Differing approaches to combating marketed tax avoidance schemes

7th June 2022 by George Turner

Taxation magazine recently carried an article from our Executive Director looking at HMRC’s record on tackling marketed tax avoidance schemes over the last 10 years. The article looks at the differing results HMRC has achieved going after two different types of tax avoidance scheme and what lessons can be drawn. The text of the article can be found below. A pdf is available here: A_tale_of_two_avoidance_schemes_-_Taxation,_

In 2013, there were in effect two marketed tax schemes – sideways loss relief and disguised remuneration.
Several court decisions ruled that sideways loss relief schemes were ineffective from a tax law perspective.
There have been criminal prosecutions of people who operated these schemes.
HMRC has won two cases – Rangers and Aberdeen Asset Management – on disguised remuneration and that was on the PAYE argument.
The loan charge has helped promoters with the argument that nothing was wrong until HMRC changed the law retrospectively

The tax avoidance industry has been through a remarkable transformation over the past decade. Ten years ago, there were only two tax avoidance schemes that were sold to individuals in any volume: sideways loss relief schemes and disguised remuneration schemes. According to HMRC figures, in the 2013-2014 tax year 35% of all users of tax avoidance schemes – 8,500 people – were members of sideways loss relief schemes. Today that figure is zero. Over the same period, disguised remuneration has flourished. There were 13,200 people involved in disguised remuneration in 2013-14, but this has risen to 28,000 in 2019-20, the latest year when figures are available. Why is it that HMRC has been so comprehensively successful at combating one form of tax avoidance, while demonstrably failing to deal with another?

Respectable end of the avoidance market

In an appearance before the House of Commons Public Accounts Committee last year, Jim Harra, HMRC chief executive, offered one explanation: ‘The situation with the promotion of tax avoidance is over recent years, we feel we’ve been very successful at driving the respectable end of the tax profession out of offering tax avoidance.’ Clearly, we have come a long way since David Hartnett described sideways loss relief schemes as ‘schemes for scumbags’.

In 2013, there were in effect two marketed tax schemes – sideways loss relief and disguised remuneration. Several court decisions ruled that sideways loss relief schemes were ineffective from a tax law perspective. There have been criminal prosecutions of people who operated these schemes. HMRC has won two cases – has won two cases Asset Management – on disguised remuneration and on disguised remuneration and that was on the PAYE argument.was on the PAYE argument. The loan charge has helped promoters with the argument that nothing was wrong until HMRC changed the law retrospectively.

In particular, HMRC points to the code of practice on taxation for banks (large banks were frequently involved in providing the finance for sideways loss relief schemes), and the tightening of professional conduct rules for accountants and tax advisers in 2017, which in effect made it a disciplinary offence to sell a mass-marketed tax avoidance scheme. The implication is that more senior professionals subject to professional regulation were successfully persuaded to get out of selling the schemes to their clients. Although it is the case that sideways loss relief schemes were mainly targeted at high net worth individuals – the kind of people that employ professional accountants and lawyers and are clients of private banks – sideways loss relief schemes are not a form of tax avoidance defined by the involvement of professional advisers. It is well known that many senior lawyers signed off on disguised remuneration schemes, senior accountants operated and sold the schemes, and former HMRC inspectors regularly pop up as being involved with disguised remuneration. In fact, it was recently confirmed that an accountant that acts for the royal family is one of the more significant players in the field of disguised remuneration. If it really is the case that improvements in professional standards have driven out the respectable end of the avoidance market, why have allegedly respectable people continued to market disguised remuneration schemes? The simple answer is that codes of practice and professional ethics will only ever take us so far. That is not to say that improving professional standards is unimportant. It is, but sadly there will always be morally vacuous people in every profession who will seek to make a profit from taking advantage of others. In the end, the most effective way of stopping any form of tax avoidance is to establish that a scheme is unlawful with regard to tax law. As Lord Templeman put it many years ago: ‘Every tax avoidance scheme involves a trick and a pretence. It is the task of the Revenue to unravel the trick and the duty of the court to ignore the pretence.’ It is also important to ensure that dishonest behaviour is challenged, if necessary by way of the criminal prosecution of those that seek to promote dishonest tax avoidance schemes. As it was recently put by Lady Justice Simler and Mrs Justice Whipple in Ashbolt and Arundell v HMRC and Leeds Crown Court [2020] STC 1813 ‘tax avoidance moves from lawful conduct to criminal conduct when it involves the deliberate and dishonest submission of false documents to HMRC with the intent of gain by the taxpayer in question and loss to the public revenue’. When we analyse the performance of HMRC in both the civil and criminal courts, it is here where we see a real difference in performance with regard to different forms of tax avoidance.

Sideways illusion

Sideways loss relief schemes worked in the following way. Investors, who were always high earners with large income tax liabilities, entered into a partnership that was formed on the pretence of carrying out some form of trade. To encourage potential clients into the arrangements, often, scheme designers based them around well-known tax reliefs, marketing the scheme as a government-supported initiative. Film schemes such as Eclipse and Ingenious are perhaps the most well-known examples, but there were also schemes that invested in vaccine research or reforestation and green energy. However, almost any investment could be used to claim sideways loss relief, such as the well-known Working Wheels scheme based on the used car industry, and some lesser-known schemes investing in computer software. The expenditure incurred in the trade would result in losses which were used to reduce the income tax liabilities of the partners under the sideways loss relief rules. The trick was that these losses were inflated by circular financing arrangements which meant that the tax write-off ended up being multiples higher than the amounts of real cash put in by clients of the scheme. The effect of this inflation also meant that the majority of capital raised by the partnerships would never actually be spent on the trade itself. For example, in Vaccine Research Limited Partnership Scheme v CRC [2015] STC 179, the partnership claimed to have spent £114m on developing various vaccines, when in fact only £14m had been spent on research and development with the balance being paid in fees to the scheme operators and the banks that had funded the contributions of partners in the first place. HMRC disallowed the claims for tax relief for partners of sideways loss relief schemes, arguing that to qualify, expenditures had to be incurred for the purposes of a trade, and the partnerships needed to operate on a commercial basis.

