Netflix in Canada: Let No Good Deed Go Unpunished

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. If you can absorb all that, then you will have some idea of the issues that Netflix is grappling with in Canada. It’s a minefield–with many people laying mines.

In fact, Canada is not the only jurisdiction where Netflix is facing challenges, which is presumably why it is staffing up with a new head of Public Policy, former Amazon executive Monique Meche, who will split her time between Washington, DC and Amsterdam. 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. She was accused of being naïve by being hoodwinked by a large US corporation. First the accusation was that Netflix was not really spending any new money, since it already spends “hundreds of millions” on production in Canada, according to its own statements. Netflix has now clarified that the $500 million is in addition to its existing plans. Second, will 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.)

Serving poutine for lunch on the set does not add a point.

At this point we do not know if the productions will qualify as Canadian although Netflix has said that $25 million has been earmarked for French language production in Quebec, which presumably will be Canadian content. That did not stop Quebec producers and the Quebec government from going into high dudgeon with the government announcing that it would move to require Netflix to charge the 9.975 percent provincial sales tax on its subscriptions in Quebec.

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.

The other form of taxation often referred to as the “Netflix tax” is the requirement for Netflix to collect sales taxes (federal and provincial) on the service it provides. However, once again, Netflix has no legal requirement to do so since it is providing digital services from outside Canada (although to Canadian consumers). Its competitors have somewhat more valid grounds in this instance to claim an unfair advantage for Netflix since Canadian online video providers are required to collect sales taxes, which in some provinces total as much as 15%. Still, 15% on an $8.99 Netflix subscription amounts to $1.35 per month, hardly a huge competitive advantage or disadvantage. The kind and range of content provided is a far greater differentiator for consumers—and Netflix has been wildly successful.

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. When a Parliamentary committee dominated by Liberal MPs proposed the imposition of a 5% internet broadband tax earlier this year, to fund culture, Prime Minister Trudeau quickly shot down the idea on the basis that the Liberal government’s policy was to lower not raise taxes. The government has now formally replied to all of the committee’s recommendations, and had this to say with regard to the internet aka Netflix tax;

“The Committee’s recommendations to generate revenue by expanding broadcast distribution levies so that they apply to broadband distribution would conflict with the principle of affordable access”.

While the Committee was holding its hearings, Heritage Minister Joly launched a root-and-branch review of Canadian cultural policy, designed to adapt cultural support policies to the digital age. In her speech on September 28 launching “Creative Canada”, she rolled out a menu of announcements that included more money for the CMF, some support for publishers of periodicals, a refreshed mandate for the CBC, further review of broadcasting, telecommunications and copyright legislation, more flexibility for music funding, etc. Significantly she also indicated there would be no new broadband taxes (i.e. no “Netflix tax, although she did not mention this term), but at the same time she highlighted Netflix’s planned investment in a Canadian production facility. Was there a quid pro quo here?

Critics were quick to jump on the announcement and claim that Netflix was “getting away with murder”, while both the government and Netflix insisted that the investment announcement was unrelated to any decision on taxes. No doubt this is true; it is highly unlikely that the tax/investment trade-off was put explicitly on the table. On the other hand, it was probably inevitable that the linkage would be made, and Joly did not help with weak messaging around the announcement or in the immediate days that followed.

As for Netflix, it would not have invested in Canada just to fight off measures to force it to impose sales taxes, given the relatively small competitive advantage it gets from being sales tax exempt. It might have indicated that there was no need to impose Canadian content levies because it was already engaged in lots of production in Canada, and saw a business case for doing more. Doing something voluntarily is always better than being forced to do it by government regulation. It is no accident that production in Canada is booming; the wealth of talent and experience for productions combined with a low Canadian dollar and incentives from various levels of government ensures that Canada will continue to be an attractive location for production for Netflix as it continues to invest in co-productions and its own content.

Netflix finally responded to set the record straight, but not until almost two weeks had passed of attacks on Mme. Joly and the company. It really was a case of “let no good deed go unpunished”. Yet, at the end of the day, Canadian creators and the film and TV industry in Canada can only benefit from Netflix’s increased commitment to production, whatever the determining factors were for the company. You’d think that would be something worth celebrating rather than complaining about. Maybe, in time, it will be.

© Hugh Stephens 2017. All Rights Reserved.