One of the few companies where profits are under management control Credit, Amazon logo

Here’s a very useful example of what’s wrong with much of the shouting about economics, tax and the world over to the left of us. Richard Murphy is a campaigner on tax matters. He was also the inventor, for which read collator of bad ideas, of Corbynomics. He has, for example, popularised the idea of the Tax Gap, an estimation of the amount of tax that should be paid as against that tax which is paid. His tax that should be paid being a listing of what he thinks should be paid in tax, not what the law or Parliament or the government or even HMRC thinks should be paid in tax.

You know, a phantasm with no basis in reality.

A useful guide to how this all works being this from him in The Guardian today. He’s managed to entirely misunderstand the most basic points about Amazon’s tax position. Entirely and completely doolally in fact. No wonder the paper isn’t allowing comments on the piece:

There has been much anguish expressed about the latest Amazon accounts for its UK operating company. This is unsurprising. Those accounts suggest that Amazon has increased its UK activity from £1.45bn of sales in 2016 to £1.99bn of sales in 2017, with its profits increasing threefold from £24m to £72m. Yet its overall apparent tax charge was still a minuscule £1.7m.

However, all is not as it seems. Once the tax effect of payments made to staff using share option schemes is taken out of account, this company looks as if it paid £4.7m in tax in 2017, compared with £3.7m the year before. That’s actual cash paid, and it suggests a tax rate of approximately 6.4% in 2017 compared with 15.5% in 2016. Given that the expected tax rate for the 2017 accounts was 19.25%, Amazon appeared to pay only a third of what might have been due.

Amazon explains the fuss by referring to the effect of those share payments. But that’s a sideshow, in my opinion.

It’s not a side show it’s the very essence and point.

To make it clear to the Senior Lecturer at Islington Technical College. Paying the workers is a cost of being in business. The way we tax companies is upon profit. That is, revenues minus costs. So, we take the costs of paying the staff off revenues before we have a profit figure which we then tax.

Great.

So, this gets ever such a little bit more complicated when we see someone paying staff in equity, with share options of share awards. Because we get to a profit figure and then, before we declare that to be the profit to be righteously taxed, we take the costs of those share awards off. This is something that an accountant should know, it’s most certainly something that we’d expect an FCA to know.

Which this particular accountant, FCA even, doesn’t appear to know. For he’s arguing that £4.7 million was paid in tax on profits of £72 million – 6.4%. But the £72 million isn’t taxable profits, that’s the profit before we take off the cost of paying the staff. When we do take off the costs of paying the staff then, as we’ve noted before:

The lower payment to the UK taxman comes despite an increase in operating profit at the tech behemoth. Amazon’s UK operating profit grew to £79m up from around £26m the previous year.

Operating profit, see? The way we do this being that operating profit is before the costs of paying the staff with equity.

The tax payment was adjusted down by £17.5m because of share-based awards, which have grown significantly along with increases to Amazon’s market value. That would have left the US group paying no tax in the year

Those costs of paying the staff being so large that there was no taxable profit. Then we get to the other adjustments which led to that minimal payment.

So, here’s what we’ve got. The expert called in by a national newspaper to explain Amazon’s tax bill to everyone manages to get it all entirely, absolutely and wholly wrong. He’s comparing the tax bill to the operating profit. Rather than what it should be compared to, the taxable profit. In this case the difference between operating and taxable profit being largely the cost of paying the staff with share options.

Now do you understand why Corbynomics is such a mess? Why the arguments about the tax gap are so nonsensical?

Quite, the accountant presenting such plans can’t even manage to work out a corporation tax bill, can he? And The Guardian employs him yet to explain it to us.

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16 COMMENTS

  1. Of course you are correct on the point of detail, and Amazon has done absolutely nothing wrong (that we know of). However, I do believe that you miss the big picture by focussing on the detail. The fact is that many, perhaps most, people are enraged that massive, multinational companies, that appear to be doing very well indeed, also appear to be pay very little tax. The problem is that we are taxing something – profit – that is an accounting construct quite far removed from anything tangible. In particular, it can be moved quite readily in time and space. And the bigger the corporation, and the more international, the easier that can be done. So small, local enterprises are disadvantaged against established global giants. In this particular case, Amazon’s taxable profit has been decreased now, while the gain the staff may make on their options will be taxed at some point in the indefinite future. The solution is to abolish corporation tax and institute a sales tax, liability for which would be much harder to avoid, postpone or transfer to another jurisdiction. It could even be progressive, like income tax, to give the little guy a chance. But that’s a matter of taste.

