Thank you for selecting the debate, Mr Speaker, and I give my heartfelt thanks to George Turner and the investigative think-tank, Tax Watch UK, for providing me with so much information.
For many years, global digital companies have been avoiding tax. I have spent the last decade campaigning for more corporate transparency and arguing for stronger action at both the national and international level to stamp out this abuse. Indeed, the Minister, when he was a member of the Treasury Committee, was extremely helpful in exposing some of the unacceptable tax behaviour in one of our major banks—HSBC—and he effectively held the bank’s chief executive to account. In the light of his previous interest and commitment to ensuring that everybody acts responsibly and pays their fair share of tax, I hope that he will respond positively to the suggestions I am making tonight. These suggestions will go some way to tackling the shocking example of corporate tax avoidance that we have uncovered.
I have secured this Adjournment debate because until now one major tax avoider has remained under the radar: Netflix. Netflix demands our attention for a number of reasons. Not only does it deliberately dodge its corporation tax bills, but it, in fact, receives moneys from the public coffers through the high-end television tax relief.
This is a very important issue and I thank the right hon. Lady for securing the Adjournment debate. Bearing in mind that last year Netflix UK subscribers paid some £700 million, does she not agree that the fact that it uses loopholes to avoid tax is simply disgraceful? Government really must close these loopholes and ensure that big business has to pay a reasonable rate of tax.
Netflix takes out of the public purse more than it contributes in corporation tax. While Her Majesty’s Revenue and Customs fails to collect money from it in corporation tax, the US Government are extracting tax from the same profits that it earns here and then hides in unknown tax havens.
I congratulate my right hon. Friend on securing the debate. While austerity has seen billions of pounds taken out of our public services, with £300 million gone from the economy in Newcastle, is it not absolutely vital that we get this tax policy right so that we have that money to fund our vital public services? Multinationals such as Netflix should make their fair contribution.
Not only should they be making their fair contribution, but they use the services that other people’s tax pays for.
Netflix creates its content here, supported by grants that it receives here through our tax credit system, yet it pays tax on the profit that it makes here in the USA. Frankly, I say to the Minister: you couldn’t make it up. The situation is scandalous, intolerable and unfair. It is the sort of behaviour that really winds up the British public, most of whom are law-abiding taxpayers who never try to avoid their duty to pay taxes.
Let me explain the Netflix situation in detail. Netflix is the world’s biggest video-streaming service, with 167 million subscribers. The California-based company is the online home of popular shows such as “The Crown” and “House of Cards” and films such as “Marriage Story” and “The Irishman”, but while we all binge-watch Olivia Colman’s portrayal of the Queen, Netflix has deliberately constructed a devious financial structure that has no other purpose than to avoid paying its tax.
The Netflix strategy is to be the biggest player in the online video streaming market, to buy out or undercut any rivals and to release a sea of content to attract a truly global subscriber base. For many years, the service ran at a loss to secure this dominant market position, but it is now operating in the black. Netflix’s global operating profit rose by an enormous 61% last year to £2 billion. By 2019, Netflix had 11.62 million UK subscribers, who generated a £1.08 billion income for the company, but under the ruse it employs any UK citizen who subscribes to Netflix is billed not in the UK but from a subsidiary company in the Netherlands.
The most recently published Netflix accounts for 2018—the only earnings declared here—amount to a very small proportion of its billion-dollar UK revenue. Money declared by Netflix in the UK is paid by the Dutch subsidiary to a much smaller subsidiary based in Britain, which makes up just a trivial proportion of the services the company provides. Tax Watch UK estimates that the actual profit Netflix made in the UK was close to £70 million in 2018, so the company should have paid over £13 million in corporation tax.
I appreciate the points the right hon. Member is raising about complex financial issues, but does she accept that the traffic is not all one way? In the last year, Netflix has invested more than £400 million in the UK, creating 25,000 jobs and productions, and has recently been driving the pioneering agenda of encouraging women into television and film making.
I am all for encouraging Netflix’s growth here, but I am afraid that that in no way mitigates its refusal to pay its fair share of tax.
Where Netflix’s UK profits do end up is a complete mystery. It uses a shady system of subsidiaries and shell companies based in tax havens to shift its profits and avoid paying its fair share in many jurisdictions. From the publicly available data and translating that data into pounds sterling, it looks as if between £251 million and £329 million of non-US profit was shifted into tax havens from the Netherlands. Netflix did pay some tax on profits. Ironically, over 90% was paid by the Netherlands-based company and went to Brazil, where the authorities use a withholding tax to extract money. Is it not astounding that Brazil is more efficient at collecting tax from digital companies than we are? If Brazil can tax Netflix, why can’t we?
