Laurence Parry, tax partner at Kreston Reeves, answers a reader’s burning questions relating to Amazon’s tax bills.
Q: How does Amazon pay so little tax in the UK? Why did it reduce by 50% last year? Can I do something similar to help my business?
A: Amazon’s tax bill has halved from £15m to £7m even though turnover rose from £946m to £1.46bn. Tax is paid on profits not turnover. The real question is why profits are £24m on c£1.5bn of turnover?
There are a number of reasons for this. A big warehouse in any country doesn’t automatically mean that you are taxable there. To encourage overseas trade most double tax agreements say that warehouses do not constitute a taxable presence. So what it is about Amazon that creates its profits? Amazon doesn’t sell many of its own goods – where it does (eg Kindles) these are manufactured abroad. It sells electronically supplied services (eg Amazon Prime) but these are delivered from a server which could be anywhere.
Why do people use Amazon? I do because it’s easy to use; the product comes from another supplier. It’s the web design and infrastructure that creates value – not the physical product. This is how ‘transfer pricing’ works – income is recognised where the value is created. Much time (and money) is spent by companies and tax authorities analysing and testing this.
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This explains why there are little profits generated from this £1.5bn of turnover.
Why did the profits decrease, when turnover rose?
Corporation tax is charged on profits, a key part of which are employee costs – easily identifiable if cash but what happens if the staff are paid in shares? To allow a proper comparison between those that use shares and those who pay in cash, accounting and tax rules include the value of the equity as a cost. Amazon gives employees free shares that they can sell after a certain period. If these shares increase in value over this period, as they have done, the cost in the accounts also increases.
The specific rules that Amazon uses are generally only suitable for large companies which have a market for the shares. For most private companies this scheme is not appropriate, but other arrangements can provide similar outcomes for private businesses. For example, by giving equity options exercisable on a sale, there is no initial cash or tax cost, but there can be a big tax deduction when the sale happens.
So, you can be quite like Amazon.