Even though the schemes contained some commercial element which meant that it was theoretically possible for them to earn a profit, the inflation of losses made the prospect of any profit actually being made in the long term wholly unrealistic, undermining any idea that the partnerships were a commercial enterprise. As Judge Colin Bishop put it in his First-tier Tribunal decision in the Icebreaker case Acornwood and others (TC3545): ‘A 14-handicap golfer may set out on the first tee with the aim and hope of going round the course in par; but he could have no reasonable expectation of doing so.’ The courts were generally supportive of HMRC’s arguments, and there followed a long line of cases where various sideways loss relief schemes were defeated. This includes TowerM Cashback, Working Wheels, Eclipse, Ingenious and Vaccine Research. In some cases, HMRC started criminal proceedings. According to HMRC, since April 2016, 22 people have been convicted of ‘offences relating to arrangements that have been promoted and marketed as tax avoidance’. A review of HMRC press releases reveals that at least 20 of these individuals were involved in sideways loss relief schemes.

In these cases there was usually some aggravating factor which attracted the attention of HMRC’s criminal investigators. For example, in the case of R v Michael Richards and others, it was found that a sizeable chunk of the money that was supposed to have been invested in reforestation projects was being siphoned off into secret Swiss bank accounts for the personal benefit of the scheme operators. However, it is also remarkable that in at least some cases, the core elements of the offences prosecuted by the crown were the very basis on which sideways loss relief schemes operated. In his sentencing remarks following the conviction of four individuals behind the Little Wing film scheme Judge Drew described the ‘cheat’ as: ‘Submitting tax returns which contained false statements about the LLP’s allowable losses. They were false because the jury found as a fact either that the expenditure was not wholly and exclusively for the purposes of the LLP’s trade, or the trade was not carried out on a commercial basis.’ He may not have been aware of it at the time, but Judge Drew, in summarising the guilty act of a serious criminal offence, was in effect describing how all sideways loss relief tax avoidance operated. Something which must have at least given some promoters pause for thought.

Legal confusion

HMRC has not had the same success when it comes to disguised remuneration schemes. Many of these arrangements involve the creation of an offshore employee benefits trust. A company employing an employee or contractor would place funds into the trust, which would then be loaned to the employee. The trust might also provide some other benefit, such as a gift of shares in a company controlling a bank account full of cash. The scheme promoters argued that because the trust was independent of the company and that the loan was in theory repayable, then it should not be counted as income for tax purposes. The reality however, was that the trust always paid the loan and never asked for the money back. Both employers and employees regarded the money as income for the employee to keep.

Early attempts by HMRC to deny the benefit of schemes to taxpayers were met with opposition from the judiciary. In two cases that went before the Special Commissioners in 2000s, Dextra Accessories (SpC 331) and Sempra Metals (SpC 698), the judges found that loans granted by the employee benefit trust were not taxable income. In both cases the government decided not to appeal the point on income tax. In 2013 the Court of Session accepted HMRC’s argument that Aberdeen Asset Management v CRC [2014] STC 438 should have withheld income tax under PAYE for payments made to employees made through an employee benefit trust. HMRC won on the same argument again at the Court of Session in Murray Group Holdings v CRC [2016] STC 468, defeating the Rangers employee benefits trust scheme. In that case the judges was scathing of the rulings of the tax tribunals, which until then had found in favour of Rangers, saying:

‘The fundamental principle that emerges from these cases appears to us to be clear: if income is derived from an employee’s services qua employee, it is an emolument or earnings, and is thus assessable to income tax, even if the employee requests or agrees that it be redirected to a third party. That accords with common sense… This principle is ultimately simple and straightforward – indeed, so straightforward that in cases where elaborate trust or analogous relationships are set up it can easily be overlooked. That, it seems to us, is what happened before the First-tier and Upper Tribunals in this case.’

The Court of Session decision was later confirmed by the Supreme Court (RFC 2012 plc (formerly known Rangers Football Club plc) v Advocate General for Scotland [2017] STC 1556). Both the Court of Session and the Supreme Court found that Sempra and Dextra had been wrongly decided. However, although the Rangers case established beyond any doubt that the payments made to an offshore trust in relation to employment should be considered earnings and taxed as such, campaigners rightly point out that the case does not establish that employees in disguised remuneration schemes should be liable to pay the tax themselves. This was recognised by Jim Harra himself, in an email unearthed through a freedom of information request where he expresses frustration that he has been unable to obtain a legal analysis to back HMRC’s position that individuals are taxable on earnings received via a disguised remuneration scheme. One key difference between the findings of the civil courts in cases involving sideways loss relief and disguised remuneration, is that by removing the benefit of tax relief from the partners, the courts have taken away all the incentive for investors to participate in these schemes. With disguised remuneration, without a judgment that establishes that scheme users are liable for any tax bill, the incentive for an employee to take part in the scheme remains. Employees will care little if a scheme means that they reduce their tax bills, whilst their employer runs the risk of being hit with a tax bill in the future. This is in fact how some disguised remuneration schemes have played out, with organisations like the BBC agreeing to pay off the tax liabilities of freelancers engaged through tax avoidance schemes.

Limitations of legislative fixes

The most significant intervention the government has made against disguised remuneration has been the loan charge, a piece of legislation that attempts to ensure that people historically involved in disguised remuneration schemes are subject to taxation without the need to raise an enquiry into the scheme or a taxpayer’s returns.

