Netflix: Tax Affairs

Debate between Baroness Hodge of Barking and Ian Paisley

Monday 3rd February 2020 Commons Chamber

[Dame Margaret Hodge]

Not only should they be making their fair contribution, but they use the services that other people’s tax pays for.

Netflix creates its content here, supported by grants that it receives here through our tax credit system, yet it pays tax on the profit that it makes here in the USA. Frankly, I say to the Minister: you couldn’t make it up. The situation is scandalous, intolerable and unfair. It is the sort of behaviour that really winds up the British public, most of whom are law-abiding taxpayers who never try to avoid their duty to pay taxes.

Let me explain the Netflix situation in detail. Netflix is the world’s biggest video-streaming service, with 167 million subscribers. The California-based company is the online home of popular shows such as “The Crown” and “House of Cards” and films such as “Marriage Story” and “The Irishman”, but while we all binge-watch Olivia Colman’s portrayal of the Queen Netflix has deliberately constructed a devious financial structure that has no other purpose than to avoid paying its tax.

The Netflix strategy is to be the biggest player in the online video streaming market, to buy out or undercut any rivals and to release a sea of content to attract a truly global subscriber base. For many years, the service ran at a loss to secure this dominant market position, but it is now operating in the black. Netflix’s global operating profit rose by an enormous 61% last year to £2 billion. By 2019, Netflix had 11.62 million UK subscribers, who generated a £1.08 billion income for the company, but under the ruse it employs any UK citizen who subscribes to Netflix is billed not in the UK but from a subsidiary company in the Netherlands.

The most recently published Netflix accounts for 2018—the only earnings declared here—amount to a very small proportion of its billion-dollar UK revenue. Money declared by Netflix in the UK is paid by the Dutch subsidiary to a much smaller subsidiary based in Britain, which makes up just a trivial proportion of the services the company provides. Tax Watch UK estimates that the actual profit Netflix made in the UK was close to £70 million in 2018, so the company should have paid over £13 million in corporation tax.

[Ian Paisley (North Antrim) (DUP)]

I appreciate the points the right hon. Member is raising about complex financial issues, but does she accept that the traffic is not all one way? In the last year, Netflix has invested more than £400 million in the UK, creating 25,000 jobs and productions, and has recently been driving the pioneering agenda of encouraging women into television and film making.

[Dame Margaret Hodge]

I am all for encouraging Netflix’s growth here, but I am afraid that that in no way mitigates its refusal to pay its fair share of tax.

Where Netflix’s UK profits do end up is a complete mystery. It uses a shady system of subsidiaries and shell companies based in tax havens to shift its profits and avoid paying its fair share in many jurisdictions. From the publicly available data and translating that data into pounds sterling, it looks as if between £251 million and £329 million of non-US profit was shifted into tax havens from the Netherlands. Netflix did pay some tax on profits. Ironically, over 90% was paid by the Netherlands-based company and went to Brazil, where the authorities use a withholding tax to extract money. Is it not astounding that Brazil is more efficient at collecting tax from digital companies than we are? If Brazil can tax Netflix, why can’t we?

The UK makes up 14% of Netflix’s non-US market. We provide a vital consumer base for Netflix, and much of its content is created here, so the intellectual property on Netflix’s product is developed here in the UK. Google always argued in the past with me that it should not pay tax in the UK because its intellectual property was developed in California. If that argument has any credibility, given that much of Netflix’s intellectual property is created here and funded in part by the taxpayer through tax credits, the case for taxing it here in the UK is irresistible.