On line retailers have been in the headlines for the rates of tax they are paying, but David Heaton suggests the tax avoidance axe grinders might not appreciate the full reality of taxing online cross-border businesses.
Amazon has been pilloried recently for paying little or no corporation tax on UK sales of more than £3bn a year. It grabs headlines, but are the tax avoidance axe grinders simply ignorant of the reality of taxing online cross-border businesses?
After ordering from Amazon.co.uk, the acknowledgement email often shows that we’ve bought from Amazon EU Sàrl., a private limited liability corporate entity under Luxembourg law. As such, it is subject to Luxembourg’s corporation tax (charged on its taxable profits at a current rate of 22.05% including unemployment surcharge) on its profits from its worldwide activities.
If that company has no activity in the UK, it is not taxable in the UK.
Take a simple example. Many British travellers will have bought goods from Europe’s biggest department store, KaDeWe in Berlin (or Galeries Lafayette in Paris, or Macy’s in New York), helping the retailers to make a profit in the process. But nobody would seriously expect the shop to pay UK tax on those profits. The profits are earned in the country where the business is physically located.
Sticking with the Berlin theme, let’s assume we don’t physically go on a spree on the Spree, but we log on from home to www.kadewe.de instead, and click on ‘Shop Online’. We give them our credit card details and they ship us a case or two of excellent Riesling, charging German VAT in the process because we are not business customers.
The goods are handled by Deutsche Post and Royal Mail/Parcelforce, who are paid for transporting them and collecting duty, and make a modest margin. Again, nothing would suggest that KaDeWe should be subject to UK corporation tax on its profit on the sale.
How is Amazon different? Amazon has a UK-domain website (and a German site, and a French site, etc), but the server could be in Wyoming. More importantly, it has a subsidiary company in the UK that deals with its UK marketing, but the company that sells you the goods and makes the merchant’s profit is still in Luxembourg and never sets a metaphorical corporate foot in the UK. It pays the UK company to ensure the goods are sold, just as KaDeWe might pay Parcelforce for delivery.
Given that the accounts show £50m of property assets, the UK company might conceivably have warehouses in the UK to house stock destined for UK consumers, as part of its service to the Luxembourg company. But the stock, and the profit margin on its sale, do not belong to Amazon UK. The goods might never see Luxembourg: if the vendor can have its suppliers deliver to its fulfilment contractor, why would it ship them twice?
Amazon.co.uk Ltd’s tax position depends on its own profitability. It employs 3,000-odd employees in the UK and its salaries bill is around £100m including £8m in employer NICs. It has just reported a 2011 accounting profit before tax of £3.1m, after taking a £6.9m charge under FRS20, which is an accounting fiction, not “real” money, and is not tax-deductible. The accounts also show it has in the past made trading losses in the UK business that have led to no current corporation tax being payable in 2010 or 2011.
Commentators might think Amazon is paying too little tax in the UK, in light of its multi-billion sales to UK consumers, but the UK can’t tax Luxembourg companies simply because they export to the UK. It can and does tax the UK entity, but that’s not making the profit because it doesn’t buy and sell the products.
Amazon Inc has disclosed transfer pricing enquiries by other tax authorities, so there will inevitably be questions over potentially under-priced marketing service charges by the UK company, leaving more profit in Luxembourg, or potentially over-priced charges coming into the UK from elsewhere in the group, with the same result, but that is always part of the tax affairs of international groups.
If the Chancellor is worried about consumers buying from Amazon over the Web rather than from UK businesses on the High Street, he should perhaps look at VAT. Luxembourg charges 3% on e-book downloads (and real books) and 15% on DVDs and other standard-rated items. Apart from zero-rating real books, the UK charges 20%. Is it any wonder Amazon located its main European trading business, and makes its profits, outside the UK?
David Heaton is a tax partner at Baker Tilly, specialising in employment taxes. This article first appeared in the firm’s Weekly Tax Brief on 12 April 2012.