Following questions to Netflix from michaelwest.com.au last week, the US streaming giant has sprung into action and filed its 2018 financial statements, albeit five months late.

The latest set of accounts shows that Netflix continues to claim that it is not in the business of selling streaming services to Australians, as would appear to be the case. Rather, Netflix Australia asserts that it operates a small debt collection agency for a company in The Netherlands.

This accounting mist means Netflix sends more than half a billion dollars a year straight to Holland while the income it books in its accounts as revenue in Australia comes back the other way, from Holland.

The latest accounts, for the year to December 2018, show the company continues to claim its business in Australia is not providing streaming services – as it would appear to be – but rather providing debt collection services to an entity in Holland.

Netflix is by no means alone when it comes to accounting fantasies and fictions. Fellow tax dodger eBay also books its revenue straight to a friendly tax jurisdiction in Europe and claims:

“The principal activities of the Company during the year were the recommendation of market penetration strategies and advertising and promotion activities”.

Ebay would have us believe that it is not in the business of running a billion-dollar online auction house in Australia but rather in the business of “recommending penetration strategies”, whatever that means. Just as misty is online accommodation juggernaut Booking.com which slots hundreds of millions of dollars to The Netherlands too and merely books a fraction of that income for providing “services” to Australia from Holland.

This story is running in The New Daily today:

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.

The real revenue picture

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.

Auditor invisible in The Mist

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.

Rip-offs are easier in The Mist

“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.

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 Fog of Law

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.

Editor’s Note:

Some feedback on social media yesterday was critical of the story below for focusing on Netflix’s revenue rather than profit. Income tax is payable on profit not revenue, as consistently pointed out in these pages. The criticism ignores however the fact that multinational companies aggressively wipe out their taxable profits in this country by bulking up their costs.

Netflix, eBay and Booking.com – and until last year Google and Facebook too – go a step further by not even recognising the revenue they make in Australia as Australian revenue. Rather, the revenue they actually book is a paltry service fee from a related entity offshore.

For what it’s worth, Netflix paid $270,000 tax in 2019 up from $185,000 in 2018 – given its surging revenues … pocket fluff.

https://www.michaelwest.com.au/a-netflix-original-dreams-of-theft-downunder/

Public support is vital so this website can continue to fund investigations and publish stories which speak truth to power. Please subscribe for the free newsletter, share stories on social media and, if you can afford it, tip in $5 a month.