An unexpected and painful $619 million tax expense from Brazil knocked the operating margin for Netflix‘ September quarter, defying Wall Street’s upbeat guidance and hitting the stock, which fell more than 6%.
It was unusual. Asked on the streamer’s post-earnings Q&A webcast to please provide more color on what happened, CFO Spencer Neumann stressed “two really important takeaways that I want to leave you with. The first is that … no other tax looks or behaves like this in any other major country in which we operate. And, secondly, absent this expense, we would have exceeded our Q3 ‘25, operating income and operating margin forecast. And we don’t expect this matter to have a have a material impact on our results going forward.”
Netflix reported an operating margin of 28% for the third quarter. Without the Brazilian hiccup, the margin would have exceeded the company’s guidance of 31.5%, it said. The culprit was a national tax on outbound payments called the Contribution for intervention in the Economic Domain (CIDE).
“It’s a bit complicated … It’s a cost of doing business in Brazil,” Neumann explained. “It involves a 10% tax on certain payments made by Brazilian entities to companies outside of Brazil. It’s not a tax that’s specific to Netflix. It’s not even specific to streaming. So we assume other companies will be impacted by this.
“In our case, Netflix Brazil pays Netflix U.S. for services that enable Netflix Brazil to offer subscriptions to our Brazilian customers. And we actually received a favorable ruling from a lower court back in 2022 that concluded we were not subject to this tax, which is why we believed we couldn’t accrue this.”
He said the legal issue – which the streamer has apparently flagged in several SEC filings — relates to the scope of transactions covered by the tax — in particular, whether it applies to service payments that don’t involve a transfer of technology.
In August of this year, the Brazil Supreme Court decided against an unrelated company, ruling that “the tax applies to a wider range of transactions than we thought was legally permissible,” including service payments that don’t involve the transfer of technology.
“So given that court’s ruling, that’s caused us to reevaluate the likelihood of prevailing, and we now deem the loss to be probable, and that’s why we recorded the expense in Q3.”
About 20% of the expense is from 2025.
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