Impact of Tax Avoidance by Amazon

Directors of big multinationals such as Amazon, Google and Starbucks received a challenging investigation by MPs annoyed that big multinationals are avoiding paying corporation tax. An Amazon director was described as being ‘deliberately evasive’ and being unacceptably ignorant of who owned the Luxembourg based Amazon company – used to avoid UK tax.

According to Conservative MP Charlie Elphicke, last year Amazon’s UK sales amounted to £3.9bn but the company paid just £1.9m in tax – the equivalent of just 2.5p%of its estimated profits, based on its global operating margin. Amazon can avoid paying tax by registering in Luxembourg. If you buy from Amazon, you will often notice some reference to its Luxembourg offices.

Rivals, such as John Lewis, argue that this clever tax avoidance will give Amazon an unfair business advantage. If corporation tax is 27% and you pay 27% of your profits to the exchequer, you will have much less money to invest, compared to say Amazon which retains a much larger share of its operating profit. The tax avoidance helps Amazon to

  • Cut prices – even to finance predatory pricing.
  • Invest more in new business capacity.
  • Expand in new products and expand their market share,

There is understandable concern and anger that large companies are able to avoid paying tax – even though there primary business activities are in the UK. Multinationals like Amazon benefit from public spending on roads and infrastructure, but avoid contributing to public funds.

Tax Avoidance and Monopoly Power

In a fast changing book market, Amazon is gaining substantial monopoly power in selling e-books and traditional books. Many existing retailers are struggling to compete with Amazon’s economies of scale and online presence. This monopoly power is being enhanced by their tax avoidance, which magnifies their supernormal profits.

Tax Competition

If tax avoidance can’t be stopped, there is a danger that European countries may be forced into tax competition (pressure to keep cutting corporation tax rates) to entice multinationals to set up in their country.

Note: tax avoidance is different to tax evasion. Tax avoidance are legal measures to seek to avoid paying tax. Tax evasion is illegal methods. However, with MPs on all sides claiming Amazon’s (and Google and Starbucks) methods are ‘immoral’. The government will be looking at ways to end tax loopholes and make firms based in the UK pay UK tax rates.

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