Do Companies Pay Their Tax? (A Brief Look At Amazon)

Yes. They do. If they didn’t, this would be tax evasion. Tax evasion is illegal and firms face penalties for evading tax. So why is there such a big fuss about companies such as Amazon, Google and Starbucks not paying their fair share?

There are two issues here. The first is that too many people do not understand how business taxes work in the UK and are misled by left-wing media. Linked to this is that too many people do not understand the difference between illegal tax evasion as mentioned above, and legal tax avoidance which is common sense.

 The second is that this question sometimes get mixed up with: do companies pay their fair share of tax? This is a question that I’m not going to go into as it is primarily concerned with political philosophy – my aim is not to tell people how to think but give them the knowledge to think accurately.

Therefore this blog post is hopefully going to tackle some misconceptions. I’m going to mainly stick to Amazon’s tax affairs as this is the company which I know most about. Last year, the Guardian stated that “Shoppers have been urged to boycott Amazon's British business after it paid just £4.2m in tax last year, despite selling goods worth £4.3bn.” There are two main things wrong with this statement.

The first is that corporation tax is not paid on revenues and as such, the statement makes no logical sense. Corporation tax is a tax levied on profits at a rate of c. 21% (this can change slightly depending on the size of the company). However, companies can make deductions from their trading profits if they make charitable donations, or invest in capital.

The second fault with the statement is that the goods worth £4.3bn mentioned were not sold by Amazon UK but by Amazon EU Sarl. This is the company based in Luxembourg from which we buy goods from when we place an order through Amazon’s website. Amazon UK is merely a distribution company which Amazon EU Sarl pays to distribute the goods.

Amazon UK made £17m of profit in 2013, and paid £4.2m of that in corporation tax to HMRC. This is a rate of over 24%, meaning the company paid all the tax due in the UK. Maybe you object to the fact that Amazon is based in Luxembourg, and if you do, you can blame Jean-Claude Juncker, the former president of Luxembourg and current president of the European Commission. He offered Amazon a special rate of corporation tax (3.5%) if they set up their headquarters there as he knew that the Luxembourg government would reap the benefits (support for the argument that lowering the corporation tax rate brings in more business and therefore more money to the government).

You could blame Amazon for setting up in Luxembourg and “avoiding” tax but be honest, if you had the choice of paying 3.5% income tax or 20% income tax and both options were completely legal, which would you choose? It’s interesting that we don’t describe individuals who put money into their pensions or take part in cycle to work schemes, so that they have less taxable income, as “tax avoiders”.

It is also worth noting that Amazon is not a profitable company in general. Even if they had no “tricks” to avoid tax, they would not pay much corporation tax. On global revenues of $89bn in 2014, Amazon.com made a loss of $241m. This is because Amazon offer so many of their goods and services at a loss. Their Kindle tablets and Fire phones are both sold at a loss, and Amazon loses millions of pounds on delivery every year. Now, I’m not going to pretend that this is for the benefit of consumers – it is purely to gain market share in as many markets as possible. However, a side effect of this is that we, as consumers, get a great deal. As Milton Friedman once said, “The social responsibility of business is to increase its profits” – and the best way to increase profits is to look after both your customers, and your employees.

So boycott Amazon if you must, if you feel that they are “cheating the system”, but please be aware that the only person who will suffer as a result is yourself. I hope that you are now in the loop on corporation tax but if you’d like me to explain anything else on this topic, please leave a comment below!

Ed

Note: Since planning this blog, Amazon announced they would be changing how they report their sales and items distributed in the UK would be reported as sales for Amazon UK. This should lead to Amazon paying more corporation tax in the UK but this is not guaranteed as, again, corporation tax depends on profits and not revenue! This is a voluntary move by Amazon, but it has possibly been hastened by the investigation currently ongoing by the EU into Luxembourg’s relationship with Amazon. It should be noted, however, that it is Luxembourg’s offer of reduced corporation tax that is potentially illegal. It is not Amazon’s business structure that is being investigated. There are also investigations at present into Ireland’s relationship with Apple, and the Netherlands’ relationship with Starbucks.