However, in the absence of any decision of a court establishing that the users of loan based remuneration schemes had any tax liability at all, the use of legislation to enforce HMRC’s view of the existence of that liability has proved highly problematic. Inevitably, it has been interpreted by many people as demonstrating that disguised remuneration was at the time a lawful means of reducing a tax on the part of an individual taxpayer, which a defeated HMRC has been forced to attack with retrospective legislation, something which goes against every principle of justice in this country. The perception that the loan charge is an unjust act of a vengeful administration has pushed scheme users into the arms of promoters of loan charge avoidance schemes. As a policy designed to draw a line under disguised remuneration the loan charge has been a complete failure. Participation in disguised remuneration schemes increased substantially between the announcement of the loan charge in 2016, and its implementation in 2019.

Learning lessons

By looking at the history of litigation in both the civil and criminal courts, the answer to the question, why has HMRC been much better at tackling sideways loss relief schemes than disguised remuneration, is obvious. Through careful, painstaking litigation HMRC have managed to establish the principle that sideways loss relief schemes are not only ineffective in tax law, rendering the whole enterprise pointless for scheme users, but that the promotion and operation of these schemes could be regarded a cheat on the revenue, ending with a period of incarceration at her Majesty’s pleasure. It is little wonder that the use and promotion of these schemes has stopped entirely. Until now at least, HMRC have not been able to establish the same with regards to disguised remuneration. As recently confirmed by the financial secretary to the Treasury, the number of people that have been the subject of a successful criminal prosecution is precisely zero. Despite a barrage of legislative remedies, the practice continues to operate. This may soon be about to change. HMRC recently disclosed for the first time that it currently has 17 people under active criminal investigation for ‘offences relating to arrangements promoted as disguised remuneration tax avoidance schemes’. The only investigation where details have emerged publicly, Operation Skeet, is connected with alleged attempts by Paul Baxendale Walker’s firm (or its successor) to rebrand loans so that they fell outside the scope of income tax and the loan charge. In judicial review proceedings the Court of Appeal upheld search and seizure warrants issued against two individual users of these schemes whom it suspected of offences of fraud by false representation and cheating the public revenue (see Ashbolt and Arundell v HMRC and Leeds Crown Court [2020] STC 1813). On the civil litigation side, HMRC points out that it still has thousands of open enquiries into users of disguised remuneration schemes, some of which may still come before the tribunal.

One case currently before the Court of Appeal, Hoey v CRC, deals directly with the issue of whether HMRC has the right to tax an employee, and not the employer, in a disguised remuneration scheme, one of the biggest legal issues yet to be resolved. If HMRC is successful in bringing a series of civil and criminal cases against disguised remuneration schemes, we could see the practice go the same way as sideways loss relief. But do not expect that to happen anytime soon. HMRC first opened its enquiry into the tax returns of Rangers Football Club in 2004, yet it was not until 2017 that the Supreme Court finally resolved the case in favour of HMRC. In 2005 HMRC opened an enquiry into Carbon Trading Positive Ltd, which finally ended in the conviction of Michael Richards and his co-conspirators in 2017. In that case it took seven years to bring the case to trial after the defendants had been charged. There were long-running disputes over disclosure and, at one point, a High Court judge stayed the proceedings as an abuse of process, only for them to be re-instated at the Court of Appeal. The trial itself took 11 months. One of the jurors managed to conceive and give birth to a child during the course of it.

Justice delayed is justice denied

The old saying of justice delayed is justice denied was never more true than with disguised remuneration. The decisions of the tribunals in Dextra, Sempra and Rangers meant that for the best part of ten years, the tax tribunals supported an interpretation of the law that was later found by the superior courts to be wrong. In the interim, thousands of people were brought into disguised remuneration schemes having been reassured by senior lawyers and accountants that the structures they were entering into were perfectly legal. Had the tribunal’s interpretation of the law been corrected more quickly, many thousands of people may have been spared the stress and anxiety arising from their involvement in a tax avoidance scheme. What the story of disguised remuneration demonstrates beyond any doubt is that the pitifully slow progress of tax disputes is a source of real injustice and an issue that needs to be addressed.

This article was originally featured in Taxation Magazine

Netflix, tax reform and the unreal nature of digital taxation

8th December 2020 by George Turner

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 Amazon.co.uk 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 freestocks.org on Unsplash

1 Netflix tax affairs debated in the House of Commons, TaxWatch, http://13.40.187.124/netflix_debate_parliament/

2 Parliament forces Netflix to respond to TaxWatch research, TaxWatch, http://13.40.187.124/netflix_responds_to_taxwatch_report/

3 Video streaming giant Netflix faces new probe into how it escapes UK tax bills, Daily Mail, 09 August 2020, https://www.thisismoney.co.uk/money/markets/article-8607869/Netflix-faces-new-probe-escapes-UK-tax-bills.html

4 Italy to Investigate Netflix for Failing to File Tax Return, Bloomberg, 03 October 2019, https://www.bloomberg.com/news/articles/2019-10-03/italy-said-to-investigate-netflix-for-failing-to-file-tax-return

5 Why is Amazon still paying little tax in the UK?, Tax Justice Network, 10 August 2018, https://www.taxjustice.net/2018/08/10/why-is-amazon-still-paying-little-tax-in-the-uk/

6 Ethical cosmetics company Lush takes ‘bullying’ Amazon to court, The Guardian, 30 November 2013, https://www.theguardian.com/money/2013/nov/30/lush-amazon-trademark-court-battle

7 Cosmetic Warriors Limited, Lush Limited vs Amazon.co.uk Limited, Amazon EU SARL, High Court, 10 February 2014, https://www.bailii.org/cgi-bin/format.cgi?doc=/ew/cases/EWHC/Ch/2014/181.html&query=(cosmetic)+AND+(warriors)

8 Risk-Mining the Public Exchequer, Journal of Tax Administration, 2017, http://jota.website/index.php/JoTA/article/view/142/118

