Netflix is one of the world’s largest and popular content streaming platform 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 has paid $ 0 Tax in 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.
The online content streaming services like Netflix and Amazon prime are considered a Luxury in India. However, the ‘Netflix Culture’ is getting mainstream day by day. Netflix India had a revenue of INR 466 Crores in the fiscal year 2019-2020. If the trends continue, India could be Netflix’s biggest market ever. Still, these companies have been using legal loopholes to avoid taxes.
How are countries Taxing these companies?
Although on paper, slashing the Corporate Tax seems the pretty obvious and go-to choice, 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 buffer around it.
According to several Senior Senators, Corporate Taxation has been a continuous issue for a very long time. But this is changing, 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.
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. Just like major Silicon Valley Tech Giants, Netflix has been using legal loopholes to avoid taxes.
The US 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 provides tax income information that is geographically specific. Unsurprisingly Netflix’s ‘Foreign Tax Provision’ of $ 133 million was pretty 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 Netherlands to further save on taxes. If news reports are to be believed, Netflix moved somewhere around $ 330 million in tax havens. According to reports, only 4 million euros were paid to the Ducth, while Neflix used 3 BV 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 US for decades. Most of the famous companies have been registered in tax havens like 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. On top of that we are among the youngest nations in the world. These important Socio-Economic traits have made India a huge market for global corporations.
Companies like Amazon, Facebook and Netflix are spending 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.