Hodge damns Netflix for ‘dodging’ taxes

7 Feb 2020

Labour MP Dame Margaret Hodge secured and opened a debate in the Commons about Netflix, having spent the last decade campaigning for more corporate transparency. She is currently angry with Netflix because she says it deliberately ‘dodges’ its corporation tax bills while receiving money from the public coffers through the high-end television tax relief. In the last two years it has received nearly £1 million from the Government in tax credits and, according to its USA accounts, it is ready to enjoy £218 million in tax credits worldwide. The UK makes up 14 per cent of Netflix’s non-US market.

Dame Margaret – who is chair of the All Party Parliamentary Group for Responsible Tax - gave a lengthy explanation. She explained that Netflix creates content in the UK, supported by grants that it receives here through the UK’s tax credit system, yet it pays tax on the profit that it makes here in the USA. Netflix’s global operating profit rose by an ‘enormous’ 61 per cent last year to £2 billion. By 2019, Netflix had 11.62 million UK subscribers, who generated a £1.08 billion income, but she explained ‘under the ruse it employs’ any UK citizen who subscribes to Netflix is billed not in the UK but from a subsidiary company in the Netherlands. Money declared by Netflix in the UK is paid by the Dutch subsidiary to a much smaller subsidiary based in Britain, which makes up just a trivial proportion of the services the company provides. Tax Watch UK estimates that the actual profit Netflix made in the UK was close to £70 million in 2018, so the company should have paid over £13 million in corporation tax, she said. From the publicly available data and translating that data into pounds sterling, she said 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, she added. Over 90 per cent was paid by the Netherlands-based company and went to Brazil, where the authorities use a withholding tax to extract money. Much of Netflix’s IP is created in the UK and funded in part by the taxpayer through tax credits so the case for taxing it here in the UK is irresistible, she charged.

Netflix depends on services that are funded by the taxpayer, such as our physical and digital infrastructure, our world-class universities and our highly educated workforce and the NHS, which keeps its staff healthy, Dame Margaret reminded MPs.

Her solution is that video streaming services must be included in the new digital services tax. At present they are excluded. On possible US retaliation, she said fair taxation cannot be a bargaining chip to be cashed in to secure a trade deal. She said other countries are taking action.

Netflix has massively expanded its production network in the UK 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 taxpayers' money will be gifted straight into the coffers of Netflix in tax credits, she speculated, branding it ‘nothing less than superhighway robbery’. Drawing her net wider, Hodge suggested that tax credit abuse was rife in other industries, including film and video games. Hodge suggested the UK 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.

The veteran MP complained that the US allows companies to repatriate their income from tax havens at a corporation tax rate of just 13.12 per cent. She suggested the US itself has become ‘the world’s largest tax haven’.

Dame Margeret said one way forward was for the Government to bring into force a law already passed in the UK in 2016 enabling country-by-country reporting. “Only with greater transparency will we know how much profit these digital companies make and where they should be paying their taxes.”

She closed by stating the need a new international consensus on the corporate tax regime, but said it was ‘outrageous’ that the US was 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.”

Shadow Treasury Minister Jonathan Reynolds said he was impressed by Dame Margaret’s case. He had heard companies claim that intellectual property means there has to be adjustments in national tax rates. But, he said, the Netflix sales in this country are registered to a company in Holland, although the intellectual property is here in the UK and the company is based in America: “It makes no sense at all and simply looks like an avoidance mechanism”.

Labour’s Wes Streeting said the passage of time since many of these arrangements were agreed and the prevalence of the problems today suggest that international action has not been sufficient.

DUP’s Jim Shannon said that last year Netflix UK subscribers paid some £700 million which makes the company’s use of loopholes to avoid tax ‘simply disgraceful’.  However, Ian Paisley, also DUP, said in the last year, Netflix has invested more than £400 million in the UK, creating 25,000 jobs and productions, and has recently been driving the pioneering agenda of encouraging women into television and film making.

Financial Secretary to the Treasury Jesse Norman replied that many of Dame Margaret’s wider concerns are shared by MPs across the Commons. Norman said revenues alone are not a useful indicator of the amount of tax that a business should be paying in the UK but he accepts that some multinational businesses have sought to avoid paying their fair share of tax in the UK by entering into contrived arrangements to divert profits to low tax jurisdictions. He spoke glowingly of the UK’s leadership in tackling tax abuse, citing the BEPS project recommending a range of measures to combat tax avoidance. The Government has also acted unilaterally, he said, such as in 2015 when it enacted the diverted profits tax and a tax charge on offshore receipts in respect of intangible property (ORIP) in 2019.  He supports strongly further work that is being undertaken at the OECD to reform profit allocation rules to ensure that market economies can tax a fair share of the profits of highly digitalised businesses.

The effect of the tax reliefs cited by Hodge was to help cement investor confidence in UK creative skills, infrastructure and innovation, the minister said. He said the UK’s ‘world-famous’ creative industries made a record contribution to the economy in 2017 by breaking through the £100 billion mark. The UK film industry exported a record £2.6 billion-worth of services in 2017 and employed over 90,000 people across the UK in 2018, he said.

On IP, Norman said that, under international tax rules, the UK is entitled to tax the shares of a company’s profits that relate to those production activities. On IP, he claimed the effect of the ORIP rules is to replicate the effect of a withholding tax where IP is held in low-tax territories.

The full 3 February2020 debate is here.

By Hamant Verma