Zero is the New Thirty-Five: Netflix Dodges Foreign as Well as U.S. Taxes


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Last year we reported that the Netflix corporation had given itself the ultimate Christmas gift, using a stockNetflix Taxes option tax break to zero out every last dime of income taxes on its $159 million in US profits. Now there is at least circumstantial evidence that Netflix’s worldwide ambitions extend to manipulating foreign tax codes. An investigation by the Sunday Times finds that Netflix is booking all of its profits from sales to U.K. customers in a Luxembourg affiliate—which means that the company claims it’s not earning a dime from the $200 million of revenue it derived from U.K. customers last year. 

Which raises an important question: is there any evidence that Netflix is playing similar games with its U.S. revenue? Our 2014 analysis of Netflix’ US tax bills suggested that the company was zeroing out its taxes through domestic tax breaks cheerfully approved by Congress: $168 million in tax breaks for executive stock options and $32 million in research and development tax credits go a long way toward explaining the company’s low-to-nonexistent U.S. taxes. Since Congress just made the R&D tax credit a permanent feature in our tax code, lawmakers presumably think Netflix claiming this credit for its “research” is perfectly fine. 
But there are hints that Netflix is avoiding taxes in ways that Congress might not approve of. The company now has $29.2 million in “permanently reinvested earnings”- offshore cash that the company says it’s not bringing back to the U.S. And the company estimates that it would pay about a 35 percent tax on these profits if they were repatriated, meaning that they have paid about a zero percent tax rate on these profits so far. 

Where exactly are these profits being reported? It’s impossible to know, in part because the company refuses to disclose the location of all of its foreign subsidiaries. (In a footnote to its disclosure of three foreign subsidiaries, Netflix coyly notes that “the names of other subsidiaries…. are omitted” because they don’t represent a significant share of the company’s revenue at this time.) But if Netflix is doing what CTJ recently found two-thirds of U.S. multinationals doing—creating mailbox subsidiaries in beach-island tax havens like Bermuda and the Cayman Islands—then future Christmases may find Netflix dodging U.S. taxes in the much the same way it appears to be pursuing abroad right now. 



 

Last year we reported that the Netflix corporation had given itself the ultimate Christmas gift, using a stock option tax break to zero out every last dime of income taxes on its $159 million in US profits. Now there is at least circumstantial evidence that Netflix’s worldwide ambitions extend to manipulating foreign tax codes. An investigation by the Sunday Times finds that Netflix is booking all of its profits from sales to U.K. customers in a Luxembourg affiliate—which means that the company claims it’s not earning a dime from the $200 million of revenue it derived from U.K. customers last year. 
Which raises an important question: is there any evidence that Netflix is playing similar games with its U.S. revenue? Our 2014 analysis of Netflix’ US tax bills suggested that the company was zeroing out its taxes through domestic tax breaks cheerfully approved by Congress: $168 million in tax breaks for executive stock options and $32 million in research and development tax credits go a long way toward explaining the company’s low-to-nonexistent U.S. taxes. Since Congress just made the R&D tax credit a permanent feature in our tax code, lawmakers presumably think Netflix claiming this credit for its “research” is perfectly fine. 
But there are hints that Netflix is avoiding taxes in ways that Congress might not approve of. The company now has $29.2 million in “permanently reinvested earnings”- offshore cash that the company says it’s not bringing back to the U.S. And the company estimates that it would pay about a 35 percent tax on these profits if they were repatriated, meaning that they have paid about a zero percent tax rate on these profits so far. 
Where exactly are these profits being reported? It’s impossible to know, in part because the company refuses to disclose the location of all of its foreign subsidiaries. (In a footnote to its disclosure of three foreign subsidiaries, Netflix coyly notes that “the names of other subsidiaries…. are omitted” because they don’t represent a significant share of the company’s revenue at this time.) But if Netflix is doing what CTJ recently found two-thirds of U.S. multinationals doing—creating mailbox subsidiaries in beach-island tax havens like Bermuda and the Cayman Islands—then future Christmases may find Netflix dodging U.S. taxes in the much the same way it appears to be pursuing abroad right now.

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