9 Facebook UK Ltd, Companies House, https://find-and-update.company-information.service.gov.uk/company/06331310/filing-history

10 Google to pay $1 billion in France to settle fiscal fraud probe, Reuters, 12 September 2019, https://uk.reuters.com/article/us-france-tech-google-tax/google-to-pay-1-billion-in-france-to-settle-fiscal-fraud-probe-idUKKCN1VX1SM

11 Italy prosecutors open Netflix tax evasion investigation: source, Reuters, 03 October 2019, https://www.reuters.com/article/us-netflix-probe-italy-idUSKBN1WI0NE

12 France fines Google nearly €1 billion in ‘historic’ tax fraud ruling, DW, 12 September 2019, https://www.dw.com/en/france-fines-google-nearly-1-billion-in-historic-tax-fraud-ruling/a-50407433

Parliament forces Netflix to respond to TaxWatch research

24th September 2020 by Alex Dunnagan

Netflix has agreed to respond to TaxWatch’s investigation into the company’s tax affairs after a request from the Digital, Culture, Media and Sport (DCMS) Committee. Our report revealed that the TV giant had streamed up to $430m of profits into offshore tax havens in 2018 (we have since published a follow up bl og post taking into account 2019 figures). This research into Netflix’s tax affairs has previously been the subject of an adjournment debate in the House of Commons.

The DCMS are currently holding an inquiry into ‘The future of public service broadcasting’, and on Tuesday 15 September held a formal meeting in which senior Netflix executives Benjamin King, Director of Public Policy UK and Ireland, and Anne Mensah, Vice President of Original series, participated.

During the oral evidence session the Labour MP for Cardiff West, Kevin Brennan, put our report to Mr King, in saying:

“the revenues from subscribers in the UK in 2018 for Netflix was £860 million, yet Netflix pays very little tax in the UK because that money is credited to a Dutch company….What is your response to that issue about the way in which Netflix is structured allegedly to avoid paying tax in the UK?”

Mr King responded:

“I would like to start by emphasising that we do pay all the tax that is required of us under UK law and every other jurisdiction that we operate in. Our accounts from 2018, which is our most recently published set, showed that the operating profit we made across our entities at that time was offset under HMRC’s group relief regime rules by the losses that we made on certain of our productions.”

Mr King went on to say that because Netflix’s European Headquarters is in the Netherlands, profits from the UK “are taxed in the Netherlands, which is completely in accordance with international norms”.

Mr Brennan asked if there was any truth to the allegation that Netflix is intending to take advantage of High End TV Tax Relief in the UK while not paying any profit here. Mr King responded that there were “a great many inaccuracies” and “false assertions in the TaxWatch report that we noted at the time of publication”, to which Mr Brennan questioned why Netflix did not respond to TaxWatch’s initial request for comment prior to publication.

Mr King stated that “we were not consulted on the detail of the calculations”.

As TaxWatch has now set out in a letter to Mr King, this is incorrect. TaxWatch contacted Netflix posing a number of questions that arose out of our investigation, while setting out in detail our calculations and research in advance of the publication of our first report in January 2020. We made it clear that we were contacting Netflix to allow for the opportunity to raise any factual issues and to provide a comment in advance of publication.

In a subsequent phone call with a representative of Netflix, TaxWatch’s Executive Director George Turner made it clear that we would be happy to correct any inaccuracies in advance of publication if Netflix provided us with the disputed details.

We were assured we would receive a full response to our request for comment, however, after several days of no further contact, Netflix told us that the company had decided not to respond.

For that reason we were surprised to see the claims made about our research at the committee hearing.

Mr Brennan pointed out that Netflix were given an opportunity to respond, and asked if Mr King wished to make a comment during the committee proceedings. Mr King stated that he did not have TaxWatch’s report in front of him, and repeated the claim that there are “certainly a great many inaccuracies in the report”. When pressed further he agreed that Netflix would provide a written response.

We have since re-sent our report and initial correspondence to King in order to assist with Netflix’s response to the DCMS.

A transcript of the session is available here, with video footage is available here. Reference to TaxWatch’s research begins at 1059hrs.

This story was reported in Deadline.

Photo by cottonbro from Pexels.

US effective tax rate over four times higher for tech companies

8th April 2020 by George Turner

A new study has shown that large technology companies have historically paid more than four times in tax on their US profits than on profits made in the rest of the world.

In our latest study, we looked at pre-tax profits reported by major multinational companies in the technology sector. Our study looked at Microsoft, Apple, Alphabet, Facebook, Cisco Systems, Adobe, Intel and Nvidia.

Under US stock market rules companies have to report the amount of their pre-tax profits that are made overseas and the taxes paid to foreign governments.

The study found that over the last five years technology companies have faced a tax rate of just 9.6% on profits generated outside of the US. By contrast, the same companies have seen a tax liability of 45% on profits generated in the United States.

Part of this significant gap is explained by the large, one-off tax bills faced by companies in the US to deal with historic tax abuse following tax reform in 2017. For example, in 2017 Apple faced a tax bill of 71% on its US profits. Google had an effective tax rate of 120% on its US profits. For some companies, these large charges also appear in 2018 and 2019 as new rules were issued by the IRS on how to account for the tax reforms brought in in 2017.

Average ETR 2015-2019	Microsoft	Apple	Alphabet	Facebook	Cisco	Adobe	Intel	Nvidia	Total
Foreign total tax rate	14.57%	8.21%	8.54%	5.21%	13.29%	6.94%	10.17%	3.12%	9.60%
Foreign income as % total	72.22%	67.31%	56.59%	66.06%	68.37%	67.14%	41.63%	57.74%	63.51%
US current tax rate	76.27%	68.44%	37.89%	52.42%	76.10%	32.22%	30.03%	10.06%	54.88%
US total tax rate	52.13%	48.08%	39.71%	48.36%	80.94%	20.81%	31.27%	3.75%	45.32%

However, pre-tax reform there were still very significant gaps between the rates these companies paid on US profits and on non-US profits.

