Behind the surprise tax in Brazil that shook Netflix’s revenue

An unexpected and painful $619 million tax charge from Brazil reduced Netflix’s September quarter operating margin, defying Wall Street’s optimistic forecasts and hurting the stock, which fell more than 6%.

It was unusual. Asked during the streamer’s post-earnings Q&A webcast to elaborate on what happened, CFO Spencer Neumann highlighted “two really important takeaways that I want to leave with you. One is that no other tax looks like or behaves like this in any other major country that we operate in. And, two, without this expense, we would have exceeded our guidance of operating profit and operating margin for the third quarter of 2025. And we don’t expect this deal to happen. have a material impact on our results in the future.

Netflix reported an operating margin of 28% for the third quarter. Without the Brazilian hiccup, the margin would have exceeded the company’s forecast of 31.5%, he added. The culprit was a national tax on outgoing payments called Contribution for Intervention in the Economic Domain (CIDE).

“It’s a little complicated… It’s a cost of doing business in Brazil,” Neumann explained. “This is a 10% tax on certain payments made by Brazilian entities to companies located outside of Brazil. This is not a tax specific to Netflix. It is not even specific to streaming. So we assume other companies will be impacted by this.”

“In our case, Netflix Brazil pays Netflix US for services that allow Netflix Brazil to offer subscriptions to our Brazilian customers. And we actually received a favorable ruling from a lower court in 2022 that found that we were not subject to this tax, which is why we thought we couldn’t accrue it.”

He said the legal issue — which the streamer has apparently flagged in several SEC filings — concerns the scope of transactions covered by the tax — specifically, whether it applies to payments for services that don’t involve technology transfer.

In August this year, Brazil’s Supreme Court ruled against an independent company, ruling that “the tax applies to a wider range of transactions than we thought was legally allowed,” including payments for services that do not involve technology transfer.

“So, given this court’s decision, it caused us to reevaluate the likelihood of prevailing, and we now view the loss as probable, and that’s why we recorded the expense in the third quarter.”

Around 20% of expenditure concerns 2025.