Thursday, November 3, 2016

Making sense of the #Netflix, ISP, ICT #DigiCanCon tax

There are a number of people active in the DigiCanCon debate that are claiming that Netflix isn't paying its fair share of taxes and also that Internet Service Providers (often meaning Internet transit routing providers, or access providers) and other parts of the Information and Communications Technology industry should pay special taxes to subsidize the content industry.

As there are a wide variety of issues being lumped together, I'll try to break them down and comment on each individually to make sense of them.  The types I have seen so far are as follows:

  • GST/HST issues
  • Canadian Media Fund contributions
  • Copyright levies on content distribution mechanisms
  • Because the ICT industries somehow owes the content industry

GST/HST issues

There are many flaws with the GST/HST, but I'm confused what these flaws have to do with a Heritage Canada consultation, the content industry, or parts of the ICT industries.  When people say they are against a Netflix tax, this is not what they are talking about.

There is an important matter of the perception of fairness, whether or not the amount of money is small.  There is no reason for Netflix to be called out as if they are somehow being dishonest when it comes to taxes.  Netflix should be treated as any other company offering a subscription to a digital multimedia library.  They should be treated as any other company headquartered outside of Canada that does business with many Canadians.   They should not be taxed as if they were delivering a physical product across the boarder as they are not.  They should not be taxed if if they were broadcasting as they are not.

Much of the rhetoric on GST/HST has little to do with taxes, and everything to do with trying to find fault with a foreign headquartered company providing Canadians (including content creators) an extremely valuable service.  One, I might add, that Canadian companies part of the vertically  integrated and concentrated Canadian media companies aren't even trying to offer.

If any Federal Minister outside the Finance minister should be active on the HST file, it should be the Minister of Environment and Climate Change Honourable Catherine McKenna.  We need to modernize tax policies to make repair cheaper than replacement, and one way is to increase taxes on products (the "Goods" part of GST) and remove taxes on services.  We should be encouraging digital distribution over the manufacture and distribution of physical product.

When the HST replaced the GST this increased taxes on services, when a much more environmentally responsibly policy would have been to remove services from HST entirely.

The payment of a membership fee that grants network access to a multimedia library is a service that I believe shouldn't be paying HST, while the manufacture of physical media and distribution via physical transport of physical media (a DVD rental service, like Netflix did in the past) should.

Canadian Media Fund

This is a fund established by the CRTC to levy broadcasting distribution undertakings (BDUs) as well as receiving money from the department of Canadian Heritage (Canadian federal taxpayers).  As Netflix and ISPs are not BDUs, that should be the end of the conversation but it hasn't been.  There are those who are suggesting that the mandate of the CRTC should be expanded to collect levies from industries which are outside what the CRTC would normally be regulating such that entities which aren't broadcasters, BDUs, or telecommunications companies can contribute to the CTF.

In a longer submission that included 30 DigiCanCon ideas I suggested this is a counterproductive proposal.  Rather than expanding the role of the CRTC, all funding programs should be removed from the CRTC.  A funding program like the CMF should exist as far as the destination of funding is concerned, but the source should be tax money accountably flowing through Heritage Canada.

Some funding recipients don't like this idea as they are worried about ongoing cuts to government funding programs.  What they are essentially asking for is for their funding to be less visible and thus less accountable to Canadian taxpayers.  Rather than trying to get funding under the table they should be doing more to promote their value to Canadians.  This includes reducing animosity with the public, a topic I'll be discussing later in this posting.

Copyright levies on content distribution mechanisms

This is a close relative to the existing Private Copying regime that levies audio recording media for the purpose of compensating music authors, performers and makers of sound recordings for activities which would otherwise require permission under copyright.  The idea would be to extend a similar levy to other distribution mechanisms such as the Internet itself, applicable to a larger range of copyrighted works.

I believe the government, possibly outside of the Department of Canadian Heritage, should study the impact of the existing regime before contemplating a new one.  While this regime is claimed to increase revenues to creators, all evidence I've seen is that it reduces revenues.

