Media furore over corporate tax targets Netflix

The media’s obsession with companies and the effective rate of tax they pay knows no bounds. Its latest target, is Netflix. The fourth estate must remember that it is it important to distinguish between the delivery of content to users on the one hand and the physical activities that are taking place in the UK on the other hand. It also shouldn’t take the mind of a Jedi Knight to understand that when Netflix pays hundreds of millions of dollars for American made shows such as Friends and Seinfeld, part of the UK subscriptions are due to the US.

Claims that Netflix achieves its tax efficient structure as a result of a complex corporate arrangements are nonsense. There are parts of the structure that are, of course, complex (tax is by its nature complex), but Netflix is a U.S. business, headquartered near San Francisco and listed on the NASDAQ. The service it sells is an intangible. It doesn’t require a physical place on the high street where customers can buy their products, nor “fulfilment centres” with a fleet of delivery vans clogging up the roads.

Freebie’s from the UK

Reporters also have to realise that Netflix is making use of two tax breaks given by the UK, the first of which goes against the international standard. Netflix’s UK customers contract with Netflix BV, a Dutch company that uses UK based servers to provide its streaming services. The guidance from the OECD makes clear that these servers may be taxed as if they were the same as an office or shop selling physical goods, but the UK has opted out of this system. It has decided not to tax the UK profits of Netflix BV.

It is almost certainly this guidance from the OECD’s that is Italy’s basis for taxing Netflix. They will be able to tax the profit Netflix makes from supplying its programmes to Italians. Although, as Netflix will be able to deduct the relevant proportion of those hugely expensive US programmes from the bill, the Italian profits may not be as big as Italy hopes. Still more than the UK has decided to tax though.

Another approach is the one taken by the French. They have a levy upon video and DVD rentals in order to support their domestic film industry. With the decline of the video and DVD rental industry (Blockbuster anyone?) the levy was extended to streaming services such as Netflix and Youtube in 2017. This is set at 2%, but it does seem to have caused them to be exempted from the French Digital Services Tax (and as that is 3%, they have a saving!)

Even more goodies from the Government

The activities of the UK company that provides customer services to the UK market are separate, taxed accordingly and led to the ire of the mainstream media. Again, this is misplaced as Netflix is complying with a Government initiative to bring investment into the UK.

The UK has a very successful incentive for the film and TV industry, supporting 132,000 jobs and yielding £2bn in tax in 2016, according to the BFI. The films and TV tax reliefs allow companies that make films and programmes in the UK to double many of their production expenses and, if that results in a loss, the company can sell them to the Government for a tax rebate.

Is it any wonder that with double expenses, Netflix has been able to claim some tax back? Also, as Netflix has committed to spending £232mn on Shepperton Studios and has spent over £400m on producing shows in the UK in the past 9 months, with undoubtedly more to come, I wonder what the headlines will be next year? Will they mention the 25,000+ plus jobs created by the company, the taxes paid by those people, the investment in the UK or that the low tax rates are due to tax breaks promoted by the UK and supported by the BFI, or will they harp on that Netflix has not paid their “fair share”?

Give with the left and take with the right

So, the issue is striking the right balance. On the one hand does the UK want to tax businesses and individuals based upon some nebulous concept of “fair” taxation, that changes depending on what mood the newspaper editors are in, or does it accept that in this digital age companies can choose from where they supply their services and instead settle for foreign investment from the likes of Netflix, Google and various others, all of whom, for the time being at least, see the UK as a stable, vibrant place to do business.

Sadly, it appears the Government hasn’t worked this out yet, with the tax reliefs mentioned above promoting the UK for digital companies, then the Diverted Profits Tax and the Digital Services Tax hitting them. We await the next headline to inform Government policy.

Miles Dean is Head of International Tax at Andersen Tax in the United Kingdom. He advises privately held multinational companies, entrepreneurs and high net worth individuals on a wide range of cross border tax issues.
www.andersentax.co.uk