Netflix: Tax Affairs

Debate between Baroness Hodge of Barking and Jonathan Reynolds

Monday 3rd February 2020 Commons Chamber

[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.

[Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)]

I am very impressed with the case that my right hon. Friend is making. Like her, I have had conversations with companies that claim that intellectual property means there has to be adjustments in national tax rates, but if, as she is saying, the sales in this country are registered to a company in Holland, although the intellectual property is here and the company is based in America, it makes no sense at all and simply looks like an avoidance mechanism.

[Dame Margaret Hodge]

I agree: it is nothing other than an avoidance mechanism.

It should be borne in mind that Netflix depends on services that are funded by the taxpayer, such as our physical and digital infrastructure, which is in part publicly funded, our world-class universities and our highly educated workforce, and our NHS, which keeps its staff healthy. It takes from the public purse, but fails to pay its fair share back.

There is one simple solution to this injustice, and I should appreciate the Minister’s comments on it. Video streaming services must be included in the new digital services tax. At present they are excluded. Why? Why cannot the Government simply extend the provisions to include them?

The United States Secretary of State has threatened us with tariffs on our cars if we go ahead with the digital services tax, and I welcome the Government’s resistance to that threat. Fair taxation cannot be a bargaining chip to be cashed in to secure a trade deal. We must maintain our stance, and have no truck with the bully-boy tactics of the Trump regime.

There are plenty of examples of other countries taking action to claw back some tax from the streaming giants. The French levy a 2% tax, and the Brazilians not only get their withholding tax but have a 2% tax that covers online streaming services and is paid to the local government. There is a strong case for extending the digital services tax to include streaming services. The tax is “oven-ready”, as our new Prime Minister is fond of saying, and I urge the Minister to expand its scope to cover streaming sites so that we can fund our vital public services.

What is particularly galling is that Netflix actually makes a net profit from the UK taxpayer. In the last two years it has received nearly £1 million from the Government in tax credits, and that is just the start. According to its US accounts, it is ready to enjoy £218 million in tax credits worldwide. We do not know how much of that will be paid by the UK taxpayer, but we do know that Netflix has massively expanded its production network here, and has taken out a lease for at least 10 years on virtually the whole of the Shepperton Studios site. That implies that a huge chunk of our money—taxpayers' money—will be gifted straight into the coffers of Netflix in tax credits. It is nothing less than superhighway robbery. The UK taxpayer is being taken for a ride. We are actually handing over cash while Netflix stashes money offshore.

However, Netflix is far from the only culprit. Tax credit abuse is rife in other industries, including film and video games. Rockstar Games, the maker of the controversial Grand Theft Auto series, is one example. In the UK we have a thriving creative industry with large amounts of production happening here, and that is to be encouraged and celebrated, but the present rules are clearly absurd. Large, profitable companies like Netflix and Rockstar Games claim that no profit is made here, and, as a result, are simply making money on the back of the UK taxpayer. It is the worst kind of corporate welfare. Why, I ask the Minister, can we not adjust the eligibility criteria, and insist that any company that is enjoying tax credits must declare the revenue earned from its products created with those tax credits here in the UK? Why can we not make that a condition of the tax credits, so that we collect the tax?

Finally, if the Minister will indulge me, I want to talk very briefly about the role of the United States. These digital corporations are spurred on by the US Government, who, I believe, encourage such shady tax practices. As long as some taxes are paid in the US, the US Government do not care if American corporations use shell companies, offshore tax havens or other instruments. They are happy for them to avoid taxes in the UK and other jurisdictions around the world. In recent years, US-based multinationals have built up cash piles of more than £1 trillion in tax havens such as Bermuda. Since Donald Trump’s 2017 tax reforms, the US has claimed all that profit for itself for American headquartered companies. If the companies repatriate their income from the tax havens, the income that the companies receive from outside the US is charged at a much lower rate of corporation tax—just 13.12%. So the US has become a tax haven for the overseas operations of its multinational companies. That explains why, in December last year, Google decided that it was moving its intellectual property from Bermuda back to the USA. Why stash your cash offshore when the US itself has become the world’s largest tax haven? If companies choose not to repatriate their income, they are still charged a flat rate of tax of just over 13% on the revenue they hold and accumulate in tax havens.

An obvious way through this web is to lift the shroud of secrecy that surrounds the revenue and profits of multinational digital giants. That is why this Government supported a measure that would require companies to report their activities, their revenues and their profits on a country-by-country basis. We passed the law enabling country-by-country reporting in 2016. I ask the Minister: when will the Government bring that provision into force? Only with greater transparency will we know how much profit these digital companies make and where they should be paying their taxes. Only then can we ensure that every country gets a fair ride.

I accept that we need a new international consensus on the corporate tax regime. However, news from the OECD suggests that the United States itself is blocking progress on international tax reform. It is outrageous that the US is holding up international reform, threatening individual countries with new tariffs when those countries try to tax global companies, and then charging those global companies tax—albeit at a very low rate—on the business they secure and the profits they make outside the US.

The case of Netflix is a scandal. If we want to stop this abuse, we can. The Government can be assured that such action would command the support of the whole House, but failure to act represents a betrayal of every law-abiding taxpayer. If the Government fail to take the practical actions that I have suggested, I know that I and others will not remain silent.