  • Indirect statistics based on different content distribution mechanisms are used to distribute royalties, so the wrong copyright holders are compensated.  This creates a disincentive for new entrants, and is generally unfair.
  • The regime is hard to explain, and audiences presume it covers more than it does, so the regime induces copyright infringement
  • The more types of copyrighted works that are included, the larger the levy, and the more visible the levy will be to audiences
  • Levy redistribution will be primarily to the already richest copyright holding groups.  It won't be the small musician or literary author that will be receiving money, but the existing large business software and entertainment software industries, and motion picture and television studios.
  • The more visible the levy, the more audiences will feel they have already paid for the content, and the more likely they are to do activities they are even aware infringe copyright.

This has been a discussion for decades, and I answered in the digital-copyright.ca forum a question about this in October.  I even debated the policy with Sheila Copps, the Heritage Minister at the time when the regime was implemented in Canada.  She always had a closed mind about the subject, never being willing to study to determine the level of harm it was causing to the music industry.

I have for decades suggested that strong stable funding directed at Canadian artists, direct from funding agencies manged by each level of government, is the best solution for taxpayers and for fellow creators.  In the context of the existing Private Copying regime I suggested it be replaced with a regime modeled after the Public Lending Right.  I strongly opposed the counter-productive proposal of extending the existing levy from blank media to ICT devices, and obviously oppose this type of levy being applied to the Internet.

While I'm convinced we need to expand government funding programs for Canadian creators, I believe any tie to any distribution mechanism or technology is counterproductive.  Special taxes or levies on distribution systems, media or devices will induce audiences to activities considered infringement, whether or not the new tax/levy comes with a change in the copyright act to exempt any activities.

Because the ICT industries somehow owes the content industry

Possibly the most infuriatingly misinformed comment made during these consultations was from the Minister of Canadian Heritage herself.



This received many replies from people reminding the Minister that accessing the products of the cultural industries represent only one of an infinite number of activities carried out on the Internet.  The idea appeared to be new to the Minister, but it is all to familiar to anyone who has been involved in this area of policy for even the smallest amount of time.


We have been having this debate since the creation of the printing press, through player pianos and audio and video recording, to digital editing and distribution technologies, past the Internet and onward to the wide variety of technologies that have emerged in recent years and will emerge in the future.

The cultural industries owe their success, and in most cases their very existence, to advances in information and communications technology.  As each technology has been invented the artists and industries formed around those artists have opposed the new technology or any changes it might bring.  This has been true even when it is clear that the new technology will greatly benefit the cultural industry.

This round we don't have people claiming that our "vocal cord will be eliminated by a process of evolution, as was the tail of man when he came from the ape" as John Philip Sousa claimed about recording technology, but the emotion being expressed seems to have the same basis.  At least we are only taking about inappropriate taxes on technology, rather than even more harmful attempts to control ("technological measures" inappropriately added to copyright law) or outlaw advances in technology.

If we did a fair and full accounting of "who benefit from who", I believe it would easily be found that the cultural industry owe more to the technology industry than the other way around.  And yet it has been the cultural industry that has been allowed by government to demand compensation from, and in far too many cases allowed control over, the ICT industry.


It is not the amount of the money that is the issue, so this is not about a possible small increase in the costs of Internet access or Netflix media library subscription fees.

As a taxpayer I am quite willing to pay more in general taxes to all levels of government that flows into funding programs for the arts.

As a software author, system administrator managing Internet connected servers, and part of the ICT sector my entire career I am continuously offended by those in the cultural sectors who believe the ICT sector somehow owes them something because of some odd perception on their part that we wronged them.

This discussion only creates animosity between sectors that should be working together, and is an animosity that the Government of Canada (and specifically the department of Canadian Heritage) should be actively seeking to minimize  rather than inflame.  This animosity can only be detrimental to creating a cultural ecosystem in which Canadian artists, content creators and cultural entrepreneurs can thrive -- or any of the other stated goals of the consultation.

I've spent decades involved in the copyright reform process trying to protect the interests of independent creators including software authors.  While I find infringing copyright offensive, I understand how frustrated some in the ICT sector and many in the general public feel when this blame game crops up again and again.  I know that if the Heritage Minister approves a special tax/levy on the Internet that is directed to funding programs for Canadian creators that this will backfire through inducing more copyright infringement.  This perpetuates a vicious circle where the increased infringement will further be blamed on technology rather than on the harmful rhetoric as well as failed policies and business models of the cultural sector itself.

Note: I'm not suggesting every company in the ICT sector is innocent of harm to creators, but rather than Netflix and independent ISPs they should be going after companies like Bell, Rogers and Telus.

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