Netflix, tax reform and the unreal nature of digital taxation

by | Dec 8, 2020

Netflix, tax reform and the unreal nature of digital taxation

Netflix has announced that it will be reporting the billions of pounds of revenues it gets from its European customers to their local tax authorities. In the UK, customers have received an email telling them they will now be billed by Netflix Service UK.

In making this move Netflix is the latest in a line of digital companies that have changed their structures to ensure that more revenue is declared to local tax authorities.

In each case where a company has changed their practices, it has come after pressure from the public and tax authorities.

Netflix is no different, the move comes after the company has come under increased scrutiny by organisations like TaxWatch, UK Parliament, and a number of European Tax Authorities.1 2 This includes in the UK, where Netflix has disclosed that its previous tax returns are under examination,3 and in Italy, where the company is the subject of a criminal investigation.4

So what does this all tell us about the tax structures employed by large digital companies and the process of tax reform and tax collection in the digital sector?

Digital services and distance selling

The argument often made is that digital companies have changed the way business and business tax works because they can provide their services from overseas in a way that is not possible with the exchange of physical goods.

This distance selling model has been a common feature of the tax structures employed by a numerous multinationals operating in the so called digital space, including well known companies such as Google, Facebook, and Amazon.

This has been the model applied by Netflix. As detailed in our report from earlier this year, Netflix has billed all its international customers from a company in the Netherlands, and not declared that income to local tax authorities in the UK and other European countries.

The model relies on long established rules of international taxation, which say that a government can only tax the profits of a company that is based overseas if they operate via a “permanent establishment” in the country. By selling their goods and services from outside the jurisdiction, it is hoped that the country where the customer is based loses the right to tax profits made by the seller.

Although this model may have some effect in smaller economies, for large economies like the UK, this argument has always been slightly problematic.

Amazon, Netflix, Google, Facebook and other large US multinationals all have a significant presence in the UK. Google has built a London HQ with 7,000 staff at Kings Cross. Facebook has 23,000m² of office space in Central London. Netflix has a long term lease on Shepperton Studios and does large amounts of production in the UK. All own companies that are incorporated in the UK.

Under the traditional distance selling model, these local UK companies have no sales to UK customers. They simply provide services to a non-UK unit of their parent company. The amount that the UK company charges for the services provided is reimbursed at relatively low rates, meaning that little profit arises in the UK.

This structure is designed to preserve the idea that the Irish or Dutch company billing the customer is an independent entity with no physical presence in the UK, and so the UK has no rights to tax any profits on sales.

Distance selling in practice

A key question for tax authorities is whether these structures operate in practice as they do on paper.

One of the early pioneers of the distance selling model was not a digital services company, but Amazon, which grew as an online bookseller. When you buy something from the website, you are buying from a company called Amazon EU S.à r.l. in Luxembourg, which then contracts with a company in the UK, Amazon UK Services Ltd, to “fulfil” the order.5

Amazon’s argument from a tax point of view was that the Luxembourg company that made all the sales, should be viewed as being entirely separate from the UK company which fulfilled the order, other than the contract between the two.

However, this was not how the company in fact operated. In 2013, Lush, the cosmetics company, sued Amazon for breach of copyright.6 Part of the argument deployed by Amazon in the case was that Amazon UK and Amazon EU were two entirely separate companies, which meant that Amazon UK should not be a party to the action.

Having examined the evidence of how the company worked in practice, the judge found that the two companies worked together in furtherance of a common plan, and that the idea that Amazon UK merely facilitates Amazon EU to be: “wholly unreal and divorced from the commercial reality of the situation.” 7

As outlined by academic Claire Quentin, the findings of fact in this judgment undermined the entire basis of Amazon’s tax planning, although it appears that little was done by tax authorities at the time to reclaim any taxes on this basis. 8

Pressure for change starts to impact on tax structures

Amazon did start to change its structure after that judgment, but for unrelated reasons.

In 2015, the UK government imposed the Diverted Profits Tax, which placed an additional charge on profits shifted out of the country. In 2015 Amazon responded to this via the establishment of a UK branch of its Luxembourg company that would file a tax return in the UK and account for sales from UK customers.

In 2016, after years of public pressure that criticised Facebook’s practice of billing its companies from Ireland, the company started to book sales from larger clients in the UK via its UK subsidiary. At the time, the reason given by Facebook itself was that for larger clients, its UK sales team were already responsible for making the sale.

