The Federal Supreme Court’s decision in a trial that led Netflix to announce a tax impact of R$3.3 billion in Brazil this week is peculiar and creates legal uncertainty for companies, tax lawyers told Reuters.
On Tuesday, the streaming service announced net profit of $2.5 billion and diluted earnings per share of $5.87 between July and September globally, while analysts had expected a profit of $3 billion, equivalent to $6.97 per share, according to LSEG.
The company said the result fell short of expectations due to an “ongoing” tax dispute in Brazil that forced it to report a charge of $619 million (about R$3.3 billion) in its third-quarter results.
The dispute concerns contributions for intervention in the economic sector (Cide), which received a Federal Court decision in August that widened its impact and affects other companies in addition to Netflix.
“The cumulative impact of these expenses (approximately 20% is for the year 2025 and the remainder for the period from 2022 to 2024) reduced our operating margin by more than five percentage points in the third quarter,” Netflix said in the balance sheet.
In mid-August, the Supreme Court concluded a ruling that recognized an expanded burden of the Economic Intervention and Domination Contribution, the so-called Cide-Technology. The sentence, the formal decision, was published on the 16th.
The case did not adjudicate a trial in which Netflix was a direct party. In this specific case it was an action by a company that sent resources to its headquarters in Sweden, but it had general repercussions. This means that the agreement adopted must be followed by all bodies of the Judiciary.
The judgment was six votes to five, with the victory of minister Flávio Dino, who prevailed over the initial rapporteur, Luiz Fux, in favor of a narrower interpretation of the collection of the tax.
According to Netflix’s vice president of finance, Spencer Neumann, Cide’s impact on the company’s operations is “unique” in the world.
“It’s a unique tax, no other tax looks or behaves like this in any major country we operate in,” the executive said a day earlier during an analyst conference on Netflix’s results.
The executive explained that Netflix Brazil pays Netflix in the United States for services that allow the Brazilian company to offer streaming subscriptions in Brazil. Neumann said the company reached a favorable decision from a lower court in 2022 that concluded Netflix was not subject to the Cide impact.
Strima, an association representing audiovisual content streaming services operating in Brazil and bringing together companies such as Disney, Globo, HBO, Netflix and Amazon, did not respond to a request for comment when contacted.
ADDITIONAL COST
For lawyer Flávio Molinari, a consequence of the STF’s decision will be a possible increase in the price of subscription to the service in Brazil, precisely to allow the company to cover these losses.
The tax expert, partner of Collavini Borges Molinari Advogados, believes that the STF’s decision implies a deviation from the CIDE’s own objectives. This is because the contribution was created precisely to remunerate the exploration of the use of technology – and here it applies even further, which is in apparent contradiction precisely with the thesis that determines the obligation to allocate revenue to technological funds.
“Because if the revenues must be allocated to technology funds, they derive precisely from the exploitation of the technology – and not necessarily from the exploitation of other administrative costs and the assignment of other rights that are not related to the technology,” explained Molinari.
“So, in our opinion, the Supreme Court, by majority, made a decision that has no specific relationship with the CIDE. It is a wrong decision, which creates legal uncertainty and instability for investors who allocate resources from abroad to Brazil and hope to have an adequate return,” he highlighted.
Tax expert Guilherme Peloso Araujo, partner at CBA Advogados, said the effect reported by Netflix “is an example of the cost resulting from legal uncertainty in Brazil.”
According to him, “the episode demonstrates the impact that judicial decisions have on business and the importance of precise risk classification applicable to discussions of tax theories,” he added.
Source: Terra
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