By Jason Booth (Principal, GHJ)
Just days ago (Feb. 10, 2016), the Australian treasurer introduced draft legislation to ensure that the country’s goods and services tax (“GST”) would apply to digital products and other services provided to Australian consumers by foreign vendors in a way that is similar to how GST applies to Australian vendors providing equivalent products.
This heavily discussed topic has been coined by the Australian media as the “Netflix Tax”
What exactly is the Netflix Tax then? The Netflix Tax is a change to Australia’s current GST regime. GST was introduced in 1999 and although not the same, is similar to U.S.’s sales and use tax (which differs state by state) as it is a consumption tax borne by the consumer. Current Australian law does not generally impose GST on non-Australian vendors even though the end consumer may in fact be physically located in Australia. For example, a software subscription service provided by an Australian company is required to charge GST to its customers, but one based overseas (e.g., the U.S.) does not.
In line with Action 1 of the OECD’s (“Organization for Economic Cooperation and Development”) Base Erosion and Profit Shifting project regarding taxation of the digital economy, the Netflix Tax applies the OECD destination principle which recommends that consumption should be taxed in the destination country of the imported digital products or services. With this in mind, the Netflix Tax plans to overall Australia’s GST tax system to ensure consistency in the application of GST regardless of the location of the digital vendor while attempting to minimize the costs for non-Australian companies to comply with these new GST rules.
Although the tax is not borne by the digital media company but passed on to its end users (those consuming the digital content), this change in Australian law (along with the other countries that have implemented similar legislation – e.g., New Zealand) is something that could mean a great deal for a U.S.-based digital media company. The additional GST (10 percent for Australia) could create pricing pressure for a U.S.-based digital media company and impact net profits. U.S.-based digital media companies will need to become and remain compliant with the GST collection, remittance and filing obligations with potentially no physical presence in Australia. With compliance comes the concern of available resources to deal with this matter (whether external or internal). Lastly and potentially the most disheartening, is what does the future hold for other countries that may potentially follow suit creating further compliance and overhauling of internal systems, etc.?
The Netflix Tax was introduced as part of the Tax and Superannuation Laws Amendment (2016 Measures No. 1) Bill 2016 (the “Bill”). The Australian Parliament has also issued an Explanatory Memorandum to the Bill (the Bill and Explanatory Memorandum can be found here).
AAP (2016, February 16). Treasurer introduces ‘Netflix tax’ for GST on digital products to Parliament, Sydney Morning Herald.
About Jason Booth (Principal, GHJ)
Jason has over 11 years of experience in public accounting and specializes in international tax consulting assisting both U.S. companies with operations overseas as well as non-U.S. companies with various U.S. inbound issues.
Jason has extensive experience across a variety of industries including private equity, entertainment, real estate and technology. He first started his career in San Francisco before taking back-to-back overseas assignments first in Sydney, Australia and then in Munich, Germany. While overseas, Jason represented a Big Four accounting firm managing its U.S. Tax Desk and focused on U.S. international tax planning and transactional work (M&A and tax due diligence).