[2022 National Audit] Netflix with '1 Trillion Won Sales' Over 3 Years, Also Did Not Pay 6 Billion Won in Corporate Tax (Comprehensive)

Culture, Sports and Tourism Committee Audit, Netflix Refinement Policy Legal General Witness Appearance
Rep. Kim Seung-su Points Out "81% Remittance Fee to Headquarters, Suspected Tax Evasion Manipulation"

Jeong Gyo-hwa, Executive Director of Netflix Service Korea, is attending the comprehensive audit of the Korea Communications Commission by the Science, ICT, Broadcasting and Communications Committee of the National Assembly in Yeouido, Seoul on the 21st, responding to questions from lawmakers. Photo by Yonhap News

[Asia Economy Reporter Kim Heeyoon] Global online video service (OTT) provider Netflix has been criticized for charging excessively high headquarters fees while paying disproportionately low taxes relative to its domestic sales.

At the National Assembly Culture, Sports and Tourism Committee’s audit held on the 24th, Kim Seungsoo, a member of the People Power Party, asked, "Korean content has been a huge hit on Netflix, but is Netflix providing fair compensation to our companies in proportion to their contribution?" He then pointed out, "For example, the value contributed by 'Ojingeo Game' (Squid Game) to Netflix is estimated at 1 trillion won. Aside from the total production cost of 20 billion won, has there been any additional compensation paid to the producers?"

In fact, Netflix recorded 1.2 trillion won in domestic sales over the past three years. However, it did not pay even 6 billion won in corporate tax. Lawmaker Kim criticized, "The fees paid to the headquarters under the name of cost of sales have risen excessively to as much as 80%, which seems to be for the purpose of tax evasion."

Kim explained that the proportion of fees remitted to Netflix’s headquarters relative to domestic sales surged from 65.7% in 2019 to 81.8% last year. Meanwhile, the corporate tax ratio relative to domestic sales only slightly increased from 0.3% to 0.5% during the same period. This has raised concerns that the cost of sales has been excessively inflated to avoid taxes.

Kim added, "Looking at Netflix’s profit situation, it’s a case where the bear does the tricks but the king’s envoy takes the money. Although incentives were given, they are probably at a level that cannot even be disclosed. Producers and the public believe that Netflix has no contribution to the Korean content industry or to creating a healthy production ecosystem."

Domestic sales revenue of Netflix and the proportion of remittances to group companies. Photo by Seungsoo Kim, Office of the People Power Party

In response, Jeong Gyohwa, Executive Director of Netflix Services Korea, who appeared as a witness that day, said, "It is difficult to disclose specific contract details, but we are making efforts to provide fair and sufficient compensation to creators through various types of contracts. I understand that compensation was paid following the success of Squid Game Season 1."

Jeong also emphasized, "Please consider that we bear the entire risk of success and cover costs for subtitles, dubbing, and marketing for global distribution. We will take the pointed issues into account and strive to find ways to contribute to the production environment."

Lawmaker Kim asked, "At the Communications Commission audit on the 21st, the issue of Netflix’s non-payment of network usage fees became controversial. Related legislation is pending in the National Assembly. If network usage fees are imposed, will there be disadvantages for domestic content providers (CPs), individual YouTubers, or Korean Netflix viewers?"

Jeong avoided a direct answer, stating, "It is not appropriate to comment on the effects as there is no final court ruling yet."

Hong Ikpyo, Chair of the Culture and Sports Committee from the Democratic Party, said, "Contract practices and global standards in the US and European countries should be applied at the same level in Korea and other countries. I ask Netflix Korea to seriously discuss this with its headquarters and correct the situation."

Jeong responded, "We provide fair compensation in collaboration with domestic creators. Since competition among OTTs is active in Korea, it is practically difficult for us not to provide fair compensation from a dominant position."

Criticism of Jeong’s attitude in responding continued.

Lawmaker Kim said, "I wonder what the witness, who is supposed to oversee domestic policy, actually knows. He deliberately avoids specific answers and only offers generalities that slip away like a snake over a wall."

Chairman Hong added, "The responses were more inadequate than expected, and there was nothing meaningful to confirm. It is very regrettable. I think a separate standing committee meeting on domestic OTTs, including Netflix, is necessary."