Does Netflix Subtraction Require Tax ?

Netflix is one of the world’s largest and most popular content streaming platforms, with over 169 million users. With total revenue of $4 Billion, one expects Netflix to pay taxes in millions. But, just like other major Silicon Valley Companies, Netflix paid $0 Tax in the U.S. in 2018.

Senator Sanders has been very vocal about his feelings towards the loophole exploiting companies. Bernie said, “$8.99 Netflix subscription is more than the company paid in federal income taxes last year (nothing),“. If that wasn’t enough, Sanders also lashed out at tech behemoth Amazon for avoiding taxes.

Online content streaming services like Netflix and Amazon prime are considered Luxuries in India. The ‘Netflix Culture’ is getting mainstream day by day. Netflix India had revenue of INR 466 Crores in the fiscal year 2019-2020. If trends continue, India could be Netflix’s biggest market. These companies have been using legal loopholes to avoid taxes.

How Are Countries Taxing These Companies?

Although slashing the Corporate Tax seems the obvious and go-to choice on paper, Netflix’s case in the U.S. suggests otherwise. Reducing corporate Tax from 35% to 21% didn’t work for the U.S. as companies always found a buffer around it.

According to several Senior Senators, Corporate Taxation has been an ongoing issue for a long time. But this is changing, and several countries are coming down hard on these loopholes. France introduced a ‘Digital Service Tax’ under which a flat 3% tax will be levied on Tech companies doing business in France. Sounds Familiar? Because it is, India levied a ‘2% Equalization Tax’ on any tech/digital company doing business in India.

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How Did Netflix Do It?

In 2018, Netflix posted a profit of $845 million. Rationale governs that Netflix should pay $177 million, i.e. 21% in Taxes, to the U.S. Government. Like major Silicon Valley Tech Giants, Netflix has been using legal loopholes to avoid taxes.

The U.S. Government has a ‘Double Taxation Treaty’ with several nations to protect the interests of the companies. These treaties allow companies to claim a ‘Tax Rebate’ if they have already paid taxes in other nations.

Netflix used this loophole to its advantage. Not only it benefited from the Double Taxation Treaty, but it also claimed Tax Rebate for future ‘Tax Purposes’.

According to the 10-K Report mandated by the U.S. Securities and Exchange Commission, companies are allowed to provide tax income information that is geographically specific. Unsurprisingly Netflix’s ‘Foreign Tax Provision’ of $133 million was close to the $131 million Tax paid by Netflix.

Netflix ‘cruising’ On Tax Havens

Apart from the ‘Double taxation treaty’, Netflix has been recently accused of using Tax Havens like the Netherlands to further save on taxes. If news reports are to be believed, Netflix moved around $330 million into tax havens. According to reports, only 4 million euros were paid to the Dutch, while Netflix used 3 B.V. accounts to transfer money.

Using safe havens to save on taxes has been a major business practice for a long time. The Cruise industry has also been avoiding taxes in the U.S. for decades. Most famous companies have been registered in tax havens like the Bahamas, Malta, and Panama for Tax-Deferring reasons.

Why Do Tax Revenues From Online Companies Matter So Much?

India is the second most populous country in the world. We have the highest number of growing middle-class people. These important Socio-Economic traits have made India a huge market for global corporations.

Companies like Amazon, Facebook, and Netflix spend millions on marketing their products to India’s novel consumer base. Netflix’s subscriber count has risen from 1.2 million to 2 million in just one year. If the trend continues, India will soon overtake U.S. subscribers, i.e. 60 million. Hence, It will become very important for India to extract tax revenues from digital companies.