The UK makes up 14% of Netflix’s non-US market. We provide a vital consumer base for Netflix, and much of its content is created here, so the intellectual property on Netflix’s product is developed here in the UK. Google always argued in the past with me that it should not pay tax in the UK because its intellectual property was developed in California. If that argument has any credibility, given that much of Netflix’s intellectual property is created here and funded in part by the taxpayer through tax credits, the case for taxing it here in the UK is irresistible.
I am very impressed with the case that my right hon. Friend is making. Like her, I have had conversations with companies that claim that intellectual property means there have to be adjustments in national tax rates, but if, as she is saying, the sales in this country are registered to a company in Holland, although the intellectual property is here and the company is based in America, it makes no sense at all and simply looks like an avoidance mechanism.
I agree: it is nothing other than an avoidance mechanism.
It should be borne in mind that Netflix depends on services that are funded by the taxpayer, such as our physical and digital infrastructure, which is in part publicly funded, our world-class universities and our highly educated workforce, and our NHS, which keeps its staff healthy. It takes from the public purse, but fails to pay its fair share back.
There is one simple solution to this injustice, and I should appreciate the Minister’s comments on it. Video streaming services must be included in the new digital services tax. At present they are excluded. Why? Why cannot the Government simply extend the provisions to include them?
The United States Secretary of State has threatened us with tariffs on our cars if we go ahead with the digital services tax, and I welcome the Government’s resistance to that threat. Fair taxation cannot be a bargaining chip to be cashed in to secure a trade deal. We must maintain our stance, and have no truck with the bully-boy tactics of the Trump regime.
There are plenty of examples of other countries taking action to claw back some tax from the streaming giants. The French levy a 2% tax, and the Brazilians not only get their withholding tax but have a 2% tax that covers online streaming services and is paid to the local government. There is a strong case for extending the digital services tax to include streaming services. The tax is “oven-ready”, as our new Prime Minister is fond of saying, and I urge the Minister to expand its scope to cover streaming sites so that we can fund our vital public services.
What is particularly galling is that Netflix actually makes a net profit from the UK taxpayer. In the last two years it has received nearly £1 million from the Government in tax credits, and that is just the start. According to its US accounts, it is ready to enjoy £218 million in tax credits worldwide. We do not know how much of that will be paid by the UK taxpayer, but we do know that Netflix has massively expanded its production network here, and has taken out a lease for at least 10 years on virtually the whole of the Shepperton Studios site. That implies that a huge chunk of our money—taxpayers' money—will be gifted straight into the coffers of Netflix in tax credits. It is nothing less than superhighway robbery. The UK taxpayer is being taken for a ride. We are actually handing over cash while Netflix stashes money offshore.
May I begin by thanking the right hon. Member for Barking (Dame Margaret Hodge) for calling this debate on an interesting and important topic that is of great public import? Members across the House will be aware of the interest that she has taken for many years in matters of tax avoidance, and I am grateful for the opportunity to speak in the debate and to outline work that the Government are doing to address concerns.
As the right hon. Lady will know, although I have overall responsibility for the tax system, I and other Ministers are never privy to information about the tax affairs of specific companies or individuals. This is a basic safeguard for taxpayers that is designed to ensure that Her Majesty’s Revenue and Customs can administer the tax system independently and without political interference. I am not, therefore, in a position to comment on the situation with Netflix as such, although I would like to reassure her that I have taken time to read around the subject of the debate, which excites a range of differing views. She will be aware that many of the wider concerns that she expresses are shared by Members across the House. I myself have written about them at some length and indeed pursued them as a member of the Treasury Committee, as she noted. In particular, she has raised several important general points about the tax system, which I would like to address.
The UK, like most major economies, taxes multinational companies based on the profits attributable to the economic activities they undertake here—for example, product development or manufacturing. That point has been well made by the right hon. Lady. That means that revenues alone are not a useful indicator of the amount of tax that a business should be paying in the UK. It is also necessary to consider the profitability of the business concerned, and the extent to which the activities that generate profits take place in the UK or abroad. However, the Government recognise that some multinational businesses have sought to avoid paying their fair share of tax in the UK by entering into contrived arrangements to divert profits to low tax jurisdictions, depriving the Exchequer of revenues needed to fund the public services on which we all reply. That is completely unacceptable, which is why the Government have taken robust action designed to inhibit or prevent it.
