Amazon’s tax affairs are never far from the gaze of the British media, nor from scrutiny by those who declare themselves campaigners for tax justice. So, queue the predictable uproar when it was announced that Amazon UK Services Ltd, Amazon’s UK logistics and customer services arm, had more than halved its UK corporation tax bill to £7.4m in 2016, despite a healthy increase in turnover from £946m to £1.46bn.
To guarantee headlines, commentators made accusations of tax avoidance, once again reciting the hollow and meaningless phrase ‘fair share of tax’. What they chose to selectively ignore was that the company’s pre-tax profits halved from £48m in 2015 to a more modest £24m last year. This unfortunate but common omission presents an inaccurate picture of Amazon. As all readers know, tax is only paid on profits, not revenues.
The attacks on Amazon’s contribution to the UK’s corporate tax take are ill founded and lack understanding. Amazon’s fall in taxable profits was likely highly correlated to the extra 5,000 people employed by Amazon UK Services Ltd in 2016. The result will be additional tax contributions through income tax, national insurance and VAT. Hardly something to protest.
In any event, to focus solely on Amazon UK Services Limited when making ill-founded assertions on Amazon’s UK tax contribution, is to ignore Amazon’s ongoing investment in the UK and how it now operates here.
But, first let’s recap. It is a well-established principle that a company will only be subject to foreign corporation tax to the extent that it has sufficient activity in a particular jurisdiction to create a taxable presence (permanent establishment (PE)), or is managed and controlled within a particular jurisdiction. Quite simply, no foreign corporation tax is due when there is no foreign taxable presence.
Therefore, a non-UK digital business with little need for a UK-based sales company to sell to British customers will mean limited exposure, under general rules, to UK corporation tax. This similarly applies to UK companies entering foreign markets. However, the times, they are a-changin’.
The OECD’s BEPS (base erosion and profit shifting) project seeks to counter a belief that the current PE definition and transfer pricing (TP) rules do not sufficiently protect the domestic tax base. However, feeling the frustration at the international community’s glacial deliberation, the UK moved unilaterally to introduce the Diverted Profits Tax (DPT) – a mere six months before the release of the OECD’s final papers. DPT sought to crack down on perceived multinational tax avoidance, capturing the likes of Google, Amazon and Starbucks within its remit.
DPT levies a 25% charge on companies who design their activities to avoid creating a UK PE or who create tax advantages by using entities or transactions that lack economic substance. However, the rate imposed implies that DPT was perhaps designed to encourage behaviour changes in MNEs rather than as a means of raising revenue.
Amazon’s UK operations are headquartered in Luxembourg (Amazon EU Sarl) and prior to DPT Amazon EU Sarl was the contracting entity for all UK sales. The distribution of products to UK customers was contracted to Amazon UK Services by Amazon EU Sarl for a fee on which any profit would then be subject to UK corporation tax.
While historically tax efficient (and legal), these arrangements were brought within the scope of the penal 25% DPT charge. In order to mitigate DPT (per the Government’s perceived intention), Amazon chose to establish a UK branch and allocate profits to that UK PE two months before the legislation took effect.
However, inciting multinationals to restructure in this manner leads them directly back to TP. The issue that then arises is that if all multinationals are then tested on similar comparables a new status quo is established which somewhat nullifies the full impact of the rules.
So lies the DPT ‘rub’. While both Amazon EU Sarl and its UK branch are treated as if they are transacting as distinct and separate enterprises under the arm’s length principle, limited staff numbers (not to be confused with Amazon UK Services’ 14,000 employees), risk, functions and the assets located in the UK mean that it is likely that very little profit is actually allocated to the UK branch.
For current politicians to frame the multinational tax avoidance debate as one centred on corporation tax runs contrary to the UK government’s stated agenda (on both sides of the House). The UK has repeatedly dropped the rate of corporation tax (28% in 2008 to 17% by 2020) to encourage the type of investment we see Amazon making. Caricaturising multinationals as evil corporations who do not pay their ‘fair share’ simply obscures the point. No legislation we have ever reviewed focuses on fairness or morality. To do so would introduce a moral element that could not survive legislative or judicial scrutiny. Instead of soapbox politics, we should actively encourage MNEs like Amazon to establish and expand their presence here in the UK in order to reap the tax rewards of their success.
Andrew Murray, partner and Rozi Ellis, associate at Milestone International Tax Partners LLP