Netflix’s Japan subsidiary fined for ¥1.2 bil. tax loophole scheme through 2019

The Yomiuri Shimbun

16:18 JST, March 21, 2022

U.S. streaming giant Netflix, Inc.’s subsidiary in Japan was found to have used tax loopholes to reduce its income by about ¥1.2 billion over three years through December 2019, The Yomiuri Shimbun has learned from a person connected to the matter.

The National Tax Agency’s Tokyo Regional Taxation Bureau conducted an audit of Netflix G.K. and found that the company did not receive an appropriate share of profits from Netflix, Inc.’s Dutch subsidiary, which carried out distribution operations and received most of the proceeds.

According to the source, a tax penalty of around ¥300 million was assessed on Netflix G.K. for underreporting corporate and other income in its returns.

Netflix G.K. told The Yomiuri Shimbun in writing that the company has discussed the matter with taxation authorities and revised its tax returns.

The Minato Ward, Tokyo-based company is in charge of managing call centers for subscribers in Japan and contracting Japanese film and anime production companies. To obtain content streaming rights, Netflix G.K. pays multiple production companies. In the three years through 2019, this amounted to over ¥10 billion.

The Dutch subsidiary, Netflix International B.V., obtained the rights from Netflix G.K. by paying the amount that had been paid to the production companies and for related acquisition costs. The Dutch subsidiary then provided online streaming services, making the bulk of the profit.

The taxation bureau paid particular attention to the fact that the Dutch company’s profits were made using the distribution rights acquired through the efforts of Netflix G.K., which it judged should have been rewarded an appropriate share of the profits in addition to necessary expenses.

Through calculations based on standard transactions, the bureau concluded that Netflix G.K. should have received about ¥1.2 billion through the deal, the source said. The tax authorities then judged that amount of income should have been declared by Netflix G.K.

Netflix G.K. collects monthly subscription fees ranging from ¥990 to ¥1,980 per subscriber in Japan. In its business year ending December 2019 it had estimated sales of about ¥30 billion. The source said that most of this amount was paid to the Dutch subsidiary in the name of “distribution expenses,” leaving the corporate tax paid by Netflix G.K. to a little over ¥300 million.

The Netherlands provides various tax incentives for multinationals, a reason many tech giants have set up bases in the country. Netflix International B.V. reportedly is engaged in distribution operations in Europe and countries such as Japan and Brazil. Its sales reached about €5.5 billion, or about ¥730 billion, in the business year ending December 2018. The Dutch company is believed to have accumulated the sales from Netflix subsidiaries in various countries in the name of distribution expenses and paid relatively low taxes in the Netherlands on this massive amount of income.