Dreams of Tax Theft Downunder is the story of Netflix Inc, a company from the United States which lusts after tax-free money from Australia. Masquerading as a small-time debt collector, and with sneaky tax advice from law firm Baker & McKenzie of Panama Papers fame, our hero heads off on a road trip, enjoying an orgy of corporate fantasy and disappearing Australian cash flows along the way. In the gut-wrenching finale, Australian income taxes are pilfered under the very noses of authorities before the Australian Government saves the Budget Day by purloining $4.6 billion from the National Disability Insurance Scheme. Special guest appearance from the Australian Securities and Investments Commission who plays the part of the double agent, helping the nefarious Netflix Inc and other multinationals pull off the heist. A Jeffrey Knapp and Michael West Production.
Rated MA: suspected drug-fuelled fantasies, Hollywood accounting and a sex scene with the Australian public.
Netflix in Australia is Big Business, not small
Netflix’s business of subscription video on demand (SVOD) is big business in Australia.
According to Roy Morgan research, 3.9 million Australian households had a Netflix subscription during the June 2018 quarter. The average Netflix monthly subscription is about $12.72 before GST, delivering Netflix an estimated gross income from Australia of $595 million for 2018. User numbers for June 2018 were up around 11.7% on the prior year, which gives estimated Netflix gross income from Australia of $533 million for 2017.
The estimated income for Netflix Inc in Australia of well over one billion dollars in two years, and growing rapidly, might lead a rational person to conclude that Netflix pays a significant amount of income tax to the Australian Taxation Office. But for a rational US multinational company the rationale is somewhat simpler. If Australian income taxes can be evaded with little chance of adverse financial consequences, then it’s lights, camera, action.
How much Australian income tax does Netflix pay then? Obtaining an answer to this question has only recently become possible. Before 2019, Netflix had not placed any financial information on the public record in Australia, even though hundreds of millions of Netflix subscription dollars were exiting the country bound for Netflix Inc via tax havens.
Tax theft, like any other theft, best executed in the dark
A few years ago, the Greens pushed for tax transparency disclosures by big business and multinationals including General Purpose financial statements. The resulting legislation means we now know that Netflix pays bugger all income tax in Australia.
In the year to 31 December 2017, Netflix Australia Pty Ltd paid income tax of $0.185 million or around 0.0035% on the estimated subscription income of $533 million flowing out of the country. Individual taxpayers can only dream about a tax rate of 0.0035% on their total income sourced from Australia. If you made $100,000 for the year, your income tax bill would be $35.
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.
Premiere of Netflix accounts
On 25 June 2019, a set of accounts for Netflix Australia Pty Ltd (ABN 81 601 296 771) finally premiered on the public register of the Australian Securities and Investments Commission (ASIC). These sole accounts of Netflix Australia, described as “significant global entity general purpose financial statements”, are for the year ending 31 December 2017.
If they were a video, these Netflix Australia’s accounts for 2017 might be classified in the comedy-horror genre.
The first nasty surprise is that the Netflix Australia accounts are of such significance that they have been placed on ASIC’s public register 18 months after the balance date. Untimely financial reports are a dream come true for a multinational like Netflix. Income tax theft is easier when accounting information can be worked out after the income tax return has been prepared.
The second shock is that the Netflix Australia accounts are of such significance that they have not been audited.
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.
General Purpose financial statements on ASIC’s public register are normally audited. This is because General Purpose financial statements are intended for powerless stakeholders which cannot command specific financial information from an entity.
The Netflix unaudited accounts are a case of different strokes for different (US multinational) folks. Mandatory audit otherwise applies to companies which file General Purpose financial statements with ASIC.
The third thing to have the audience gasping is that Netflix’s business in Australia is of such significance that Netflix Australia Pty Ltd claims to be a small proprietary company. Netflix Australia only had an income of $6.5 million over the same period that Netflix subscriptions of around $533 million flowed out of the country.
Black holes, high-rises and the Meatloaf Principle: Australia’s top audit fails
This is another dream come true for a multinational like Netflix; to carry on a large-scale business in a tax jurisdiction but only recognise it as a small business. Income tax theft is easier if the tax authorities can be deluded by sham tax-driven arrangements and fantasy businesses.
