether the producer is Canadian, and one of either the director or screenwriter positions and at least one of the two lead performers is Canadian, and a minimum of 75% of program expenses and 75% of post-production expense are paid for services provided by Canadians or Canadian companies. And that is before we get to the points! A production must score 6/10 points based on the following for live action productions;

Director (2 pts.); Screenwriter (2 pts.); First and Second Lead Performers (performer or voice) (1 pt. each); Production Designer (1 pt.); Director of Photography (1 pt.); Music Composer (1 pt.); Picture Editor (1 pt.)

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The issue of whether Netflix should be subject to Canadian taxes and/or levies is what made its offer of new money for production so controversial (for some). The concept of a so-called “Netflix tax” has been around since the last election in 2015, but there is a lot of confusion as to what exactly it is. On the one hand, the term is often used to refer to the imposition on Netflix of a requirement to contribute a percentage of revenues to the production of Canadian content. The more successful Netflix has become, the more the pressure has mounted from its competition to make it subject to the requirement to contribute to the Canadian Media Fund (CMF), the not-for-profit entity that invests the compulsory contributions from the cable and broadcast industry into Canadian production. The CRTC, Canada’s media and telecommunications regulatory agency, requires that broadcasters contribute 30% of revenues and distributors (known in Canada as broadcast distribution undertakings, or BDUs) 5% of revenues to Canadian production. Legally Netflix is not required to do so as it is neither a broadcaster nor a BDU, and this rubs some of its competitors in the broadcasting space the wrong way, even though Canadian media companies that provide equivalent online or OTT video services are similarly exempt.

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The “Netflix tax” first surfaced in the last election, when the governing Conservatives vowed not to impose any new taxes on internet services, on the grounds that this would increase costs for Canadians. The Liberals were quick to embrace the same position and the term “Netflix tax” became a proxy for raising taxes on the middle class.

Link to the rest at Hugh Stephens Blog