In 2016, Google had a tax bill of just 7.6% outside the US and a rate of 28.7% on its US profits. In the same year, Facebook paid just 2.6% of non-US profits in tax, whereas in the US it faced a tax bill of 30.9% on US profits.

Recently, the gap appears to have closed, following significant tax cuts in the United States, which saw the headline rate of federal corporation tax fall from 35% to 21% in 2017. At the same time action by tax officials around the world has increased the focus on tax avoidance by multinational companies.

In 2019, the US based technology companies in our study had a total foreign tax bill of 13.6% on profits generated outside of the United States. The total US tax bill was 15.6% of US profits, or 25.4% on a current tax basis.

The worldwide average tax rate was 26% in 2019 when weighted by GDP.

The figures call into question the claims made by companies on why they pay so little tax outside of the United States. Frequently when challenged companies claim that the reason that non-US governments see relatively small tax payments in their jurisdiction is due to the fact that profits should be allocated to the United States – where the value of the product is created.

However, TaxWatch’s study shows that the majority of US tech companies state in their annual accounts that most of their profits are made outside of the United States. On average the companies in our study reported that 63.5% of their profits were generated outside of the United States.

In 2019, Facebook states that 79% of its pre-tax profit was made outside of the US. Adobe claimed that it made 86% of its profits outside of the United States, on which it paid a tax rate of just 7.2%. Nvidia, the maker of high end graphics cards made 50% of its profits outside of the US, on which it paid just 3.7% tax.

The study also showed significant differences between the corporation tax liabilities of different companies on their non-US profits.

Between 2015 and 2019 Microsoft paid 14.6% of its non-US profits in tax, whereas over the same period Nvidia paid just 3.12% of its foreign earnings in tax. Most companies achieved figures in the single digits.

To download a copy of this briefing in PDF – click here.

Photo by Allie Smith on Unsplash

Netflix tax affairs debated in the House of Commons

4th February 2020 by Alex Dunnagan

An adjournment debate on Netflix’s tax affairs was held in the House of Commons last night in response to research conducted by TaxWatch. Rt Hon Dame Margaret Hodge, Labour MP for Barking and chair of the All Party Parliamentary Group on Responsible Tax, called Netflix’s tax structure “scandalous, intolerable, and unfair.”

Dame Margaret called for video streaming services to be included in the government’s new Digital Services Tax. Currently, the DST excludes companies like Netflix from the charge.

She went on to say that as a great deal of Netflix’s intellectual property is developed in the UK, with the aid of creative tax reliefs, it is only right that the profits generated are subjected to UK corporation tax. Dame Margaret questioned why the eligibility criteria for creative industry tax relief cannot be adjusted to insist that any company receiving credits must declare their revenue earned in the UK via a UK company.

Dame Margaret gives Brazil as an example of a country that successfully taxes Netflix – by using a withholding tax – asking “If Brazil can tax Netflix, why can’t we?”

Financial Secretary to the Treasury, Rt Hon Jesse Norman MP, thanked Dame Margaret for raising the issue, calling it an “interesting and important topic that is of great public import”. In response to the points raised he said: “The Government does recognise 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.” However, he stressed that by law, ministers are “never privy to information about the tax affairs of specific companies or individuals.”

In response to the suggestion that Netflix is paying no UK tax while receiving creative reliefs, Mr Norman stated that businesses should be “incentivised” to invest in the UK’s creative economy.

Mr Norman went on to say “It is equally right that HMRC should subject large businesses to an appropriate level of scrutiny and my understanding is they are actively investigating around half of the UK’s large businesses at any given time.”

Responding to the point regarding the DST, Mr Norman stated that in order to include Netflix, tax rules would have to be rewritten, as the DST is currently aimed at search engines and social media, and that “the DST is intended to be a temporary measure pending agreement of a long-term global solution”. This is in reference to the OECD’s digital tax plans for multinationals, which are not yet set in stone.

With regard to taxing intellectual property, Mr Norman said “under international tax rules, the UK is entitled to tax the shares of a company’s profits that relate to those production activities…so she should not have concern on that front”

In response to the example of Brazil, Mr Norman makes reference to a tax charge on offshore receipts in respect of intangible property. While this has the potential to be an important tool in stopping multi-nationals from shifting profits offshore, as we pointed out last year, the fact that it is restricted to non-treaty jurisdictions is a severe limitation.

Our recent research revealed that despite having 11.62 million subscribers in the UK last year, generating an estimated £1bn in revenues and £68.5 million profit, Netflix Services UK is unlikely to have faced any tax liability because revenues from UK subscribers are booked in the Netherlands and the company in the UK receives tax credits under the creative industry tax relief scheme.

However, as disclosed by the company, Netflix’s 2018 UK tax return is currently under examination by HMRC.

The debate is available on Parliament Live here.

Photo by Marcin Nowak on Unsplash

Netflix UK revenues hit an estimated £1bn, but will the company start paying any corporation tax?

3rd February 2020 by George Turner

Netflix’s latest earnings report, published on 21 January, showed that 2019 was another bumper year for the company. Revenue in the 4th quarter was up 31% on the previous year, with the company clocking up $20bn in revenues worldwide over the course of the year.

Operating profit rose an enormous 61% in 2019 and the company reached 100m subscribers outside of the US. Pre-tax profits jumped from $1.2bn in 2018 to $2bn in 2019.

But how much of that profit will end up taxed in the UK?

