News that film-streaming giant Netflix is being investigated by HMRC might be seen as another example of US tech giants being caught out after bending the rules. After all, the critics say, with UK revenues of £23.9m and profit before tax of £1.1m, there must be something wrong. As ever, it’s dangerous to rush to judgement. So what are the issues?
Netflix is thought to have around nine million UK subscribers who can choose subscriptions of £5.99, £7.99 or £9.99 per month. At an average of £7.99, it looks as though the company might generate revenues from UK customers in the region of £860m per year. That’s a lot of episodes of House of Cards.
But in a twist which the Underwoods would admire, perfectly legal arrangements between Netflix UK and its Netherlands parent company mean that most of its profits could legitimately be attributed to the Dutch company. We can be sure that HMRC will be scrutinising the these arrangements to make sure they are not contrived and that a fair transfer price is used. It’s not as if this is an unusual issue from the perspective of the UK taxman. After all, at any given time HMRC is running enquiries into around half the UK’s largest companies. That’s normal.
It's also normal that those enquiries are triggered by HMRC’s assessment of the tax risk posed by a company. As Jim Harra, the HMRC board member who oversees all large tax settlements, told the Public Accounts Committee last week, the automatic receipt of tax data from other countries under country-by-country reporting, has made it somewhat easier for HMRC to get its hands on the information it needs, but that only makes a marginal difference to the selection of investigation targets and to the outcome of those investigations.
Only time (and the published accounts of Netflix) will tell whether this enquiry generates more tax for HMRC. For now, Netflix is keen to remind us of its massive investment in content generation, with more than 20,000 people working on Netflix productions in the UK.
So what’s remarkable about the Netflix tax enquiry? Three things, really.
First, it’s a reminder that the international community has failed to agree on a uniform, global basis for taxing global tech companies. In the absence of agreement, low-tax legal structures are available and will be used. If governments don’t like that, they should change the law.
Second, tax initiatives such as the EU’s attempts and the OECD BEPS project are stalling, with countries such as the UK and Australia increasingly 'going it alone' until there is international agreement.
Third, with the rise of populism, democratically elected governments are increasingly preoccupied with domestic matters so must give less time and attention to knotty problems such as the allocation and taxation of big-tech profits in specific jurisdictions. How ironic, given that many populist movements profess themselves unhappy with the way big companies are taxed.