Amazon closes UK libraries
- 5 April 2012
Online retailer Amazon has long been credited for the demise of the high street bookseller – with major chains such as Borders and Books Etc going to the wall as well as countless independents.
Now it could be charged with helping to shut down public libraries – a live political issue with more than 100 closed or turned over to volunteers. It's a touchstone in areas such as Brent, where around half the libraries are closed, and Surrey, where plans to replace paid staff with volunteers and interns turned into a legal battle.
For while Amazon sold goods worth some £3.3bn in the UK over the past year, it paid no corporation tax on the profits from that turnover, according to a report, hidden for the past two weeks behind a paywall on The Bookseller website and now revealed by The Guardian. Had it paid tax on its profits, that could have generated £100m and most of those libraries could have been kept open.
But keeping the tax has been good for investors – Amazon's share price has quadrupled since 2005.
Online giants pay Lilliput tax
And Amazon is not the only web 2.0 quasi-monopolistic giant to arrange its affairs to minimise its tax exposure. Google, which dominates the search market and the lucrative advertising that comes from it, is also accused of setting up a complex corporate structure to cut its effective tax rate.
While Amazon, Google and other online companies legally arrange their affairs to reduce tax bills, they could run into a number of dangers.
· They risk reputational attacks. Amazon positions itself as a consumer-friendly organisation while Google's slogan is "Don't be evil". Paying minimal tax puts them into a zone more usually occupied by investment bankers and hedge funds.
· They risk a political backlash which could reduce or prohibit their activities in some jurisdictions in the same way that social media are banned or restricted in many countries.
· They risk a concerted lobbying attack from bricks and mortar companies. Wal-Mart, the world's largest retailer (and with little online presence) is already briefing in this direction telling journalists and bloggers that online retailers such as Amazon, which avoids local US sales taxes in all but five states, have an unfair price advantage.
Profits go to Luxembourg
The Guardian, which claims that Amazon is "under investigation by the UK tax authorities", says the firm paid no UK corporation tax last year despite billions of income. It also claims "Amazon's tax affairs are being investigated in the US, China, Germany, France, Japan and Luxembourg."
The report says regulatory filings by Amazon.com, the US based parent company, with the US Securities and Exchange Commission (SEC) show any tax inquiry into the UK operation will focus on the 2005 to 2006 period when formal ownership for the UK business was moved to a company in Luxembourg where corporate tax rates are low.
Amazon EU Sarl now controls the UK warehouses which have been downgraded to "order fulfilment". Payments for goods go to Luxembourg but delivery is organised in the UK from UK warehouses.
£100m tax that might have been
The Guardian says that in 2010, "accounts for Amazon EU Sarl show the Luxembourg office employed just 134 people, but generated turnover of €7.5bn (£6.5bn). In the same year, the UK operation employed 2,265 people and reported a turnover of just £147m." But the SEC filings show UK sales that year were between £2.3bn and £3.2bn. Applying Amazon's worldwide profit margin of 3% – it is higher in some countries – would bring taxable UK profits of up to £100m a year.
Added up over the years since the Luxembourg set-up was established, the profits could have produced some £100m in UK corporation tax if the company was run from this country.
The online retailer says: "Amazon EU serves tens of millions of customers and sellers throughout Europe with multiple consumer websites in a number of languages, dispatching products to all 27 countries in the EU. We have a single European headquarters in Luxembourg with hundreds of employees to manage this complex operation."
ebooks' Luxembourg tax deal
Amazon also gains from a 3% sales tax rate on ebooks routed through Luxembourg, where it dominates the market, against 20% VAT for UK based sales. It also gained from the Channel Islands VAT loophole – now closed which enabled imports into the UK of CDs and DVDs without paying VAT. This gave Amazon, and other retailers including Tesco, clear pricing advantages over onshore retailers.
Apple's European itunes operation is also based in Luxembourg.
Google may also be saving huge amounts thanks to its multinational structure. In 2010, Bloomberg estimated that it had saved $60bn in taxes thanks to an effective 2.4% corporate tax rate.
But pinning down the online multinationals is tough. Richard Murphy, of the Tax Justice Network, said" jRewriting tax rules to prevent arrangements such as those used by Amazon.co.uk would be a huge task. The key issue is, what is sold here and what is sold 'into' here? The answer is to deem distance sellers [as] resident in the UK with regard to their sales made here. That would be a big issue to take on."
There is more on Amazon and tax here.
No-go zones for Amazon
In the US, where Amazon is fighting a tax demand of some $1.5bn, it pays local taxes in just five out of fifty states, using a 20 year old ruling arising from the early days of internet trade. This said sales tax was only applicable if the online firm had a physical presence in a state. Amazon has no presence in 45 states – and is wary of even sending executives on business into these states in case their visit generates a tax charge.
More on Mindful Money
To receive our free email newsletter sign up here.
- The UK economy combines both house price inflation and goods price disinflationary pressure
- With the strong UK employment market is it time for Forward Guidance mark three?
- Why is Janet Yellen talking the US Dollar down?
- The Bank of England finds that its own Quantitative Easing worked superbly!
- Are the oil majors having to come to terms with the dawning of solar power and what should investors do?
- Challenger banks Shawbrook and Close Brothers launch market leading fixed-rate bonds
- Are you an Expat with investment property in the UK? - You could be liable for UK Capital Gains Tax
- Where to find an inflation beating savings account
- Budget pension revolution: Just 5% of pension investors planning to blow all the money and rely on state pension
- Cost of living eases as inflation drops to 1.6% in March - its lowest level since October 2009