The answer is likely to be not much. In 2018 the company reported revenues of £43.3m and profits of just £2m at its main UK company, Netflix Services UK, and paid no tax. In fact it received a tax credit under the creative industry tax relief scheme. This is despite the fact that in the same year, Netflix will have generated an estimated £860m in revenues from its UK customers. As we set out in our recent report, No Tax and Chill, subscription fees from UK customers are billed by Netflix from a company in the Netherlands. This explains why so little revenue and profit end up in the UK.

Netfix has not yet published its UK accounts, but as far as we are aware, the company structure has not changed. Our latest analysis, based on Netflix’s recent earnings reports, suggests that Netflix revenues from UK customers increased sharply to an estimated £1.08bn in 2019 – all billed to its Dutch subsidiary. This should have generated an estimated £68.5m in profit, giving rise to a tax liability of £13m.

Our analysis is based on the following data:

The Broadcasters Audience Research Board shows that Netflix had 11.5m subscribers in the UK in Q1 2019, 11.62m in Q2, and 11.77m for Q3 2019. We have taken the midway point of 11.62m as the average number of Netflix subscribers for 2019.

The latest financial data published by Netflix in January 2020 shows that the company made an average revenue per user of $10.33 per month in the Europe, Middle East and Africa region in 2019. This would suggest that Netflix made $1.44bn from UK subscribers in 2019. This is 13.5% of all revenue that Netflix makes outside of the United States.

The latest Netflix financial data states that the company’s international streaming operations made “Contribution Profit” of $1.6bn in 2019. This would suggest that the UK contribution profit would be $217m.

Contribution profit is gross profit after the deduction of marketing costs. On top of that Netflix has financing costs and other shared operational costs. On a consolidated basis, profit before tax is 41% of contribution profit. This would suggest that UK pre-tax profits are in the region of $89m, or £68.5m. Applying a 19% tax rate this should have generated a tax liability of £13m.

Whether Netflix ends up paying anything close to that remains to be seen. However, it does appear that the structure employed by Netflix has come to the attention of the UK tax authorities, HMRC, as the latest Netflix 10-K report published in late January 2020 states that their 2018 tax return is currently under examination by the UK tax authorities.

Response from Netflix

We reached out to Netflix to share our analysis with the company ahead of publication. A spokesperson for the company provided the following response:

“We believe that international taxation needs reform and we support the OECD’s proposal for companies to pay more tax in the countries where their operations help generate value.

In the meantime, we comply with the rules in every country where we operate. The TaxWatch report has a number of inaccuracies, including that Netflix has a Caribbean-based entity. This is no longer the case as we significantly simplified our tax structure last year.

Netflix continues to invest heavily in the UK – spending more than £400 million on local productions in 2019, which helped to create over 25,000 jobs and training placements.”

This research was featured in The Times, the Daily Mail, and The Independent among others.

Photo by freestocks.org on Unsplash

No tax and chill: Netflix’s offshore network

14th January 2020 by George Turner

14th January 2020

Key facts and figures:

$1.2bn – Global profit of Netflix in 2018

Up to $430m – profit from international operations moved into tax havens in 2018

€48m – amount of revenue reported by Netflix’s main UK company, Netflix UK Services in 2018.

£860m – estimated revenues from UK subscribers in 2018

18 production companies in the UK potentially eligible for UK Tax Credits

Total tax relief claimed by UK companies in 2017 and 2018 £924,000

To download a copy of this report in PDF – click here.

Summary

Facebook, Amazon and Google, have all received a significant amount of scrutiny in recent years about their tax affairs, but the last of the FANG group of companies, Netflix, has not.

One reason for this could be that that Netflix has historically not been as profitable as other digital companies, as it has spent large amounts of money building an international presence and buying film rights. However, recent years have seen the company’s profits rocket, from $123m in 2015, to $1.2bn in 2018.

In this report, we provide an analysis of Netflix’s corporate structure which shows that the company has implemented a similar tax avoidance structure to many other multi-national companies operating in the digital space. Revenues are not collected in the country where they are made. Instead, customers are charged from an offshore company. Profits appear to then be moved from the hub company to a tax haven through the use of intra-company transactions.

Netflix’s historically lower profit margins mean that the scale of any tax avoidance will be much lower than other well known companies that employ similar tactics.

However, the structure that the company operates presents a significant risk factor for the tax base of many countries as the company expands its presence, increases market share and sees an increase in profits.

In total, we estimate that the company moved between $327.8m to $430m in profits to low tax jurisdictions from its international operations.
Netflix also presents another issue particular to the film and television world, which is the way in which it is able to attract tax credits. The company is now ramping up production of original content in the UK, and it is likely that this will attract substantial subsidies from the UK taxpayer. Indeed, recently the company said that it is spending over £400m making original content in the UK this year, which means that it is likely to be eligible for tens of millions of pounds in tax relief when it next reports its UK accounts.

This demonstrates a significant loophole when it comes to the administration of tax credits for multinational companies, which can take advantage of credits by locating costs in the jurisdictions where they are on offer, whilst at the same time putting their revenues somewhere else entirely.

Netflix

Netflix is a global provider of video on demand. Originally starting in the mail order DVD market in the US, the company has been a pioneer of video rental over the internet. More recently the company has started producing its own content to add to its offer.

Netflix started international operations in 2010, entering its first market outside the US, Canada. The company quickly expanded into other markets and in 2016 announced that its content would be available worldwide in every country other than the People’s Republic of China.

Netflix structure

If we look at the corporate structure of Netflix, we can see it operates a similar structure to several well known companies engaged in tax avoidance.

Netflix does not book the revenues it gains from its subscriptions via a local subsidiary. When the company started selling subscriptions in the UK in 2012 it did so through a Luxembourg company, Netflix Luxembourg. When Netflix Luxembourg was set up in late 2011, the company did not have any customers in Luxembourg and the company published its accounts in British Pounds.

In 2015, just after the company started selling subscriptions in Luxembourg, Netflix moved its European operations to Amsterdam and a Dutch company, Netflix International BV.

