Netflix tax loophole: GST-free streaming is a problem

Netflix didn’t take long to disrupt New Zealand’s media sector.

The disruption started before the world’s largest streaming TV and film service opened in New Zealand last month.

Netflix is based overseas. That means it doesn’t have to charge GST. New Zealand companies do.

Not charging GST gives Netflix a built-in 15 percent price advantage over local TV and services like Spark’s Lightbox or Sky TV.

Reverse protectionism

Until a generation ago governments used tariff barriers to protect local businesses from foreign competition. Tariffs could also protect local jobs.

Now New Zealand’s GST tax regime is crippling local firms. It threatens jobs — good jobs.

In this sense GST acts as a brake on innovation and does nothing to help local content producers .

We all pay the price

There’s more to this than just damaging New Zealand businesses, jobs and innovation.

Tax revenue lost to overseas companies means either we go without public services or pay higher taxes. That’s all of us, Netflix customers or not.

Unless the government acts Netflix will squeeze local content providers out of business. And that means more lost taxes.

More than just GST

Spark pays New Zealand company tax. Employees pay income tax. Spark buys services from other New Zealand businesses. That money circulates. Spark contributes to the economy in many ways.

None of the money paid to Netflix circulates in the New Zealand economy. In that sense it is parasitic.

Not everyone agrees:

@billbennettnz @glynmoody Yes. It’s called the consumer surplus, the value NZ subscribers get. It is the whole point of the economy.

— Guy Herbert (@guy_herbert) March 22, 2015

We’ll come back to the value NZ subscribers get from Netflix in a moment. First, some more context.

Netflix just like online shopping?

New Zealand retailers watching from the sidelines will point out they’ve put up with similar unfair competition for years.

There are fewer bookshops on our high streets and almost no music stores any more thanks to global outlets like Amazon. Like Netflix they don’t charge GST on New Zealand transactions. ( Unless a customer is daft enough to order more than NZ$400 worth in a single transaction.)

The difference between the price of books, DVDs, CDs and other goods purchased overseas is greater than 15 percent. That’s because global retailers reap huge economies of scale from running vast centralised warehouses.

Not worth taxing

Inland Revenue says it isn’t worth collecting the GST on imported goods worth less than NZ$400. Parcels of books, CDS, DVDs and clothes rarely bust that limit. In effect, fly in under the IRD’s radar.

High street retailers would like that stop, but it isn’t going to happen.

Netflix doesn’t deal with physical goods. There’s no obvious customs border to police. Movie and TV subscriptions cost around NZ$10 a month, well below the NZ$400 threshold.

There is a practical difference between selling physical goods and selling a subscription TV service. At some point the cost of collecting GST when goods reach the NZ border is lower than the amount of tax collected.

Easily fixed

Collecting New Zealand taxes from overseas retailers is technically easy, but politically hard.

There’s nothing technical stopping US-based global retailers from charging New Zealand GST, or any other country’s equivalent tax, at the point of sale.

After all, they already have to do something similar with state-based sales taxes when selling to customers in other US states. At most it would need a few lines of code in their existing software.

Competitive edge

They don’t want to do this as it will affect their competitive edge. In reality such an effect would be small. Books from Amazon are less than half the price in NZ shops, adding 15 percent to that is unlikely to lose many sales.

On the other hand Netflix New Zealand subscription fees range from NZ$10 to NZ$16 a month. Adding 15 percent GST to those prices changes the competitive landscape for streaming video services in New Zealand. The closest rival, Spark’s Lightbox service, is NZ$13.

Time for government intervention?

New Zealand’s government isn’t shy of industry intervention. That’s especially true in the telecommunications sector where it forced an industry restructure to get its UFB fibre broadband project underway and taxes telecommunications companies to deliver rural services.

Getting involved to level the playing field for local content companies doesn’t mean changing ideology or established principles. It isn’t about protecting an out-of-date business model. Securing the tax base isn’t controversial — and is likely to play well with voters too.

However, New Zealand is too small a nation to tackle some of the world’s largest and most power companies on its own. There are moves underway elsewhere to deal with these problems. The UK and Australia are already moving towards imposing taxes on multinationals.

In December the Organisation for Economic Co-operation and Development released a paper suggesting foreign suppliers would pay local sales taxes.