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‘NETFLIX Tax’ – VAT on U.S. Digital Sales

August 11, 2016

If you sell digital goods to consumers outside the U.S., you need to collect something known as the “Netflix tax”. Read up on the requirements.

As Netflix, Hulu, and other video and music streaming sites are growing in popularity, countries are looking to defray the taxes lost on the sale of tangible media goods. As part of the BEPS, or Base Erosion and Profit Sharing Project, the OECD (Organization for Economic Cooperation and Development) has proposed an indirect tax on digital sales known as the “Netflix” tax. The Netflix tax is a value added tax (VAT) charged and collected by businesses based on where the consumer is located, rather than where the business is located. All digital businesses and merchants are affected by the Netflix tax, including all digital suppliers in the United States who sell to international consumers.

What kinds of services are affected?

If you are selling digital goods to direct users outside of the United States, then you need to register and collect VAT upon sale.

Generally, services that are affected are those that fall within:

  1. Telecommunications,
  2. Radio/television broadcasting or
  3. Digital services, which includes sales of:
  • E-books,
  • Online newspapers,
  • Subscriptions and
  • Online testing services.

This is not an all-inclusive list. Those businesses providing marketing, product & service development, customer service and business process outsourcing are most likely to be affected by this new requirement.

Requirements and data to consider

Some of the data points to consider and monitor are:

  • Sales threshold;
  • Location of the consumer in real time using two pieces of non-conflicting evidence;
  • Whether consumer is an individual or a business;

Keep in mind the following requirements as well:

  • You must comply with local invoicing rules;
  • You are required to create a tax settlement report in the currency of settlement;
  • You have to file the tax settlement return;
  • You must settle the tax in the consumer’s country.

Has the concept been adopted by many countries?

The most pressing geographical locations at the moment are Europe, Japan, South Africa, and Korea. However, the concept is quickly being adopted by other countries.

Interested in learning more? Contact our Global Tax Services Practice today.

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