“Netflix Tax” involves Portugal


The new fee is levied at an annual rate of 1% on “Relevant Income”.

A subscription to Netflix was one of the items that topped many Christmas wish lists in December 2020, in line with the trend of ever-increasing migration to digital entertainment. So it may not come as a surprise that global tax policy is trying to keep up with this shift.

The “Netflix tax” as it was labeled is coming to Portugal and other countries. It emerged as an amendment to the Cinema and Audiovisual Media Act that implemented the recast of the Audiovisual Media Services Directive (AMSD). The law had already imposed investment obligations as well as specific taxes and fees on media service providers in order to promote the development of the cinema and the audiovisual sector. The changes will create an annual subscription fee for on-demand audiovisual services for on-demand audiovisual service providers, namely video-on-demand (VoD) and streaming service providers (which include multinational giants Netflix, HBO, Apple TV and Amazon include) TV and Disney + as well as smaller European or national providers).

The inability of international tax law to keep pace with the evolution of the digital economy created an asymmetry that required states to step in and try to balance the tax burden of traditional industrial companies against digital services companies. Although the OECD and the EU have recommended harmonized and uniform solutions at the international level, the states have sought and implemented different solutions at the national level, even if this is necessary for the adoption of European guidelines.

The AMSD and the subsequent amendment to the Portuguese law on cinema and audiovisual media represent an attempt to find gradual solutions for the taxation of some digital services, while no agreement has been reached on the proposal for a Council directive laying down rules for business taxation must be a significant digital presence (proposal of the SDP Directive) and the proposal for a Council Directive on the common system of a tax on digital services on revenues arising from the provision of certain digital services (proposal of the DST Directive).

A closer look at the new fee for on-demand audiovisual services

The new fee is levied at an annual rate of 1% on “Relevant Income”. The law says nothing about what exactly “relevant income” might be and leaves taxpayers at a loss as to which tax base this annual rate of 1% applies to.

When the similar concept is envisaged for investment obligations, “relevant income” can mean the income generated from the provision of audiovisual commercial communication and subscription services or from related one-time transactions.

However, the law requires the tax authorities to adopt an annual tax base of EUR 1 million (US $ 1.21 million) if the relevant income cannot be determined.

The Legislative Decrees stipulating how and when operators must submit certified accounts to the Instituto de Cinema and Audiovisual, IP (ICA) (the Portuguese regulator) as evidence of their relevant income and how this fee is assessed, collected, paid, controlled and monitored, are still in the pipeline.

It is already known that if taxpayers fail to meet their tax obligations, the Portuguese tax authorities can follow the enforcement procedure established for the subscription fee * and initiate enforcement proceedings on the basis of a debt security issued by the ICA.

Another common feature of the “Netflix tax” and subscription fees is that all of their proceeds are allocated as separate revenues to the ICA and used to support Portuguese cinema, audiovisual and multimedia production.

Critical analysis against the background of European and constitutional principles

The framework of the new charging regime for audiovisual on-demand services remains unclear and needs further clarification.

First, the fact that the law does not contain information on “relevant income” is likely to prove a fertile ground for disputes.

Second, the true nature of this fee is unclear. According to the Portuguese Constitution in general and the so-called tax constitution in particular, taxes mostly adhere to the principle of solvency, while fees represent a consideration for a service provided by the state. The fee is levied on the taxpayer’s relevant income and could potentially qualify as income tax.

Third, the legitimacy of the presumption of a EUR 1 million tax base under the Portuguese Constitution and a poor legal workaround for omitting a key concept is highly questionable.

Tax presumptions should, in principle, only be admissible if they can be refuted by the taxpayer, otherwise they can be regarded as unconstitutional.

“Real” fees do not adhere to the principle of solvency, so to speak. However, the new fee for on-demand audiovisual services will tax relevant income, a defining characteristic of taxes, not fees under the Portuguese Constitution.

Finally, it is important to check how the fee relates to EU law. The AMSD makes the fee taxable in the receiving country, which violates the cornerstone of the AMSD, namely the country of origin principle. There is a twofold risk that this fee will result in an unacceptable distortion of EU fundamental principles (and an undue benefit to the content of the receiving countries) and double taxation, with the home country and the receiving country levying fees in relation to the EU the same / Services.

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* The subscription fee is provided for in the Cinema and Audiovisual Act and is imposed on providers of on-demand television services.

Conceição Gamito

Senior Advisor

Teresa Teixeira Mota

Senior associate

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