Netflix International BV now accounts for the majority of revenues the company makes outside of the US. In 2018 that company earned revenues of €5.5bn ($6.27bn). Reported revenue from Netflix’s “international streaming” segment stood at $7.8bn in 2018.

Netflix International BV, together with its parent Netflix International Holdings BV made profits of €151m in 2018, a profit margin of just 2.7%. One of the factors in the relatively low profit margin at the Netflix International companies was the €4bn paid to “other group companies”. The company had a tax bill of €91.61m in 2018, however, €84.9m of this was a bill for Brazilian withholding taxes and another €2.6m was for Uruguayan non-resident income tax. For 2018 the company paid just €4m in tax in the Netherlands. In 2017, there was no tax paid at all in the Netherlands with all taxes incurred by the company arising in Brazil.

Netflix International BV is owned by Netflix International Holdings, another Dutch company, which is in turn owned by Netflix Global Holdings CV. A CV usually denotes a Dutch company, however, the Netflix global accounts state that this company is based in the USA, however a search of corporate registries in the US yielded no records for the company. To confuse matters further, the founding documents of Netflix International Holdings state that Netflix Global Holdings CV has an address in the Cayman Islands. Netflix now say that they have retired their Cayman entity. Where the company is actually domiciled remains a mystery.

Profits at Netflix International

How much profit Netflix makes, or doesn’t make outside of the US is a bit of a mystery. In fact, Netflix themselves appear to have difficulty with that calculation.

According to the consolidated annual accounts of Netflix, the company made losses in its “International Streaming” segment in every year between 2011 and 2018, when it turned a profit for the first time.

Despite this, the Netflix accounts in 2017 disclosed that the company had accumulated a total of $484.9m in foreign earnings. The disclosure was made as part of their calculations of their liability for the transition tax imposed on US companies as part of the Trump administration’s reforms to corporate taxation.

Until 2017 US corporations were in theory subject to US federal taxation on their worldwide profits, but corporations could permanently defer paying taxes if they re-invested those profits overseas. This led to many US corporations moving their non-US profits into tax havens, where they were ‘permanently re-invested’ in government bonds and marketable securities. Corporations built up huge cash piles offshore that were untaxed anywhere.

The transition tax was designed to deal with this historic issue, and the tax was imposed on the profits that US corporations had accumulated in tax havens from their non-US operations. As part of their disclosure, Netflix stated that their figures on non-US profit that would be subject to the tax were provisional pending more detailed work required to calculate the exact liability.

In the 2018 accounts for Netflix, that detailed work had been completed, and Netflix reversed their entire tax liability arising from the transition tax. There is no detailed explanation provided on how the calculations on accumulated foreign income could been incorrect by almost half a billion dollars.

Netflix – GILTI of tax avoidance?

In December 2018 The Times reported that Netflix’s accounts were under examination by HMRC, although there was no detail provided on specific issues HMRC were probing. Newspapers reporting on the news noted how Netflix reported tiny revenues in the UK, which did not match information about the number of subscriptions the company is known to have in the UK.

Some commentators were quick to point out that selling subscriptions from overseas was not tax avoidance, people in the UK are free to buy products from overseas.

However, there is little doubt that Netflix has structured itself to avoid paying tax, and evidence from the company’s US filings suggest that the company is moving money from its international markets into tax havens.

In 2017, in addition to the one time transition tax, the US federal government introduced a number of anti-avoidance rules to ensure that profits made overseas were subject to some minimum level of taxation. One of these rules is the GILTI – which targets returns to intellectual property in low tax jurisdictions. The operation of the GILTI rule is complex, but the effect is to put a minimum tax of 10% on profits on intangible assets located overseas. Because of the way in which the tax includes credits for taxes paid to foreign governments, the tax only targets profits declared in jurisdictions with a tax rate of less than 13.125%.

As part of their tax disclosure in their 2018 annual report Netflix notes that the company was subject to a tax charge of $43m due to the US Minimum Tax on Foreign Entities. We believe that this is likely to be the Global Intangible Low Tax Income (GILTI) provision of the 2017 Trump Tax Reform.

The disclosure from Netflix that some of its income is subject to a minimum tax level, appears to confirm that the company is moving profits into tax havens. The disclosure that $43m is subject to the a minimum tax rate, suggests that between $327.8m and $430 of non-US profit was shifted into tax havens by Netflix in 2018.

Netflix in the UK

Our research found 19 companies controlled by Netflix operating in the UK. Only one of these companies, Netflix Services UK, has filed accounts, with the rest being established only recently.

Netflix Services UK does not have any customers in the UK, it provides services to Netflix International in the Netherlands, which sells directly to UK customers. In common with similar tax avoidance structures, Netflix Services UK is paid little more than is required to cover its costs and makes little profit. In 2018 the company reported revenues of €48m, with pre-tax profits a little over €2m.

The real value of the UK market to the company is far higher. The revenue of Netflix in the UK is relatively easy to calculate. There are surveys of TV usage which tell us how many subscribers it has in the UK, and Netflix publishes data on average revenue per subscriber.
Data from the Broadcasters’ Audience Research Board show that Netflix hit 10 million subscribers in Q4 2018. Although a more mature market than some other places where Netflix operates, the company’s growth in the UK has still been impressive. The company had 5.2 million subscribers in the UK in 2016.

At the beginning of 2018 the company had 9.11 million subscribers and 10.31 million by the end of the year. Netflix’s average revenue per user in its international streaming segment was $113 a year according to their corporate accounts, which, if we take the average number of subscribers throughout the year (9.71 million) translates to revenues from UK subscribers of $1.09bn (£860m) in 2018. This is equivalent to 14% of the company’s international (non-US) streaming revenues. In reality the UK will have even larger revenues because the average global revenue per user will include Brazilian subscriptions which are charged at a lower rate.

