Matt Smith and Claire Foy in The Crown (2016). Photo: IMDB Matt Smith and Claire Foy in The Crown (2016). Photo: IMDB
Finance Finance News Netflix is dudding Australians by not paying its fair share of tax: report Updated:

Netflix is dudding Australians by not paying its fair share of tax: report

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Netflix is masquerading as a small business in Australia, allowing it to avoid tens, or possibly hundreds, of millions in tax each year, a tax investigation has found.

A report by forensic accountant Jeffrey Knapp and investigative journalist Michael West has revealed that the streaming giant had an estimated gross income in Australia of almost $533 million in 2017. But the company paid just $182,000 in tax in that year.

That would make Netflix’s tax rate in 2017 around 0.034 per cent. In other words, it’s the equivalent of a tax bill of $34 for someone earning a taxable income of $100,000 a year.

“Alas, this sort of income tax arrangement is generally unavailable to individual taxpayers – the quiet Australians with salaries and wages – but readily available to a multinational corporation like Netflix,” the pair noted wryly.

While income tax does apply to profit, not revenue, Netflix has still managed to eliminate 98 per cent of its income by sending it offshore, West and Knapp’s investigation concluded.

In a subsequent declaration for the 2018 year – filed on September 20, 2019, within days of questions being put to the company by West – Netflix declared a tax bill of $270,000. On an estimated gross revenue of $595 million, that’s still only a tax rate of 0.045 per cent.

The pair arrived at Netflix’s gross income figures by multiplying connection numbers by subscription costs in Australia.

According to figures from Roy Morgan research, 3.9 million Australian households had Netflix subscriptions in the June 2018 quarter. At an average Netflix monthly subscription of about $12.72 a month (before GST), West and Knapp estimated that Netflix’s gross income in Australia would have been $595 million in 2018.

With the company declaring it had grown subscriptions by 11.7 per cent from 2017 to 2018, the pair calculated a gross income figure of $533 million for 2017.

“Summing up, Netflix Inc extracts more than half a billion dollars a year from Australian customers, but asserts that the only business it is carrying on in Australia subject to income tax is a debt collection service,” the article concluded.

But West and Knapp found that the first time Netflix placed any financial information on the public record in Australia was not until June 2019, and that was for the year ending December 2017 – 18 months after the actual balance date. And that was despite “hundreds of millions of Netflix subscription dollars … exiting the country bound for Netflix Inc via tax havens”, the article said.

It last week filed a second declaration, for the 2018 year, within days of West putting questions to the head of Netflix Inc in New York.

Those accounts were also unaudited, they said.

“Unaudited financial reports are another dream come true for a multinational like Netflix. Income tax theft is easier when the tax authorities in a tax jurisdiction are left in the dark without access to information from audited financial reports,” the report notes.

But even more astonishing is the fact Netflix Australia Pty Ltd claims to be a small proprietary company. Netflix Australia only declared income of just $6.5 million in 2017 – the year that about $533 million in subscriptions would have been paid to the company.

And in 2018, its reported income was $12.05 million – the same year that it would have received an estimated gross income of $595 million. (Its 2018 accounts were also filed late with ASIC, but in this case,only five months late.)

So, as West and Knapp point out, Netflix is carrying on a large-scale business in a tax jurisdiction, but only recognises itself as a small business.

“Income tax theft is easier if the tax authorities can be deluded by sham, tax-driven arrangements and fantasy businesses,” West and Knapp reported.

Bear in mind that Netflix currently has a market capitalisation of about $164 billion.

Netflix Australia HQ is a lawyers’ office in Melbourne

According to the ASIC Company Extract purchased by West on September 12, 2019, the registered address and principal place of business of Netflix Australia Pty Ltd is Baker & McKenzie, Level 19, 181 William Street, Melbourne, Victoria 3000 – an office of Melbourne lawyers.

According to Netflix’s 2017 annual report, its principal business activity is to provide services to Netflix International B.V. from the Netherlands and it has only one resident director. It has no employees and no physical office space in Australia.

The 2017 annual report explains that the service fees of $6.5 million are for reimbursement of reasonable costs incurred in providing services to Netflix International B.V. as agreed by the “Collection Services Agreement”.

“In other words, the corporate shell of Netflix Australia Pty Ltd with its shiny company certificate hanging somewhere in a law firm at Melbourne is a debt collector,” the report said.

“The reality is that Netflix Australia Pty Ltd is a huckster peddling Netflix wares in a dishonest way to evade Australian income tax.”

The final betrayal

In 1997, then-Treasurer, the Hon Peter Costello, MP, circulated an Explanatory Memorandum (EM) for the Company Law Review Bill 1997. This explained why a small proprietary company that is foreign-controlled should be required to prepare and lodge an annual financial report with ASIC, if the controlling foreign company did not do so.

The intention of this was for foreign companies carrying on big business in Australia “to be accountable in Australia”. But in 2017, ASIC issued a new legislative instrument to cancel that.

ASIC’s new instrument allows multinationals like Netflix to not produce audited annual financial reports by claiming that they are not part of a large corporate group carrying on business in Australia.

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