Both of these examples raise questions of whether or not the distance selling model was ever in fact effective in the countries where the company operated a sales infrastructure. If Facebook staff located in the UK were booking sales to large clients based in the UK, what possible reason did they have for sending an invoice from a company in Ireland? Is it really possible to separate the sales and marketing function from all the infrastructure required to deliver a product?

The impacts of structural change

Although changes to corporate structures, ensuring that revenue raised in a country is reported to local tax authorities, is a more transparent way of operating and so welcome, it does not necessarily follow that there will be huge increases in corporate tax as a result. In order to increase the tax base, the underlying avoidance behaviour needs to be tackled. This is why in the past, TaxWatch has proposed imposing income tax on royalties paid by digital companies to tax haven entities.

In 2015, Facebook UK had a current tax charge of £4m. Despite revenues jumping from £211m to £842m the following year, the company’s current tax charge increased to just £5m.9

We do not know how much tax Amazon EU pays in the UK after it started declaring revenuesto HMRC in 2015, as the company does not publish its accounts on a country by county basis. However, as a whole, Amazon EU S.à r.l. does not it seems pay any corporation tax at all – in fact the company receives tax credits from governments.

All this means that even though Netflix Services UK will see its revenues increase next year by hundreds of millions of pounds after it starts to bill its UK customers, that is no guarantee that this will flow through into higher profits declared in the UK.

In fact, as we have pointed out, Netflix has substantial operations in the UK that qualify for UK film production credits. These credits can be offset against any profits that the company makes in the UK.

The European approach

Whilst the UK has generally looked at the distance selling model deployed by digital companies as an avoidance issue, and responded with new anti-avoidance rules to capture the avoided tax (like the Diverted Profits Tax), European tax authorities have taken a different approach to the very same issues.

In France, tax authorities opened an investigation into fraud after it alleged that Google had failed to declare activities in the country. Google settled the matter and paid a fine of €965m.10

In Italy, Italian prosecutors are currently investigating whether or not Netflix is guilty of tax evasion through the non-declaration of revenue from its Italian subscribers (because until now, that revenue has been declared in the Netherlands). The case is interesting in that it asks whether the physical infrastructure that Netflix owns to deliver content to its subscribers (including servers and cables) means that it is in fact trading via a permanent establishment.11 Netflix has until now not had an office in Italy.

These cases demonstrate how different tax authorities around the world can look at the same problem and take a very different view over the approach to take, including what legal remedies to employ in order to combat suspected tax avoidance.

Tax Reform

When Google settled its dispute with the French Authorities, the company made a statement which said:

“We remain convinced that a coordinated reform of the international tax system is the best way to provide a clear framework to companies operating worldwide.”12

It may well be the case that tax reform is necessary in the digital sector to make the administration of taxation easier. There also may be tax policy reasons why governments would want to reform the tax systems to require a different apportionment of income between countries.

However, the need for tax reform has often been used as an argument that the tax system is unable to capture the income of multinationals today, and that we live in some new world unforeseen by current tax law.

This narrative can suggest to the public that governments are unable to levy taxes until reform materialises, and that they should overlook any sins of the past.

However, as has been demonstrated by the various actions taken by governments with regard to the distance selling models used by digital companies, tax authorities can often do more than people may think when they take a detailed look at the commercial reality of these schemes and testing them against their current tax law. On top of that, public pressure works, as has been demonstrated by the way that changes to company tax structures have often followed public pressure. All of this can be done without the need to wait for international tax reform, and given the slow nature of that process, continuing scrutiny of the tax affairs of multinationals by tax authorities and the public is essential.

Photo by on Unsplash

1 Netflix tax affairs debated in the House of Commons, TaxWatch,

2 Parliament forces Netflix to respond to TaxWatch research, TaxWatch,

3 Video streaming giant Netflix faces new probe into how it escapes UK tax bills, Daily Mail, 09 August 2020,

4 Italy to Investigate Netflix for Failing to File Tax Return, Bloomberg, 03 October 2019,

5 Why is Amazon still paying little tax in the UK?, Tax Justice Network, 10 August 2018,

6 Ethical cosmetics company Lush takes ‘bullying’ Amazon to court, The Guardian, 30 November 2013,

7 Cosmetic Warriors Limited, Lush Limited vs Limited, Amazon EU SARL, High Court, 10 February 2014,

8 Risk-Mining the Public Exchequer, Journal of Tax Administration, 2017,

10 Google to pay $1 billion in France to settle fiscal fraud probe, Reuters, 12 September 2019,

11 Italy prosecutors open Netflix tax evasion investigation: source, Reuters, 03 October 2019,

12 France fines Google nearly €1 billion in ‘historic’ tax fraud ruling, DW, 12 September 2019,

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