February 13, 2019
February 13, 2019
In an age when even the most incontrovertible facts are routinely dismissed as “fake news,” reporting on corporate taxes can be a daunting challenge for members of the media. ITEP’s recent analysis of the income tax disclosures made by Netflix in its annual financial report last week provide an excellent reminder of this.
ITEP’s finding that Netflix paid no federal or state income taxes on $845 million of U.S. profits in 2018 was very straightforward: it was based entirely on three numbers the company published in its own annual report. The detailed income tax section of the annual report discloses U.S. profits of $845 million, current federal income taxes of minus $22 million (that is, a tax rebate), and current state income taxes of minus $10 million (also a rebate). These three numbers are all that is required to assess the impact of the U.S. tax system (or lack thereof) on Netflix in 2018.
So it came as a surprise when Netflix’s public relations team contacted several reporters who covered this story, strongly suggesting that their reporting of ITEP’s research was incorrect. (These reporters each shared the company’s communication with us.)
One newspaper was told “[i]t is reported in our financial statements that we paid $131 million in taxes in 2018. Please have the article removed or corrected.”
Another received a similar message: “I wanted to get in touch regarding this story you posted, as it’s actually factually incorrect. Our financial statements show that we paid $131 million in cash taxes in 2018.”
Covering their bases, the indefatigable PR team at Netflix then contacted ITEP staff directly to communicate the same message, word for word.
As it happens, the company’s tactics are at best misleading, and at worst grossly inaccurate. The $131 million figure Netflix repeatedly cited is the amount of cash income taxes the company paid worldwide in 2018, and the same income tax note that is the source for ITEP’s estimate of zero federal and state income tax liability makes it clear that every last dime of the company’s 2018 income tax liability is foreign tax paid on foreign income.
Put another way, Netflix is responding to the observation that it paid no U.S. income taxes in 2018 by observing that it did pay income taxes somewhere else in the world.
While this finding may come as some relief to tax authorities in some of the countries that have been victimized by Netflix’s tax avoidance in the past (most notably Britain, where Netflix paid no income tax on £500 million in 2018), it is utterly irrelevant to the policy discussion here in the United States.
Before the passage of the so-called Tax Cuts and Jobs Act (TCJA) in late 2017, it was widely recognized that many of the biggest and most profitable corporations were routinely finding ways to zero out their federal income taxes. As an ITEP report found that year, 100 companies in the Fortune 500 found ways to pay a zero percent tax rate in at least one profitable year between 2008 and 2015. Netflix did it twice—which is why we were especially interested to see what the company’s new financial report revealed about its U.S. taxes in 2018, the first full year of the new corporate tax law. Would the companies that got away with tax avoidance under the old rules continue to do so under the new law?
The company’s new report makes it quite clear that Netflix is every bit as much unaffected by the U.S. corporate income tax now as it was before the passage of President Trump’s corporate tax cut. That’s bad news for the middle-income working families and small businesses who must pick up the slack when huge corporations don’t pay their fair share—and Netflix’s assertion that there is some other country in the world where they did pay income tax last year doesn’t make this news any less bad. The company’s aggressive effort to seek retractions from media outlets covering this story appears to be based on fear, not facts.