Netflix Services UK claims to have 29 staff. These staff are apparently very highly paid. With a wage bill of €6.2m, that is the equivalent to an average salary of €214,000.

LinkedIn suggests that there are substantial numbers of employees in the UK (200+). Netflix themselves say they have 20,000 people working on Netflix productions in the UK. Many of these will be freelancers working on specific productions, or working for independent production companies contracted to Netflix. It is not known how many employees are working for the production companies which the company has recently set up in the UK.

In December 2017 Property Week reported that Netflix had secured a new 12,000 Sq ft London HQ.

All of this confirms that the company has a substantial presence in the UK and it is not clear why the accounts of its main UK subsidiary only disclose a few members of staff.

Reliefs and Rebates

In 2017, Netflix Services UK received some £307k in reliefs, leaving the company with a £179k income tax credit. The 2018 accounts disclose reliefs of over half a million, leaving Netflix UK seeing a further £51k tax credit.

High-End Television Tax (HETV) Tax Relief in the UK allows TV projects with a minimum expenditure of £1m per broadcast hour to “claim a payable cash rebate of up to 25% on UK qualifying expenditure”.1 There is no limit on the budget, or on the amount of relief payable – but the relief is capped at 80% of the core expenditure.

Reports have claimed that the first season of The Crown cost £97.4m2 – more than the £82m Sovereign Grant paid to the Queen by the British Treasury. If this is the case for future series of The Crown, and if 80% of the expenditure is in the UK, then the studio producing the show stands to bank £19.5m in tax relief per season.

In March 2018 Netflix Studios UK was established to produce content for Netflix. In the 9 months to the year end, the studio received £125k in tax reliefs. With operating expenses of £4.2m in a 9 month period, which is likely to increase over the coming years, there is potential for the studio to claim millions a year in HETV relief.

Double dipping

The UK operates a generous system of tax credits for the creative industries. Tax credits reduce a company’s tax bill by increasing the amount that a company is allowed to deduct from their profit for tax purposes, based on the amount of money it is able to spend on certain items. If the amount of credit exceeds the total profit made, then a company can receive cash back from HMRC.

In the UK companies can receive tax credits for a variety of activities in the creative sector, including film production and the production of high-end television programmes. In 2018 a number of productions distributed by Netflix were eligible for tax credits, War Machine, The End of the F****ng World, Altered Carbon, Safe, Black Mirror Series 4, The Crown Series 2 and The Angel.

Of all of these, only War Machine has Netflix listed as a producer, the others were made by third party production companies and then distributed on the Netflix platform.

However, Netflix in recent years been taking a much more active role in the production of its own content. The company has established 18 production companies in the UK, and recently announced that it was taking out a long term lease on Shepperton Studios to create a dedicated UK production hub.

None of the Netflix UK production companies have yet filed annual accounts, however, we expect that these companies will be eligible for UK high end television tax credits, which could lead to substantial amount of government cash flowing towards Netflix.
The result of this would be that Netflix manages to get a double tax benefit. On the one hand claiming tax credits on the costs it locates in the UK, whilst apparently moving revenues offshore.

Conclusions

From an analysis of Netflix’s accounts, it seems clear that the company is structured to minimise taxes in its operations outside of the US, and maximise the amount that the company receives from the taxpayer in the form of tax credits.

It is clear from the facts that we have been able to establish that Netflix has a tax structure which is typical of many digital companies we have studied. Sales are made from outside the UK, even though there is a substantial UK presence. This offshore sales hub is located in a jurisdiction with a strong treaty network (the Netherlands). The sales hub makes a very low profit margin as large costs are paid to related companies. The UK office sells its services to the wider Netflix group at a low margin and as a result there is little profit left in the UK. It is likely that the company operates in a similar way in other jurisdictions.

In 2018, Netflix Services UK made revenues of just €48m and a profit of €2.3m. Had Netflix’s revenues from its UK subscribers been included in the accounts, it would have had revenues of £860m.

It is difficult to say how this would translate into profit in the UK without access to more detailed accounts of Netflix’s operations.
Netflix’s own figures show that the company has historically made a loss on its international streaming segment, however this does appear to conflict with data published by the company elsewhere, particularly regarding its potential liability for taxes on its foreign profits in the US.
The numbers published on the U.S. GILTI charge, suggest that the company moved between $327.8m and $430 of non-US profit into low tax jurisdictions in 2018.

This structure is particularly concerning given the steep rise in the profits at Netflix in recent years, which suggest that the problem can only get worse.

There is also another concern in the UK, given the fact that the company is substantially increasing its production activities and could be eligible for UK tax credits for high-end television.

We believe that the Netflix case raises some real concerns about the operation of the high-end TV tax relief scheme, which could see it being used by companies to claim credits on production costs, whilst locating the income from those productions offshore.

Our research was put to Netflix ahead of publication. The company declined to comment.

Photo by Thibault Penin on Unsplash

No tax and chill: Netflix’s offshore millions

14th January 2020 by George Turner

Online video streaming company Netflix streamed up to $430m of profit from their international operations into tax havens in 2018.

“No Tax and Chill”, an analysis of the company’s accounts in the US, the Netherlands and UK shows the company is the latest in a growing list of digital giants that use a web of offshore companies to shift profit offshore and avoid tax.

In 2018, despite making $1.2 billion in worldwide profits and booking an estimated £860 million in revenue from its 10 million strong UK subscribers, the company paid no tax in the UK. On the contrary, the company received £924,000 back from the UK taxpayer in 2017/18 in tax credits.

Although where the profit from Netflix’s international operations end up remains a mystery, the company’s US accounts suggest that large amounts end up in tax havens.

The full report can be found here
A PDF version can be downloaded here

This research featured extensively in the UK and international press. In the UK, this research was featured in The Times, BBC News, and The Guardian among others.