EU streaming contributions: When is a payment to a government agency not a tax?
Denmark and Switzerland in May both enacted laws that will require digital content streaming services — many of them U.S.-based — to make contributions to their respective countries’ television and motion picture production industries.
At the same time, both countries are part of The Organization for Economic Cooperation and Development’s talks to implement global tax changes that include an explicit ban on individual nation’s taxes on digital services. It’s part of a broader deal to more equitably share the taxable wealth that the world’s largest multinational enterprises are generating.
So how do the governments of two countries that have agreed not to tax digital services plan to take money from digital service providers without violating those agreements? It could come down to a question of when is a mandatory payment to a government not a tax.
OECD strikes tax deal for the digital age
The OECD agreement that was announced in 2021 settled two long-running pain points for nations involved in the global economy:
1) Participating countries would get to tax the 100 largest multinational corporations based on the share of the revenue they generate in each country; previously, those multinationals were primarily taxed on the revenues they generate in their legally established home countries.
2) All countries agreed to a minimum 15% corporate tax; previously, countries were free to set the tax as low as they wanted, which led companies to shop around globally for the most-favorable tax regime, regardless of where their actual operations were located.
The agreement gives countries until 2023 to work out the legislation that will allow them to participate in the agreement.
As part of the agreement, countries pledged to forego specific taxes on digital services. This had been a key point for the United States: U.S. companies (Meta, Alphabet) dominate the digital services market globally, and they were the targets of many nations’ tax legislation. In return, the Trump administration first imposed, then lifted, retaliatory tariffs on France, and the Biden administration threatened tariffs on six other countries — Austria, India, Italy, Spain, Turkey, and the United Kingdom. That dispute was later resolved.
One potential sticking point remains, however. European Union regulations allow EU members to impose financial obligations on media content providers, if the money collected is used to increase investments in European-produced films and television shows.
EU countries argue that this is not a digital services tax, because the obligation is imposed on all content providers, digital and analog alike (including over-the-air broadcasters); and because these mandatory “contributions” don’t go into the general-fund accounts of a national government, like a tax would. Instead, they are earmarked for national accounts created to support arts and humanities within each country.
Portugal requires fees, investments in programing
Portugal, for example, has implemented requirements under this EU agreement. In 2020, Portugal approved a law to require streaming service providers to pay an annual fee equal to 1% of their Portuguese revenues, or 1 million euros, whichever is more, with the money going to support the Instituto do Cinema e do Audiovisual, a government-funded private agency that promotes Portuguese film and television.
In addition, streaming platforms are required to invest 4% of their in-country revenues (or at least 4 million euros) in producing Portuguese-language movies, TV series, or documentaries.
The law, which took effect this year, also requires state-owned Portuguese broadcaster RTP to spend more on locally produced content. RTP — which runs four national TV channels and three national radio channels and provides satellite and cable service as well — must reinvest 10% of its revenues in local content production, up from 8%.
Swiss voters approve “Lex Netflix”
On May 15, 58% of Swiss voters in a national referendum approved Lex Netflix, as it was popularly known — a law requiring digital content streaming services (like Netflix, Amazon Prime, and Disney+) to invest 4% of their income from Swiss subscribers into Swiss film and television projects.
Companies that fail to meet the investment standard will be required, under the law, to pay a 4% tax to Switzerland’s Federal Office of Culture. The law also set a requirement for 30% of the streaming content provided to Swiss viewers to be produced in Europe.
Previously, Swiss broadcasters had been required to invest 4% of their revenues into domestically produced movie and television content. The new law extends that requirement.
The new contributions are expected to total between 18 million and 30 million Swiss francs a year, which is roughly $19 million to $30 million a year. That’s about enough to produce a single season of something like the acclaimed German drama Babylon Berlin. Its first two seasons cost about 40 million euros to produce.
Danish government enacts cultural contribution
On May 21, the Danish government announced a required 6% “cultural contribution” on revenues from streaming services, with the money going to the Danske Filminstitut. The money will be split between a fund that subsidizes cinematic movie production costs, and another that supports TV series and documentaries.