I thank the Minister for giving way. He is right to emphasise the importance of international co-operation, but the passage of time since many of these arrangements were agreed and the prevalence of the problems today suggest that international action has not been sufficient. What about the two examples of unilateral action that my right hon. Friend mentioned: a withholding tax applied in this country, or an extension of the ambit of the digital services tax that the Government currently have under consideration?
I thank the hon. Gentleman for his question, although it is a pity that he asks a question that has already been asked when we are short of time in a debate, because that does not allow me the time to come back to the right hon. Member for Barking, who asked the question in the first place. If they permit me, I will get to his point in due course after I address another issue raised by the right hon. Lady that is of great importance to the debate.
Turning to creative sector tax reliefs, we need to be clear that the creative industries make an important and extremely valuable cultural contribution to the UK. They are also an important part of a dynamic and diversified economy, with the UK’s world-famous creative industries making a record contribution to the economy in 2017 by breaking through the £100 billion mark. The Government are committed to supporting these highly skilled and innovative industries as they support economic growth across the UK. That is why the Government continue to offer support for the creative industries through eight sector-specific tax reliefs. The most established of those are reliefs for British film and high-end television productions. The reliefs have supported over £19 billion of UK expenditure, including the completion of 90 TV programmes and 245 films in 2018-19 alone. The success and popularity of British films overseas is well known. The UK film industry exported a record £2.6 billion-worth of services in 2017 and employed over 90,000 people across the UK in 2018.
The effect of the tax reliefs, in turn, is to help cement investor confidence in UK creative skills, infrastructure and innovation. Indeed, investment in facilities has spread to projects around the UK and includes new studio spaces such as Wolf near Cardiff, Pentland in Scotland, Church Fenton in Yorkshire, and the Littlewoods building redevelopment project in Liverpool.
I now turn to the questions raised by the right hon. Lady. She asked about the location where IP is created and whether that should determine the taxation of that IP. As she will be aware, I cannot comment on the circumstances of individual businesses, but under international tax rules, the UK is entitled to tax the shares of a company’s profits that relate to those production activities. That is what we are in a position to do, so she should not have concern on that front.
I really have no time if I am to answer the right hon. Lady’s questions. Perhaps I can come back to the hon. Gentleman, but I have already taken two completely irrelevant repetitions of questions that I am trying to answer.
Why can Brazil tax companies but the UK cannot? As the right hon. Lady explained, Brazil has a withholding tax. In the Finance Act 2019, the UK introduced a charge, as I have described, on offshore receipts from intellectual property. That charge, introduced in 2019, completely refutes the suggestion made by the hon. Member for Ilford North (Wes Streeting) that tax arrangements have existed for a long time—in fact, trying to stop these forms of aggressive avoidance and potentially outright evasion is an ever continuing process. The effect of the ORIP rules is to replicate the effect of a withholding tax where IP is held in low-tax territories, along the lines that the right hon. Member for Barking has called for.
The right hon. Lady asked about the digital services tax. As she is probably aware, that is designed to relate to large search engine, social media and online marketplace businesses. Those are different from the case that she is discussing, as they rely on their users to create value where that value is not recognised under current international tax rules. Therefore the set of rules would have to be entirely rewritten to take into account the circumstances of the case that she is describing now, which may be important but is in any case captured by existing Government law in many instances. In any case, the DST is intended to be a temporary measure pending agreement of a long-term global solution, potentially including the United States, that will address the wider challenges posed by digitisation.
I remind the right hon. Lady as she denounces the company in question, for which I hold no brief either way, that it is planning to invest about £232 million in Shepperton Studios. That is not a trivial act and is something that we should be aware of. Finally, she mentioned country-by-country reporting. Again, the law is in place. Since 2017, large multinationals have been disclosing the information to HMRC. Businesses of all shapes and sizes make a valuable contribution to the UK’s creative economy, and it is absolutely right that they should be incentivised to continue to do so. But it is equally right that HMRC should subject large businesses to an appropriate level of scrutiny, and my understanding is that it is actively investigating around half of the UK’s large businesses at any given time. That is a very considerable undertaking and ample testimony to the seriousness with which it takes this issue.
10:44 pm
House adjourned.
