In this new regular column, Heather Self (Blick Rothenberg) provides an expert view on a tax issue which made the headlines in the national press. The first topic under review – how much tax should Amazon pay?
Not for the first time, the relatively low corporation tax bill paid by Amazon has provoked criticism. The 2017 accounts for Amazon UK Services Ltd show a tax charge of £1.7m, comprising corporation tax of £4.6m and a deferred tax credit of £2.9m (although most of the mainstream press got these figures the wrong way round, saying that £2.9m of the tax payable was deferred!).
These are the accounts for Amazon UK Services Ltd, which is the UK fulfilment company, providing delivery services for goods bought from Amazon. It is a very high turnover (almost £2bn), low margin business, so it’s not surprising that its tax bill is fairly low. However, the tax bill has been reduced by an adjustment of £17.5m relating to share based awards – absent this figure, the total tax bill would have been at least equal to the UK statutory rate.
Giving share-based awards is common, and even encouraged by the government – so it is hardly tax avoidance. It seems that a large proportion of Amazon’s awards go to their lower paid workers in fulfilment centres, via a share save scheme which allows them to receive up to £3,600 tax free: this is not a ‘fat cat bosses’ story.
What is odd, however, is that the share-based adjustment is a permanent and not a timing difference: the clues to this are in note 18 to the accounts. Employees receive restricted stock units (RSUs) in Amazon Inc, and the amount amortised is the fair value of the RSU at the date of grant. However, the tax deductible amount will be the fair value at the date of exercise (CTA 2009 Part 12) which, given the rapid growth of Amazon’s share price, has so far been a much higher figure.
So there is nothing very unusual about Amazon UK Services Ltd’s tax charge, although the share-based piece is a bit complicated. However, this is not the full story, of course, since the sales of goods are shown not in this company but in Amazon EU Sarl, a Luxembourg company. There is also another UK company, Amazon Web Services UK Ltd, which made profits of £5m relating to consulting services – so this is relatively small in the grand scheme of things.
Amazon EU Sarl set up a UK branch in 2015, so sales to UK customers are now attributable to a UK permanent establishment (PE) and fully taxable in the UK. If HMRC considers that those profits are too low, it can challenge them under transfer pricing rules or diverted profits tax legislation; it will also receive full information on the group’s affairs with the filing of the country by country report (CBCR). However, the CBCR is not public, and Amazon EU Sarl does not split out its UK profits or tax charge, so the general public and media cannot check whether Amazon is paying a ‘fair share’ of tax.
What does seem likely is that there is nothing very odd going on in the UK figures, both those we can see and those that are only visible to HMRC. And looking at page 65 of Amazon’s SEC filing of its worldwide group 10K for 2017, the total tax charge, at $769m, is around 20% of profits. However, this is after taking a significant reduction for the impact of the 2017 US Tax Act – without this the overall tax rate would be just over 40%. It may well be that Amazon is, as its spokesman said, paying ‘all taxes required in the UK and in every country where we operate’.
However, such bland statements do nothing to reassure a suspicious public or media, and Amazon could do more to explain its position – although as others have found, explanations often just raise more questions, so it may have decided it’s not worth the trouble.
A few days after the results were announced, Philip Hammond said that he was ‘strongly considering’ introducing a so-called ‘Amazon tax’ on electronic trade. This appears to be a rehash of the Autumn Budget 2017 announcement which said that the UK government would work with ‘like-minded international partners’ to explore interim measures to increase UK tax revenues from certain digital businesses, but that, if necessary, the government was prepared to act alone. An updated paper in March 2018 set out how a revenue-based tax might be designed, but acknowledged the significant challenges that would have to be overcome.
It is fair to say that the corporate tax system needs to adapt in order to tax modern businesses effectively, but making significant change is going to be a lot more difficult than clicking through on a website.
In this new regular column, Heather Self (Blick Rothenberg) provides an expert view on a tax issue which made the headlines in the national press. The first topic under review – how much tax should Amazon pay?
Not for the first time, the relatively low corporation tax bill paid by Amazon has provoked criticism. The 2017 accounts for Amazon UK Services Ltd show a tax charge of £1.7m, comprising corporation tax of £4.6m and a deferred tax credit of £2.9m (although most of the mainstream press got these figures the wrong way round, saying that £2.9m of the tax payable was deferred!).
These are the accounts for Amazon UK Services Ltd, which is the UK fulfilment company, providing delivery services for goods bought from Amazon. It is a very high turnover (almost £2bn), low margin business, so it’s not surprising that its tax bill is fairly low. However, the tax bill has been reduced by an adjustment of £17.5m relating to share based awards – absent this figure, the total tax bill would have been at least equal to the UK statutory rate.
Giving share-based awards is common, and even encouraged by the government – so it is hardly tax avoidance. It seems that a large proportion of Amazon’s awards go to their lower paid workers in fulfilment centres, via a share save scheme which allows them to receive up to £3,600 tax free: this is not a ‘fat cat bosses’ story.
What is odd, however, is that the share-based adjustment is a permanent and not a timing difference: the clues to this are in note 18 to the accounts. Employees receive restricted stock units (RSUs) in Amazon Inc, and the amount amortised is the fair value of the RSU at the date of grant. However, the tax deductible amount will be the fair value at the date of exercise (CTA 2009 Part 12) which, given the rapid growth of Amazon’s share price, has so far been a much higher figure.
So there is nothing very unusual about Amazon UK Services Ltd’s tax charge, although the share-based piece is a bit complicated. However, this is not the full story, of course, since the sales of goods are shown not in this company but in Amazon EU Sarl, a Luxembourg company. There is also another UK company, Amazon Web Services UK Ltd, which made profits of £5m relating to consulting services – so this is relatively small in the grand scheme of things.
Amazon EU Sarl set up a UK branch in 2015, so sales to UK customers are now attributable to a UK permanent establishment (PE) and fully taxable in the UK. If HMRC considers that those profits are too low, it can challenge them under transfer pricing rules or diverted profits tax legislation; it will also receive full information on the group’s affairs with the filing of the country by country report (CBCR). However, the CBCR is not public, and Amazon EU Sarl does not split out its UK profits or tax charge, so the general public and media cannot check whether Amazon is paying a ‘fair share’ of tax.
What does seem likely is that there is nothing very odd going on in the UK figures, both those we can see and those that are only visible to HMRC. And looking at page 65 of Amazon’s SEC filing of its worldwide group 10K for 2017, the total tax charge, at $769m, is around 20% of profits. However, this is after taking a significant reduction for the impact of the 2017 US Tax Act – without this the overall tax rate would be just over 40%. It may well be that Amazon is, as its spokesman said, paying ‘all taxes required in the UK and in every country where we operate’.
However, such bland statements do nothing to reassure a suspicious public or media, and Amazon could do more to explain its position – although as others have found, explanations often just raise more questions, so it may have decided it’s not worth the trouble.
A few days after the results were announced, Philip Hammond said that he was ‘strongly considering’ introducing a so-called ‘Amazon tax’ on electronic trade. This appears to be a rehash of the Autumn Budget 2017 announcement which said that the UK government would work with ‘like-minded international partners’ to explore interim measures to increase UK tax revenues from certain digital businesses, but that, if necessary, the government was prepared to act alone. An updated paper in March 2018 set out how a revenue-based tax might be designed, but acknowledged the significant challenges that would have to be overcome.
It is fair to say that the corporate tax system needs to adapt in order to tax modern businesses effectively, but making significant change is going to be a lot more difficult than clicking through on a website.
