Photo/Illutration The logo of Netflix (Asahi Shimbun file photo)

Tax authorities have discovered that the Japanese arm of Netflix Inc. failed to declare a total of 1.2 billion yen ($10 million) in income over the three years through December 2019, according to sources.

The Japanese unit will likely be ordered to pay roughly 300 million yen in back taxes, including penalties.

The sources said the Tokyo Regional Taxation Bureau noted that Netflix G.K., a Tokyo-based affiliate of the leading U.S. online video streaming service provider, should have received a share of the profits from an overseas group company for its contribution to the earnings.

The Japanese unit is tasked with signing contracts with domestic movie and animation film production companies to acquire rights to stream their works on Netflix, according to the sources.

A group company in the Netherlands has obtained those rights from Netflix G.K. to operate the online streaming services. The Dutch firm pays the Japanese arm the costs to acquire the rights and other expenses incurred in the process.

The Tokyo Regional Taxation Bureau determined that Netflix G.K. should also have received a certain portion of profits of the Dutch company, which posted strong earnings largely thanks to the streaming rights it gained from the Japanese unit.

The bureau concluded that Netflix G.K. failed to declare a total of 1.2 billion yen in income after calculating the amount of the profits it should have received.

Netflix G.K. also collects monthly fees ranging from about 1,000 yen to 2,000 yen from Netflix subscribers in Japan. It posted an estimated 30 billion yen in sales for the fiscal year ending in December 2019.

But most of those earnings were transferred to the Dutch firm, which provides the streaming services, under the pretext of “streaming fees.”

That means those corporate taxes were mostly paid in the Netherlands, which offers various tax breaks to multinational companies, to keep the tax payment in Japan to a minimum.

Other countries have also been facing the same problem: global companies avoid paying taxes in the jurisdictions where they have users but no physical presence there.

Japan and 135 other nations and regions agreed in October to introduce a new taxation system to address the issue, targeting the so-called GAFA (Google, Apple, Facebook and Amazon), in particular.

The new system would enable countries where such tech giants have their clients to impose corporate taxes on them by distributing rights to a levy on a portion of the firms’ profits to those nations according to the companies’ earnings.

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