The curious case of Netflix in India

US streaming platform Netflix could face tax in India after the Income Tax Department (“ITD”) seeks to tax Netflix Inc’s income from streaming services in India, one of Netflix’s most important markets.

The ITD asserts that Netflix has a permanent establishment (PE) in India and as such, any income generated in India is subject to tax in India.

Under Article 5 of the double taxation treaty between India and the United States of America, a PE is defined as “a fixed place of business through which the business of an enterprise is wholly or partly carried on” and includes, inter alia, a place of management, a branch, an office or the rendering of services, other than included services as defined in Article 12 (Royalties and Fees for Included Services), in a Contracting State by an enterprise through employees or other agents, but only if:

• activities of this nature continue in that State for a period or periods totalling more than 90 days in any twelve-month period; or

• the services are provided in that State for a related enterprise (within the meaning of paragraph 1 of Article 9 (Associated enterprises)).

According to ITD, Netflix has Netflix Inc. employees and infrastructure on secondment in India to support its streaming services, leading to a PE in India, which in turn creates an obligation for taxes on income generated in India by the PE.

According to press reports, ITD has attributed Netflix PE income of Rs. 550 million (€5.96 million) for the assessment year 2021-2022 in its draft decree.

If ITD goes ahead, it would be the first time the government has sought to tax foreign digital companies for providing e-commerce services to India. India has, however, made clear its ambition to regulate the digital economy and ensure that foreign companies pay taxes on the income they earn in the country in recent years, and has been discussing the introduction of a digital tax for some time now.