Netflix’s Tax Payments Only Account for 0.3% of Its Revenue

On January 22, 2021, The Guardian reported that Netflix, the renowned U.S.-based streaming giant, generated £940 million in revenue in the UK in 2019 but paid only £3.2 million in corporate taxes—just 0.3% of its revenue. Does this mean Netflix is engaging any tax avoidance? If so, how did they manage to do it?

I. Netflix UK Paid £77 Million in Service Fees to Netflix Netherlands

As professional international tax experts, we cannot jump to the conclusion that a low tax-to-revenue ratio automatically implies tax avoidance. A company’s large turnover doesn’t necessarily equate to high profitability. A prime example is Elon Musk’s Tesla: it only became profitable in early 2021 after years of sustained losses. However, Netflix CEO Reed Hastings runs a more stable ship compared to Musk, and Netflix has been consistently profitable with decent profit margins.

In 2019, Netflix’s global pre-tax profit margin was 10.2%. Assuming Netflix UK’s profit margin was in line with the global average, its corporate taxes should have been £18.2 million instead of £3.2 million—a difference of more than five times. This raises suspicions of tax avoidance, but we need to delve deeper to avoid unfair accusations.

Upon investigation, Netflix UK paid £77 million in service fees to Netflix Netherlands in 2019, resulting significant decrease in profits and taxes. If Netflix UK had not paid this service fee, its corporate tax liability would have increased by £14.63 million (£77 million x 19%, the UK corporate tax rate in 2019), bringing its total tax liability to £17.83 million. This figure is just £400,000 shy of the £18.2 million we estimated earlier, confirming that the service fee is the main culprit.