It’s expected to generate between 20 million euros and 27 million euros a year (roughly $21 million to $29 million).
The law also requires video streaming companies to share with the Danish government the algorithms they use to determine which videos they suggest to viewers, based on their previous choices.
The measure is squarely aimed at helping Danish production companies compete with the flood of content coming from outside Europe.
“International streaming services are taking up more and more space,” Denmark’s Minister of Culture Ane Halsboe-Jorgensen said. “It is absolutely necessary that they contribute to our cultural community.”
With the 6% contribution, she continued, “we ensure that we also in the future have Danish-language films, series and documentaries of high quality, which can bring us together and challenge us.”
The new law also requires Danish broadcasters DR and TV2 to increase their spending on Danish feature and documentary films, with details on that to be announced by 2024.
Critics panned the new streaming contributions
Not everyone likes the new system of mandatory contributions.
In Switzerland, a coalition against Lex Netflix emerged, citing two problems with the proposal. For starters, streaming companies are almost certain to pass on the additional 4% contribution by raising subscription fees, the opponents said.
And the requirement for 30% of the content to be European could backfire, the opponents said. Instead of providing more European productions, the streaming services simply could cut the total number of shows they offer each month, to make it easier to hit the 30% mandate.
Higher fees for fewer shows is not in anyone’s best interest, opponents said.
Meanwhile in Denmark, Scandinavian streaming service Viaplay Group — which produces about 70 Nordic-language titles a year — blasted the new required contribution.
Viaplay President and CEO Anders Jensen called Denmark “a fantastic, creative market with some of the best talent to be found,” but said the required contributions will lower his company’s profits. That means Viaplay needs to ”immediately implement further measures to control the costs of any Danish production we do.”
The mandatory contributions — which Jensen called a “tax” — could motivate streaming companies to “immediately redirect investments to financially more attractive markets” that don’t require the payments, he added. That would result in fewer Danish projects, not more.
Some industry watchers said the new contribution requirements in Denmark and Switzerland are a 2020s reaction to a 2010s problem that was already going away.
When streaming services were new, they relied heavily on readily available Hollywood movies and TV series. Even today, Portugal’s RTP on Fridays shows subtitled reruns of classic American fare like “Mission: Impossible,” “The Love Boat,” and “Walker, Texas Ranger” Denmark’s TV2 on Mondays runs repeats of the long-running cartoon comedy “American Dad,” along with BBC reality show “The Repair Shop”
In Denmark, at least, there seems to be a real concern that this influx of American content isn’t necessarily consistent with Danish cultural values, and it is pushing Danish broadcasters out of the market.
Technology companies “in a short time have gained enormous influence on our lives, our society and our community,” Halsboe-Jorgensen said. “Denmark must take the lead in ensuring greater democratic control over the tech giants.”
But to compete in the various global markets, critics say streaming services are finding they need to provide more original content in languages other than English. The global hit “Squid Game,” for example, came out of a Netflix effort to develop original Korean-language programming for its entry into that market.
So streaming services already are investing significantly in non-American shows — only to see individual EU governments require them to take money out of their own production budgets and give it to nationalized arts and culture agencies.
While the new Danish law “would have been an important market intervention three years ago, in 2022 it is a solution to a problem that has already been solved by a hugely competitive international video streaming marketplace,” wrote Tim Mulligan, executive vice president and head of research at MIDiA Research in London.
Expect more debate over this
A new industry group formed in May to coordinate the response of streaming services to the various initiatives. The group includes U.S. giants Netflix, Warner Bros., Discovery, Paramount, Starz, and NBCUniversal, along with European counterparts like Viaplay, Sky, Chili, and Sooner.
The next battleground could be Finland, where the Finnish Film Foundation already is calling for a new streaming levy because of cuts in the amount of government support going to it. The foundation is currently funded largely by revenues from the national lottery and state-owned gambling entity; those revenues have fallen during the pandemic.
In addition to digital services taxes and streaming contributions, there are nearly 100 countries around the globe that have introduced specific legislation that requires nonresident digital service providers to register and charge either value-added tax (VAT) or goods and services tax (GST) to their domestic customers.
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