However, Netflix is far from the only culprit. Tax credit abuse is rife in other industries, including film and video games. Rockstar Games, the maker of the controversial Grand Theft Auto series, is one example. In the UK we have a thriving creative industry with large amounts of production happening here, and that is to be encouraged and celebrated, but the present rules are clearly absurd. Large, profitable companies such as Netflix and Rockstar Games claim that no profit is made here, and, as a result, are simply making money on the back of the UK taxpayer. It is the worst kind of corporate welfare. Why, I ask the Minister, can we not adjust the eligibility criteria, and insist that any company that is enjoying tax credits must declare the revenue earned from its products created with those tax credits here in the UK? Why can we not make that a condition of the tax credits, so that we collect the tax?
Finally, if the Minister will indulge me, I want to talk very briefly about the role of the United States. These digital corporations are spurred on by the US Government, who, I believe, encourage such shady tax practices. As long as some taxes are paid in the US, the US Government do not care if American corporations use shell companies, offshore tax havens or other instruments. They are happy for them to avoid taxes in the UK and other jurisdictions around the world. In recent years, US-based multinationals have built up cash piles of more than £1 trillion in tax havens such as Bermuda. Since Donald Trump’s 2017 tax reforms, the US has claimed all that profit for itself for American headquartered companies. If the companies repatriate their income from the tax havens, the income that the companies receive from outside the US is charged at a much lower rate of corporation tax—just 13.12%. So the US has become a tax haven for the overseas operations of its multinational companies. That explains why, in December last year, Google decided that it was moving its intellectual property from Bermuda back to the USA. Why stash your cash offshore when the US itself has become the world’s largest tax haven? If companies choose not to repatriate their income, they are still charged a flat rate of tax of just over 13% on the revenue they hold and accumulate in tax havens.
An obvious way through this web is to lift the shroud of secrecy that surrounds the revenue and profits of multinational digital giants. That is why this Government supported a measure that would require companies to report their activities, their revenues and their profits on a country-by-country basis. We passed the law enabling country-by-country reporting in 2016. I ask the Minister: when will the Government bring that provision into force? Only with greater transparency will we know how much profit these digital companies make and where they should be paying their taxes. Only then can we ensure that every country gets a fair ride.
I accept that we need a new international consensus on the corporate tax regime. However, news from the OECD suggests that the United States itself is blocking progress on international tax reform. It is outrageous that the US is holding up international reform, threatening individual countries with new tariffs when those countries try to tax global companies, and then charging those global companies tax—albeit at a very low rate—on the business they secure and the profits they make outside the US.
The case of Netflix is a scandal. If we want to stop this abuse, we can. The Government can be assured that such action would command the support of the whole House, but failure to act represents a betrayal of every law-abiding taxpayer. If the Government fail to take the practical actions that I have suggested, I know that I and others will not remain silent.
Internationally, the Government have been at the forefront of efforts to ensure that multinational companies pay their fair share of tax. In 2013, the UK used its presidency of the G8 to initiate the OECD’s base erosion and profit shifting project, which carried out a comprehensive review of international tax rules. The BEPS project recommended a range of measures to combat tax avoidance, which the UK has led in implementing. They include rules restricting companies’ ability to shift profits using interest deductions, rules counteracting tax avoidance arrangements involving so-called hybrid mismatches, a requirement for multi- nationals to disclose information about their sales, profits and assets in each country to HMRC, and new rules to prevent the abuse of tax treaties.
The Government have also acted unilaterally where needed. In 2015, they enacted the diverted profits tax, which charges a higher rate of tax on profits diverted from the UK in order to encourage companies to declare the right amount of profits. In 2019, they introduced a tax charge on offshore receipts in respect of intangible property—known in the trade as ORIP—which targets companies that hold valuable intangible assets, such as brands or technology rights, in low-tax jurisdictions. Such measures have significantly curbed the ability of multinational companies to shift profits to low-tax jurisdictions and have collectively raised over £8 billion for the Exchequer.
However, we must be realistic about the scale of the problem, not merely in the UK but around the world. New digital business models continue to pose challenges for international tax rules, and the sad fact remains that the vast majority of the rules were developed prior to the digital revolution of the past two decades. The Government therefore strongly support further work that is being undertaken at the OECD to reform profit allocation rules to ensure that market economies, including the UK, can tax a fair share of the profits of highly digitalised businesses. Only last week, UK officials attended meetings of the OECD in Paris, at which countries agreed to an outline of reforms. It is a complex area and there remains much work to be done, but the Government are optimistic that global agreement will be reached.
The right hon. Lady also raised the question of Brazil.
Let me conclude, Mr Deputy Speaker, by thanking you and thanking the right hon. Lady once again for raising this important issue.