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 Box challenge. But, it's something that is even more galling, especially for those who oppose corporate greed and income inequality: the company paid virtually no US taxes in 2018.
According to a blogpost from the Institute of Taxation and Economic Policy, the company posted its largest ever profit in 2018 – $ 845m – but did not pay any 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 came into effect at the beginning of 2018, which means that companies are 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 will not 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 is not a one-time thing: how will these lower rates affect future spending and investment?
We can discuss these issues and whether these companies will use their savings to reinvest or hire more people. But for now what I would like to explain is how. How did Netflix pay taxes on all this income?
The company has not 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 begins to clarify.
The explanation has to do with just two words: tax credits. Remember, a tax "credit" is not a deduction. You apply a loan directly against the tax you owe. If you do not use the credit it can carry forward to future years.
That's why even though Netflix actually paid $ 131m in foreign taxes during 2018 – which would be about 15.5% of its income (US corporate tax rate is now 21%) – it did not have to do the same in this country . US tax law – going well before the 2017 Tax Cuts and Jobs Act – has allowed 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 abroad? I do not know, and that would make an interesting story. But the bottom line is that Netflix still paid taxes, just not in the US.