The Brazilian Tax That Just Cost Netflix $619 Million

Netflix just took a US$619 million hit in Brazil. The “expense” showed up in its latest earnings report and came as a surprise to many. According to the company, it relates to taxes on payments made by Netflix to its US headquarters for the technology and systems behind its streaming service in Brazil.

The issue involves CIDE-Tecnologia, a digital services tax on payments sent abroad for the use of technology. While the tax has been around for years, it was never clear how far it reached. But that changed this past August when Brazil’s Supreme Court (STF) ruled that the tax extends beyond the transfer of technology. The STF held that CIDE also applies to payments for royalties, technical services, and administrative support.

While Netflix wasn’t a party to the case, the court’s precedent impacts businesses across the board. Other companies making similar payments abroad now find themselves in the same position. For example, Disney, Amazon, and other streaming companies will now need to adapt to this new reality.

The CIDE rate is 10 percent. That might not sound like much, but when applied retroactively over several years, it adds up fast. For companies with large or recurring payments abroad, the potential tax liability could be substantial.

In Brazil, taxes are complicated. The rules change frequently, and court decisions can have serious consequences even for non-litigants. If you’re doing business in Brazil or sending money abroad, make sure you understand the risks, and in particular, the tax consequences of your actions.