As the debate around corporate tax avoidance rumbles on, the likes of Apple, Google and Starbucks have faced increasing criticism for aggressively offshoring profits to lower tax regimes to minimise their payments to the UK’s public purse.
Google’s tax shenanigans meant they paid £6 million in Corporation Tax on UK profits of £2.6 billion last year. If they’d paid the full 23% that bill would have been more like £600 million.
Starbucks faced a backlash from customers for their lacklustre tax payments and subsequently volunteered an extra contribution, and recently announced they are to move their European HQ from Amsterdam to London to increase their tax liabilities.
There is one curious outlier in this group though – American retail giant Amazon. Aside from a headquarters in Luxembourg and a recently-closed loophole allowing VAT-free sales of DVDs through Jersey (the Low Value Consignment Relief), Amazon has had little need of aggressive tax avoidance tactics – certainly nothing on the scale of Apple’s Irish loophole abuse.
Despite using fairly run-of-the-mill tax minimisation tactics (note: we’re not condoning this behaviour, merely pointing out that a Luxembourg HQ is fairly commonplace for an international business) Amazon has faced constant pressure from the media and Government to increase its Corporation Tax liabilities, even appearing before the Public Accounts Committee and the fearsome Margaret Hodge in late 2012.
As Crunch clients will know, Corporation Tax is paid on profits – and where there is no profit, there will be no tax owed. This is the key difference between Amazon and other businesses which aggressively minimise their taxes – Amazon has never turned a decent profit, and so naturally has very small tax liabilities.
How much profit has Amazon made?
As of their last financial results Amazon has made cumulative profits of $5.47 billion since January 2000. That might sound like a lot, but Apple made a profit of $10.2 billion between January and March this year.
Amazon and its mercurial founder Jeff Bezos just aren’t interested in profits, even as their revenues skyrocket.
Brad Stone’s book on the company, The Everything Store, puts it like this:
“Despite the recent rise of its stock price to vertiginous heights, Amazon remains a unique and uniquely puzzling company. The bottom line on its balance sheet is notoriously anemic, and in the midst of its frenetic expansion into new markets and product categories, it actually lost money in 2012.
“But Wall Street hardly seems to care. With his consistent proclamations that he is building his company for the long term, Jeff Bezos has earned so much faith from his shareholders that investors are willing to patiently wait for the day when he decides to slow expansion and cultivate healthy profits.”
Amazon views customer service, marketing and low prices as different parts of a cohesive whole – why spend millions of dollars for TV ads when you can use those millions to reduce your prices?
The company’s automated software scours the web and monitors prices on competitor websites – if they spot a lower price, more often than not they’ll lower theirs to match or beat it. This can often lead to a loss-making sale – but it’s a sale for Amazon, and not the competition. Jeff Bezos calls this “proactively delighting customers.”
The media is unclear on the issues
With every quarter of Amazon results, headlines such as these appear with alarming frequency –
The media is comparing apples with oranges here – even the “Financial website of the year” can’t get it right. Sales revenue has no correlation with the amount of Corporation Tax a company must pay. The Daily Mirror went one better and mixed up revenue and profits:
“So, if Amazon paid UK corporation tax next year at a planned new rate of 20%, it would pay £860 million – instead of the paltry £4.2 million.”
Given the purpose of a company historically is to make a profit, and the widespread misreporting of their tax liabilities, many people are justifiably confused and angered by Amazon’s tiny tax payments.
What can be done?
There have been several suggestions in this area – a tax on turnover for companies which are not seen to be contributing their fair share, or a financial transaction tax which would collect a tiny percentage of the sale price every time a customer bought something from Amazon.
Neither these, nor a litany of other alternative tax arrangements, have garnered much serious debate due to their narrow focus on tackling avoidance while ignoring the wider impact on the UK business community. Amazon’s line throughout the controversy has been:
“We pay all applicable taxes in every jurisdiction where we operate. We have a single European headquarters in Luxembourg with hundreds of employees to manage this complex operation.”
Closing Amazon’s £11 billion Luxembourg tax loophole has long been considered the answer, however there’s little evidence this would increase the company’s Corporation Tax payments. In fact there’s historical evidence that it would have no impact whatsoever – the closing of the Low Value Consignment Relief loophole had no discernable effect on Amazon’s Corporation Tax payments; likewise the closure of similar schemes in five US states did not change the company’s profitability there. More likely Amazon would just re-adjust its pricing and expenditure and continue to bubble along, turning a small profit here and there, and making paltry Corporation Tax payments.
The simple reality is that the UK’s corporate taxation regime – and that of all other countries – isn’t set up to effectively tax a business that doesn’t want to turn a profit.
Jeff Bezos has disrupted online and physical retail, logistics, publishing and web infrastructure services, but his most notable achievement (for better or worse) might well be founding a company that avoids the burden of corporate taxation altogether – by never making any money.
Photo by Sergey Galyonkin