According to Netflix’s latest UK filings, the video-streaming service saw close to a 40 percent decrease in its UK tax bill from 2015 to 2016 – and it seemingly paid taxes on just a small fraction of its total UK revenues. This has raised the eyebrows of both politicians and civil society groups alike, with many suggesting that the company may be reneging on its tax obligations.
Netflix, which is based in the UK, has an estimated 6.5 million subscribers in the UK alone. However, it books the revenues from these subscribers – upwards of £580 – through Netflix International, its Netherlands-based parent company. The actual revenue that Netflix reported in the UK was just a small proportion of this amount, and all of it was generated from marketing activities.
“In 2016, our UK entity reported €22m revenue and €21m operating expenses on marketing activities, with a profit before tax of €1m and an income tax charge of €269,000,” a Netflix representative said in response to the allegations, pointing out that that translates into an effective tax rate of roughly 27 per cent. “Netflix is contributing to the UK economy in many different ways, including corporate and other taxes, remitting millions in VAT, employing staff directly and funding dozens of UK productions for hundreds of millions of pounds.”
However, many have been quick to point out that this model of taxation isn’t equitable, as when companies divert their profits to lower tax jurisdictions, it deprives the public coffers of revenue. Several politicians, including Liberal Democrat leader Vince Cable, have argued that this is just another way for major companies to get around UK tax regulation.
“Tax liabilities are not a function of the profits that they make on their UK-based sales,” Jolyon Maugham, a UK lawyer specializing in tax, explained to the Financial Times last month. “This illustrates how divorced our corporate tax system has become from the world in which it is supposed to operate. You have a tax system that only nods in passing to the activities taking place.”
So, what’s the solution? Increasingly, courts are cracking down on tax evasion, as illustrated in the now-famous case in which Ireland was forced by the European Commission to collect tens of millions of back tax from Google. Many have argued that there needs to be systematic reform to address the issue, suggesting that companies be taxed on activity within a jurisdictions as opposed to just profits.