[2021 National Audit] Yang Jeong-suk: "Netflix Transfers 77% of Korean Sales to Headquarters as Commission to Evade Taxes"

[Asia Economy Reporter Eunmo Koo] Netflix is being criticized for lowering its operating profit margin and evading taxes by transferring 77% of its domestic sales to its headquarters as commission fees.

According to Yang Jeong-suk, an independent member of the National Assembly's Science, Technology, Broadcasting and Communications Committee, Netflix increased its cost of sales and lowered its operating profit margin by paying 320.4 billion KRW (77%) of its 415.4 billion KRW domestic sales last year to its headquarters as commission fees. The corporate tax Netflix paid last year was only about 2.17 billion KRW.

Comparing the financial status of Netflix headquarters and its Korean branch, the cost of sales ratio to revenue was 61% at the headquarters and 81% at the Korean branch, showing a 20 percentage point difference. The operating profit margin, which is related to tax payments, was 18% at the headquarters and 2% at the Korean branch, nearly nine times difference.

Yang’s office explained, “Netflix was able to arbitrarily adjust the operating profit margin by following an ‘agreement’ between the headquarters and the Korean branch when calculating the cost of sales.” Previously, the National Tax Service conducted a tax audit from August last year to April this year and reportedly collected about 80 billion KRW in additional taxes.

Assembly member Yang Jeong-suk pointed out that Netflix is evading taxes despite earning huge profits due to the COVID-19 effect and the success of K-content. She also added that although traffic is rapidly increasing every year, Netflix is neglecting to pay a fair fee for network usage.

According to SK Broadband, the traffic caused by Netflix surged about 24 times from 50 Gbps in May 2018 to 1200 Gbps in September this year. As of the fourth quarter of last year, this accounted for the second highest share of total internet traffic after Google, about four times that of Naver and Kakao.

Assembly member Yang Jeong-suk said, “As Netflix’s overall sales and corporate value have greatly increased thanks to the success of K-content, it must fulfill its responsibilities in Korea.” She added, “It is urgent to prepare measures to prevent behaviors that evade taxes and network usage fees.”