    • 1) Amazon’s profits get taxed in the US. So they’re not untaxed.

      2) Even if you don’t like that then why not just abolish corporation tax and any sales tax? Just tax incomes as and when people receive them? Why are you even trying to tax business activity?

    • The UK, in common with other EU countries, has a sales tax, it’s called VAT. It’s currently 20% (on most goods and services).

      (Please don’t say “but that’s paid by the consumer”, since that’s the case for all corporate taxes.)

    • Tim,

      1) A quick google suggests that Amazon pays very little US corporation tax either. Even if they did, I’m uncomfortable that companies can use various devices to suck profit away to low-tax jurisdictions (I know the US isn’t exactly a tax haven and I know that cross-charging ought to be reasonable, but then we’re in length-of-string territory).

      2) I have a lot of sympathy with that point of view. The populace is kidded that the tax burden can be loaded onto companies so that its be reduced. The whole burden of tax falls upon people. One reason for taxing companies is so that tax cannot be avoided by having corporate assets support personal lifestyles. Can’t think of much else.

      Quentin,

      Yes, it could be done by raising VAT; though, as you say, it doesn’t apply to everything, e.g. printed books and some takeaway food/drink. As above, the bit in brackets is a pre-buttle to an assertion I would never make!

      In summary, if we are to tax companies, then it should be by a mechanism that is hard to avoid and that doesn’t favour big multinationals over small local competitors; a sales tax meets those criteria much better than a profits tax.

        • Its retained earnings jumped $3.7Bn during 2017 (2% of sales revenue) on which they paid no US federal income tax. The top line is less manipulable than the bottom line. Basing corporate tax on the top line (supposing we want corporate taxes at all) would be fairer to smaller companies, and it would be the perfect time to bin accumulated ridiculous exemptions.

          • Tim, that’s from the Cathy Newman strawman school of interrogation and unworthy of you. In each of the last three years (I haven’t researched further), Amazon has reported substantial increases in retained earnings. Is it possible, something to be entertained in your mind, that current systems of corporate taxation favour multinational behemoths over more modest enterprises?

          • Carry-forward of past losses is the most common way for profit-making businesses to report no tax liability. Of course Amazon has millions to lobby Congress and a garage start-up does no lobbying at all. But is Amazon breaking any law?

            What a marvelous discussion of how to reform the tax code, with the single criterion of giving Amazon its come-uppance! Conservatives again fighting on a battleground selected by lefties! And “keep it low and simple” (sez Lionage, below)? If there were any political benefit to doing so (even avoiding revenue loss when the tax rate jumps the Laffer curve), the politicians would have done so with the existing tax code!

      • One reason for taxing companies is so that tax cannot be avoided by having corporate assets support personal lifestyles
        Shirley, the incentive for that behaviour reduces as the corporate tax rate reduces.

  2. And by paying the staff more, the Treasury actually receives more money through employment taxes than they would be receiving if the staff were paid peanuts and the only tax was on corporate profits.

  3. Why do companies only pay tax on profit? I would love to pay tax on my income minus costs, rather than on the income. Just think of all the dodges that could be used to avoid tax.
    So why are business treated differently? Bill Wozniak (he of Apple fame) once proposed that business should be taxed on turnover, not profit. Businesses would know that a percentage will go to the taxman and then they can do whatever they want. Keep it low, keep it simple and no exceptions (to paraphrase Nigel Lawson). Just imagine the wailing and gnashing of teeth of all those tax lawyers, accountants, tax inspectors, etc. who would be out of a job but who would no longer be a cost of doing business.

  4. There are at least NINE UK operating companies in the Amazon web, and either Amazon UK Services paid more than £6.8m or the Auditor needs to be disciplined by the ICAEW.
    Murphy is confusing the “current tax charge” shown in the note to the P&L account with tax actually paid which should be shown in the Cash Flow Statement. Sad!

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