U.S. Streaming Giants Challenge Canadian Digital Services Tax in Court

Netflix (NASDAQ: NFLX), Walt Disney (NYSE: DIS), and other major U.S. streaming companies are pushing back against a Canadian mandate that would compel them to allocate 5% of their Canadian revenues to support local broadcast news and other domestic content. These companies have approached the Canadian Federal Court of Appeal, asserting that the Canadian Radio-television and Telecommunications Commission (CRTC) has overstepped its regulatory authority.

The Motion Picture Association-Canada (MPA-Canada), which represents leading streaming platforms including Netflix, Walt Disney, Warner Bros. Discovery, and Paramount Global, has voiced strong objections to the CRTC’s directive.

Wendy Noss, president of MPA-Canada, highlighted the significant contributions these companies already make to the Canadian economy. “Our members’ streaming services do not produce local news nor are they granted the significant legal privileges and protections enjoyed by Canadian broadcasters in exchange for the responsibility to provide local news,” Noss stated.

In their court filing, lawyers for the streaming giants argue that the CRTC’s decision lacks a solid foundation. They claim the regulator did not provide sufficient justification for why foreign streaming services should be responsible for funding local news production.

“The broadcast regulator concluded, without evidence, that ‘there is a need to increase support for news production,'” the legal filing states. “Imposing on foreign online undertakings a requirement to fund news production is not appropriate in the light of the nature of the services that foreign online undertakings provide.”

MPA-Canada’s legal team contends that the CRTC’s actions are unreasonable and has requested the Federal Court of Appeal to intervene.

The CRTC’s order, issued last month, has sparked concerns within the streaming industry about potential financial implications. Industry analysts have warned that the new levy might lead to increased subscription costs for Canadian consumers and could even prompt some streaming services to reconsider their operations in Canada.

The regulatory body, however, justifies the levy as a necessary measure to sustain local content production.

“The mandated contributions are meant to address concerns that certain types of content like local interest stories will not be made or distributed anymore. Or that they will become less available because they will not be funded by market forces alone,” defends Vicky Eatrides, chairwoman of the CRTC.

Digital services tax

The backdrop to this court challenge is Canada’s controversial digital services tax (DST). The Liberal government proposed the tax in its 2019 election platform, initially agreeing to delay its implementation until the end of 2023 to negotiate an international agreement on taxing multinational digital companies. However, as these negotiations dragged on, the federal government decided to proceed with the DST, enacting it through an order in council on June 28, after receiving royal assent on June 20.

Deputy Prime Minister and Finance Minister Chrystia Freeland has defended the move, emphasizing Canada’s preference for a multilateral solution. “It’s simply not reasonable, not fair, for Canada to indefinitely put our own measures on hold,” Freeland stated. She pointed out that allies like the U.K., Spain, Italy, and France have successfully imposed similar taxes without facing U.S. retaliation.

The DST applies to digital firms with global annual income of at least $1.1 billion and annual revenues in Canada over $20 million, taxing these revenues at a rate of 3%. The first year of the tax includes revenue earned since January 1, 2022. The Parliamentary Budget Office estimated that the tax would bring in more than $7 billion over five years, while the 2024 budget forecasted revenues at $5.9 billion over the same period.

The decision to impose the DST has drawn criticism both domestically and internationally. U.S. Ambassador to Canada David Cohen described the tax as “discriminatory,” warning that it could lead to retaliatory measures from the U.S.

The U.S. Chamber of Commerce and the American Chamber of Commerce in Canada also issued a statement opposing the tax, arguing that it would raise prices for everyone, disproportionately impact U.S. companies, and potentially violate trade agreements like the USMCA and WTO obligations.

“At this very sensitive time in the Canada–U.S. trade relationship, we urge the Government of Canada to reconsider this unilateral and discriminatory new levy,” the organization said in a statement.

Robin Guy, vice president of government relations for the Canadian Chamber of Commerce, called for a reversal of the unilateral decision, urging the government to “instead work with our trading partners on an international solution that would better serve Canadians.”

Similarly, Ontario Finance Minister Peter Bethlenfalvy expressed disappointment with the tax’s implementation before reaching an international agreement, cautioning against unnecessary taxes that could isolate Canada from the U.S. market.

“Canada, like the rest of the world, is taking steps to address the tax fairness issues that arise from the digital transformation of the global economy,” he wrote.

Information for this story was found via CBC, Morningstar, and the sources mentioned. The author has no securities or affiliations related to the organizations discussed. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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