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How did Netflix get away with not paying income tax in 2018?

By February 12, 2019No Comments

(This post originally appeared on The Guardian)

Netflix has made a lot of news this past week, and it’s not because of the Ted Bundy documentary or all those fools doing the Bird Boxchallenge. No, it’s something that is even more galling, particularly to those who oppose corporate greed and income inequality: the company paid virtually no US taxes in 2018.

According to a blogpost from the Institute on Taxation and Economic Policy, the company posted its largest ever profit in 2018 – $845m – but paid no federal (or state) income tax.

“After a year of speculation and spin, the public is getting its first hard look at how corporate tax law changes under the Tax Cuts and Jobs Act affected the tax-paying habits of corporations,” senior fellow Mathew Gardner wrote. “The law sharply reduced the federal corporate rate, expanded some tax breaks and curtailed others. The new tax law took effect at the beginning of 2018, which means that companies are just now closing the books on their first full year under the new rules.”

This story kind of validates a post I wrote last week about how the beneficial effects of the 2017 tax reform really won’t kick in until this year, when companies and people start doing their 2018 returns. Think about it: how many other companies will see their tax bill go down like Netflix? And remember, this isn’t a onetime thing: how will these lower rates affect future spending and investment?

We can debate these issues and whether these companies will use their savings to reinvest or hire more people. But for now what I’d like to explain is how. How did Netflix not pay any taxes on all this income?

The company hasn’t disclosed a lot of details so I can only make a few educated hunches. Its publicly available information has certainly given us some clues. In fact, when you look at Netflix’s reported deferred tax assets – which represent the future tax savings that will someday be realized – the answer starts to clarify.

The explanation has to do with just two words: tax credits. Remember, a tax “credit” is not a deduction. You apply a credit directly against the tax you owe. If you don’t use the credit it can carry forward to future years.

Which is why even though when Netflix actually paid $131m in foreign taxes during 2018 – which would be about 15.5% of its income (the US corporate tax rate is now 21 %) – it didn’t have to do the same in this country. US tax law – going well back before the 2017 Tax Cuts and Jobs Act – has allowed for companies (and individuals) to claim a tax credit on certain foreign earnings to avoid double taxation. How did Netflix, a US company, allocate so much of its income overseas? I don’t know, and that would make an interesting story. But the bottom line is that Netflix still paid taxes, just not in the US.

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