Netflix Releases Unbelievable
This week Netflix released its new drama series called Unbelievable. Netflix Australia Pty Ltd should have used the same title on the front cover of its annual report for 2017.
According to the ASIC Company Extract purchased on 12 September 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. Yes, that’s right, Netflix Australia Pty Ltd has been running its business from a plaque on a wall in the Melbourne office of legal firm Baker & McKenzie.
And what is this business exactly?
According to the 2017 annual report of Netflix Australia Pty Ltd, its principal business activity is to provide services to Netflix International B.V. from the Netherlands. Netflix Australia Pty Ltd must have been providing these services on autopilot because it has only one resident director, no employees and no physical office space in Australia. And what is the nature of these services exactly?
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.
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.
Like an Netflix horror movie, viewers are required to suspend disbelief when watching this Netflix original. Believing that Netflix only carries on a small business in Australia is believing there really are zombies in Shaun of the Dead.
The reality is that Netflix Australia Pty Ltd is huckster (from the Middle Dutch, “hoekster” where incidentally the company’s immediate parent is domiciled) peddling Netflix wares in a dishonest way to evade Australian income tax.
It would be easier to marvel at how Netflix engages in tax theft in Australia if it wasn’t so obviously associated with accounting irregularities which are somehow overlooked by Australia’s politicians and regulators.
Vanishing cash flows
Confronting the detail in the accounts of Netflix Australia Pty Ltd. The accounts disclose cash receipts and cash payments from operations of around $6 million each. There is no disclosure of the millions in cash that Netflix Australia Pty Ltd has been collecting from Australian customers of Netflix.
There is no disclosure of the millions in cash that Netflix Australia Pty Ltd has transferred to Netflix International B.V. On page 12 of the annual report, Netflix Australia Pty Ltd claims that “Cash flows are presented on a gross basis”. This is untrue. Cash flows have been netted off including the goods and services tax paid.
The statement of cash flows is false and misleading. Netflix Australia Pty Ltd is breaking the law by concealing the cash flows of the only real business that Netflix has in Australia. Maybe if the accounts had been audited, the failure to comply with accounting standard AASB 107 ‘Statement of Cash Flows’ would have been duly noted.
Then there is the small matter of additions of $587,512 for property, plant and equipment shown on page 15 of the annual report. Netflix Australia Pty Ltd operates out of the office of a law firm. There doesn’t appear to be very much in the way of property plant and equipment that would be needed by this company.
What items of property, plant and equipment are they buying exactly? A cash counting machine for the lawyers? A diamond encrusted frame for the company certificate? A BatPhone for calls from Netflix International B.V.?
Who should take action against Netflix Australia Pty Ltd for producing accounts that are demonstrably not true and fair? Theoretically, it should be the Australian Securities and Investments Commission (ASIC). The Financial Reporting Council could also be more active, or active at all.
The Final Betrayal
Back in the day, the (then) Treasurer, the Hon Peter Costello, MP, circulated an Explanatory Memorandum (EM) for the Company Law Review Bill 1997. The EM 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 registered foreign company did not do so.
The legislative purpose, the intention of the Federal Parliament, was that foreign companies carrying on a big business in Australia had to be accountable in Australia.
In 2017, ASIC issued a new legislative instrument to cancel out the original intention of Peter Costello and his fellow parliamentarians. ASIC’s instrument gives a green light for 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.
Sadly, this instrument promotes secrecy for multinational business activities in Australia and fuels the theft of Australian income tax.
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Michael West established Michael West Media in 2016 to focus on journalism of high public interest, particularly the rising power of corporations over democracy. West was formerly a journalist and editor with Fairfax newspapers, a columnist for News Corp and even, once, a stockbroker.
Jeffrey is a retired lecturer in accounting at the University of NSW. His forensic accounting work exposing multinational companies for tax avoidance and accounting irregularities led to the 2015 Senate Inquiry into Corporate Tax Avoidance and subsequent reforms.