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Tax Intelligence

Amazon’s UK taxes: criticisms misplaced

Andrew Murray, Partner and Rozi Ellis, Associate, examine Amazon’s UK tax:


The recent release of Amazon’s UK logistic and customer service company’s financial accounts revealed a lower corporation tax liability (£7.4mn corporation tax on profits of £24.3mn), despite a healthy increase in turnover. The commentators’ response was to wield accusations of tax avoidance and allow the unfortunate phrase ‘fair share of tax’ to once again reach media headlines.

But, allowing the tax avoidance debate to focus solely on corporation tax illustrates a lack of understanding:

  1. of a basic tax calculation;
  2. of how MNE’s operate generally;
  3. that the UK’s Diverted Profits Tax (DPT) has been largely effective in creating a behavioural shift; and
  4. that corporation tax is only a small portion of Amazon’s total UK tax contribution.

The tax calculation

Revenue versus profit is an unfortunate but common error loudly played out in the media. As all readers will know, tax is only paid on profits, not revenues. Thus, it’s a misnomer to contend that Amazon’s UK operations avoid tax merely because corporation tax has fallen while revenues have increased. So, what’s going on?

Amazon UK Services Limited is Amazon’s UK fulfilment and corporate support services business. Essentially, it provides employees to the distribution centre and administrative staff for Amazon’s UK operations. It’s a high volume, low margin business. 2016 revenues were £1.46bn, up from £0.95bn in 2015. Yet, profits fell. The reason? Amazon employed an additional 5,000 people in the UK. Hardly actions to end up in the stocks.

But to focus solely on Amazon UK Services Limited when drawing a conclusion regarding Amazon’s total UK tax contribution, is to ignore how Amazon now operates in the UK.

MNEs global operations

But first, we need to go back to basics. A foundation of international tax is that a company will only be subject to foreign corporation tax to the extent that the company has a taxable presence (permanent establishment (PE)) in that foreign jurisdiction or is managed and controlled from there. The maths is relatively simple: no foreign taxable presence equals no foreign corporation tax.

In today’s globalised world, a non-UK digital business with little need for a UK based sales company to sell to UK customers will mean limited exposure, under general rules, to UK corporation tax. Similarly, UK companies entering foreign markets have the same ability to operate through a no or low touch domestic presence, thereby limiting their exposure to foreign corporate tax. But times are changing.

BEPS, DPT and behavioural change

The OECD’s BEPS (base erosion and profit shifting) project, was a result of concerns that the current PE definition and transfer pricing rules were inadequate in protecting the domestic tax base. Frustrated with the lack of immediate implementation and, six months before the OECD released its final papers, the UK moved unilaterally to introduce DPT, an entirely new tax aimed at perceived multinational tax avoidance (to capture the likes of Google, Amazon and Starbucks).

DPT levies a 25% charge if a company:

  1. designs its activities to avoid creating a PE in the UK by moving profits out of the UK to a low tax jurisdiction; or
  2. creates a tax advantage by using entities or transactions that lack economic substance.

DPT was designed to send a message to the UK public that something was being done to reign in ‘evil’ multinationals. However, the rate has been set at a level that, perhaps more than a direct revenue raise, is designed to encourage a behaviour change for MNEs operating in the UK while also seeking to ensure the UK is kept sufficiently attractive for inward investment.

Amazon’s UK structure

Amazon’s UK operations are headquartered in Luxembourg (Amazon EU Sarl). Before the introduction of DPT, all UK sales were booked through Amazon EU Sarl. The distribution of products to the UK customers was then contracted to Amazon UK Services by Amazon EU Sarl for a fee on which any profit would then be subject to UK corporation tax.

These arrangements, while historically tax efficient (and legal) were clearly within the scope of the penal 25% DPT charge. To mitigate DPT (which seemed to be the Government’s intention), Amazon could incorporate a UK subsidiary or establish a UK branch and allocate profits to that UK PE. The latter was chosen two months before the legislation would bite.

However, how has DPT had the desired effect? Pushing multinationals to restructure in this way, throws them directly back into transfer pricing, the source of many current international tax inadequacies. The level of profits allocated to the UK branch are now determined by the arm’s length principle based on comparable market transactions calculated by internationally agreed methodologies. The difficulty is that if all MNEs are tested on similar comparables, a ‘new normal’ is created, somewhat nullifying the full impact of the rules. Thus, while Amazon EU Sarl and its UK branch are treated as if they are transacting as distinct and separate enterprises, it’s likely that very little is actually allocated to the UK due to the limited staff (separate from the Amazon UK Services’ 14,000 employees), risk, functions and assets located here.

Interestingly, the size of the Amazon group means that HMRC will have reviewed and agreed the allocation of profit to the UK branch in accordance with internationally accepted transfer pricing practices. The branch structure also means that public are not privy to this information as the figures are aggregated with those of Amazon EU Sarl.

Looking at the alternative arrangements however, Amazon made a wise decision. HMRC claimed its first DPT victim, Diageo, earlier this year announcing a £107mn DPT assessment. Perhaps even HMRC were surprised by the lack of encouragement Diageo took from the penal 25% DPT. The Budget Statement estimated DPT would raise £270mn (rising from £25mn in the 2015-2016 tax year), meaning Diageo’s assessment covers a large portion of the expected revenue from DPT. Clearly, all is not as clear as it seems.

Perception is key

The attacks on Amazon’s contribution to the UK’s corporate tax take are ill-founded and lack understanding. Any government that wants to incentivise investment, growth and innovation in a highly competitive global market place cannot be completely out of step with its neighbours. The UK took a significant risk with DPT but, in the end, likely got the result it wanted: additional UK tax.

Amazon’s business model means far more tax is paid through the investment it makes into the UK. The additional 5,000 people Amazon employed during 2016 will provide additional income tax, national insurance contributions and VAT, amounts likely to far outweigh the corporation tax perceived to be lost.

Indeed, allowing the MNE tax avoidance debate to centre solely on corporation tax is at odds with the UK government’s stated agenda (on both sides of the House). The UK has moved to alleviate the corporate tax burden by repeatedly dropping the rate (28% in 2008 to 17% by 2020). Labelling multinationals as evil corporations who do not pay their ‘fair share’ distorts the argument. 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 a presence here in the UK and reap the tax rewards of their success.


This article was published in Bloomberg BNA

Reproduced with permission from Copyright 2017 The Bureau of National Afairs, Inc. (800-372-1033)


September 1, 2017

Andrew Murray

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Andrew is a co-founder of Milestone. He was previously employed by a major US investment bank where he specialised in the development of tax structured and tax enhanced derivative products and solutions.

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