Tax dodging? It's harder to do - and rarer - than you think
What are Amazon and Apple really getting away with?
Tech giants: 'So what're you going to do to stop us, huh?'
There's an interesting little leak here explaining what the OECD is trying to do to make sure that taxes are indeed paid on those profits.
Also up for possible revision are long-standing "specific activity exemptions" which have been used by Amazon to enable it operate major retail businesses in countries like Britain and Germany without creating tax residences for these businesses.
Subject to tax...BUT not sold here.
This isn't quite true. Amazon's warehouses are indeed subject to the usual taxes. They're just in a separate company from the one that actually makes the sales. And one of those long-standing exemptions (it's in the standard double-taxation treaty that's been in use by everyone for well over 50 years) is that if you sell your goods into a country then using a bit of warehouse space or some logistics in that country doesn't give rise to your having a “permanent establishment” (PE) in that country. And it's that PE that creates the liability to corporation tax.
Double-Dutch-Irish sandwiches and other tasty treats
Why the exemption is there should be obvious. As an example, much of the trade in minor metals takes place in warehouses in Rotterdam. That's where the actual legal transfer of title takes place. But it would be mad for the Netherlands to get all the tax from that global trade. So what gets taxed by the Dutch is the cash from the warehouse services while all the traders pay tax on their profits back home.
But you can see how simple it is for a multinational retailer like Amazon to sell everything from, say, Luxembourg, put all the warehouses in another company and thus run away screaming maniacally with oodles of cash. Well, except for the fact that Amazon seems to operate a policy of not actually trying to make a profit at all.
The OECD draft also said it would target arrangements where treaties designed to avoid double taxation of corporate profits are abused through the use of "dual resident entities" to ensure no taxation whatsoever is paid.
Now that's a stab at Apple which does something slightly different. It has a company in Ireland that buys all the kit from China then resells it to Apple UK (and DE, FR and so on). All the profit ends up with the Irish company, the retailers left just enough margin to cover the costs of the Genius Bar.
The point here is that Ireland does have a low corporate tax rate of 12.5 per cent, yes. But it only applies it to business that really, really, happened in Ireland. Buying something in China and selling it in the UK did not so it doesn't even try to tax this: that's the secret of Apple's incredible 2 per cent overseas tax rate.
Here's Reuters again:
The OECD also has its sights set on arrangements where companies allocate profits to tax haven units on the basis these units funded research or bore business risks related to transactions elsewhere in the group. Microsoft uses such arrangements to allocate profits derived from research conducted in the United States to a unit in Ireland, a U.S. Senate investigation last year showed.
Apple also has a similar arrangement. Clearly there's some value to the research: in the tech space that is really what is being bought by the consumer. So, make some guess as to how much of the value of the kit is the research then assign that to a company. The other parts of the company then should pay that new one for use of the research.
Or, if you prefer, the Starbucks brand has a value, people should pay for using the value of that brand. Certainly, you're going to get more sales as a Starbuck's than you would as “Cafe Fred”. Which is exactly what Starbuck's was doing, the UK arm sending 5 per cent or so of sales off to the Netherlands. Not only isn't this illegal, there's actually an EU rule that says that it would be illegal to tax royalty payments from one EU country to another. We are after all in a knowledge economy and royalties do come with that territory.
The action plan said the OECD would also examine the avoidance of tax residence, or permanent establishment (PE) "through the use of commissionaire arrangements" – a mechanism used by companies including Dell to avoid reporting revenues in markets where they have major sales.
That's just a variation of Apple's dodge: sell to an intermediary in the country, make sure that broker only gets enough margin to cover costs and keep all the profit elsewhere.
There's one avoidance method that's more commonly complained about that the OECD isn't addressing. That's loading the company up with debt. This decreases taxable profits because the interest you've got to pay is tax-deductible. It's a bit of an odd one to complain about (although UKUncut did with Boots) because the interest is taxable to the people it is paid to. It can actually end up with a higher tax bill.
After all of these cute tricks we come to the final way of dodging taxes: lie. This is also known as tax evasion and it's a criminal offence and no one, no one at all, thinks that any of these large companies (nor many small ones come to that) is actually doing this. There is most certainly tax evasion going on but it's largely the province of individuals and the grey economy: no VAT receipts and the like.
It's the tax laws, stupid
The real point of all of this is that the current system of taxing large companies is completely borked. It grew up post-war, largely, when currencies were fixed, when there were capital controls, when companies rarely sold over national boundaries.
The rules set up for that world just don't work in today's. Where we've got, as one example, the European Union insisting that we must have perfect freedom of movement of capital, goods and companies. Thus reform is going to have to happen and as Google's Eric Schmidt has pointed out, the politicians set the rules and companies will obey them.
I am an extremist on this matter of course. Companies don't actually bear the economic burden of corporate taxes: shareholders and workers do. Companies used to be, in the old world, a convenient place to get the cash, but now they're obviously not. So, don't try to tax the companies: just sting the shareholders and workers as it's them that really pay anyway.
And one final point about the amount of such dodging that's going on. Various NGOs and campaigners have been insisting for years that inside those secretive Swiss banks there's billions upon billions hidden away from HMRC. So a deal was signed and the Swiss banks combed through their books, identified the UK citizens and worked out whether they should, righteously, have been paying UK tax. British Chancellor of the Exchequer George Osborne was so confident about this that he booked £4bn and change as a receipt for the cash that was about to come rolling in.
Unfortunately, once they combed the books, they found only a few hundred million that was due. For most of the Brits with Swiss accounts are either non-doms (who don't pay UK tax on their foreign earnings they keep in foreign bank accounts - for example, the UK does not tax Abramovitch's earnings in Russia, as long as they stay outside the UK) or Brits working abroad like, umm, me, who also do not pay UK tax on earnings as we're not actually resident in the UK. We cough up elsewhere.
There's something of a difference between the £4bn the government expected, the much larger squillions that tax campaigners were claiming and the few hundred million actually due. There's a great deal less tax evasion going on than the current zeitgeist might lead you to think. ®