Does Netflix not pay taxes?

Does Netflix not pay taxes?

The topic of large companies not paying US taxes has been coming up a lot recently. Netflix has been in the limelight concering that a view times. So what is really the truth behind the idea, that the streaming giant does not pay or not sufficiently pay taxes?

First we have to talk about how speculation about Netflix not paying taxes or certain taxes even started. It all started in 2017, when Congress (led by a Republican majority) passed the Tax Cuts and Jobs Act. What that led to, was a decrease in the corporate tax rate from 35 percent to 21 percent.

In 2018 this law was in effect the first time, with companies benefiting in 2019 for the first time. The average yearly tax refund (that companies get the same way privat citizen get it) of $1,865 was 8.4 percent smaller than the average refund the year before.

What we know about Netflix’ income tax

Now in 2019, the Institute on Taxation and Economic Policy (ITEP), a non-partisan tax policy think tank, wrote the following:

“The popular video streaming service Netflix posted its largest-ever U.S. profit in 2018­­ — $845 million — on which it didn’t pay a dime in federal or state income taxes. In fact, the company reported a $22 million federal tax rebate.”

Matthew Gardner, ITEP, in february 2019

It has to be said, that it’s not a clearcut thing to deduce how much income tax Netflix, or any other company, pays in the USA. Because there is no law forcing them to make this information public.

So what information do we have?

There are two main sources: Typically, a publicly traded company gives an annual report to it’s investors. Besides that, there is the so-called 10-K. A comprehensive report required by the U.S. Securities and Exchange Commission (SEC). This is a far more detailed report than an annual report, which also gives current tax provision figures.

So what does Netflix’ 10-K report say?

They had a profit of $845,402,000 in 2018 and tax rebates of $22,176,000 at the federal level and $10,234,000 at the state level. There is also a foreign tax provision of $133,146,000 — which tracks pretty closely to the $131 million amount given by Netflix.

So, Netflix paid more than $131 mio in foreign taxes in 2018 (about 15.5% of its income) but didn’t do the same in the US. In the US, it is possible for companies, to claim a tax credit on foreign earnings. This makes sense of course, because otherwise you would be taxed twice.

So the real issue is not that Netflix didn’t pay any income taxes, but that even though they are a US company, that money didn’t make it to the US.

So what does Netflix actually say about that?

Sarah Jones, Netflix’ spokeswoman, gave this statement:

“We do not disclose the US specific figure we paid. The amount of cash taxes we pay, which we disclose as $131 million (total), is not the same as the provision for taxes [money the company forecasts it will spend on taxes].”

Sarah Jones, Netflix’ spokeswoman

It’s not just Netflix, who doesn’t pay US income tax

Obviously, Netflix isn’t the only US company that is not paying a lot or any US income tax. Last year, there were 60 companies, among them Netflix competitor Amazon.com. Even though Amazon.com has made $11.2 billon in 2018, they have not payed any federal tax on its US income. According to Amazon.com the reasons are deductions for stock-based compensation and assets that are depreciating in value.

However for state taxes, Amazon’s has paid about 2.9 percent. Like with Netflix it is kind of hard to find out the whole picture, but the clues show similar things between those two companies.

According to Amazon they have invested more than $160 billion in the United States. These investments include things like building their distribution network for their packages (which has improved consistently in the last couple of years). And another huge part of their US-investments has been digital infrastructure, such as setting up complex cloud computing servers.

On compareyourcountry.org you can see that the US have very low income taxes and revenues through income taxes compared to many other first-world countries.


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