The firms concerned are able to minimise the profit tax they pay by declaring profits in countries with lower tax rates. It works like this:
Suppose Amazon sells a book in the UK for £20. The book cost £10 from the publisher giving a gross profit of £10. Amazon incurs other costs of £5 running their business in the UK meaning they have made £5 net profit.
So Amazon pay corporation tax on £5 profit? Well that could happen but not if they do it like this:
Amazon UK sells a book in the UK for £20. The book cost £15 from Amazon Luxembourg giving a gross profit of £5. Amazon UK incurs other costs of £5 running their business in the UK meaning they have made no net profit.
Amazon Luxembourg bought the book from the publisher and made £5 profit in Luxembourg which has a lower rate of corporation tax.
Amazon do pay tax where they declare the profit. But by selling goods between subsidiaries they can make the profit appear where they want it to; in the countries that tax least.
This is all totally legal. Amazon, Starbucks and Google are multinational companies and are able to do this, but a firm operating only in the UK can't. Some feel that this is unfair as in my example Amazon UK really made the money by its UK operations and they should pay tax on their real profits here.
As the companies made clear to the committee, they do pay tax. Millions of pounds in payroll taxes such as employers National Insurance Contributions, local Business Rates and VAT. However in these days of poor public finances many will have little sympathy with them.
There is no point in arguing about the morality of tax avoidance and we should just accept that any loophole found which could turn a profit will be exploited. Right now we must replace corporation tax with a different measure that actually works, perhaps a tax on the percentage of global profits that the country makes by selling in a country. There have been a lot of stories about uncovered methods of tax avoidance in the news recently and I think it is time for the government to start changing laws and making it illegal.
ReplyDeleteI hate to say it but it is good business tactics, even though it is extremely immoral. There should be an anti-tax avoidance rule written into law and the Government should seek to work with countries across the world in order to tackle massive corporate tax avoidance as well as trying to have an international financial transactions tax which countries should use to reduce their deficits.
ReplyDeleteThe number of people/corporations using loopholes like this has got to the point where the government is losing out on a huge amount of money. What makes this seem even more unfair is that it is only the larger corporations and richer people who can invest in these schemes. The government may try to reduce their losses by raising VAT or something, reducing the purchasing power of normal people's money. It seems ludicrous that we have a system where we know stuff like this happens and yet nothing is done, nor can it be done quickly enough for people not to find another loophole.
ReplyDeleteThe fact is that Amazon is a profit-driven business . If they can avoid the relatively high corporation tax in the UK then they will; Amazon have no obligation to suit they're sales around what is deemed 'right', legality is the only issue and in this case there are no legal issues. If the UK was to adjust its tax laws, the administrative costs would be just one of the problems. With a VAT of 20% and corporation tax of 24%, its no surprise that large corporations are choosing to use transfer pricing; and with UK-based profits being relatively low compared with Amazon profits from other countries, Amazon would be likely to pull out of the UK completely if transfer pricing became illegal. In the end, Amazon is now a European company.
ReplyDeleteLouis Grey-Edwards
I think it would be wrong to raise VAT, Tom. Increasing VAT would be terrible for consumer confidence and ruin demand in the economy, which would be bad for growth as well as employment in the private sector. Also another VAT hike would increase inflation and would hurt the poorest people. Why should the economy and the poorest in society for the mistakes of immoral businesses?
ReplyDeleteEven though these companies have been very smart to find a way to pay less profit tax, the UK is missing out on millions of pounds from this. If the big companies such as Amazon, Starbucks and google were to declare profit in the UK, the tax revenue received by the government would significantly increase. This could then even lead to an increase in government expenditure which (as it is a component of AD) would increase AD and shift the curve to the right causing an increae in Real GDP/potential output and move the economy closer to its full level of employment.
ReplyDeleteRhianna