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Is tax falling behind?

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Published 12th November 2019.
With a rise in popularity of purchases made online, multinational companies are able to legally reduce the amount of tax they have to pay. But what impact does this have on local businesses and the Government?

In a modern digital economy, people are managing all their purchases, and finances online. The emergence of a constantly evolving and adapting world, has caused some issues for governments taxing companies for the profits they have made on goods and services. This article will centre around Amazon because students are very familiar with this company. It should also be noted that Amazon has not done anything illegal, when it comes to paying its taxes.

The UK government set out to tackle digital companies such as Amazon, Google, Facebook and Netflix. In 2018, the former Chancellor of the Exchequer, Philip Hammond, announced that he wanted to introduce a “Digital Services Tax” in 2020, to help tax companies who are making a profit and have revenues around the world of at least £500 million. It was hoped that this new tax, would bring around £400 million extra taxes, per annum, to Her Majesty’s Revenue and Customs (HMRC).

Amazon employs over 27,500 people in the UK alone, and in 2018, Amazon become a one trillion-dollar company, only the second company to achieve this value. However, the controversy surrounding Amazon is as a result of Amazon’s pre-tax profits in the UK increasing from £24 million in 2016 to £72 million in 2017. In the same time, the amount of tax Amazon paid in the UK, fell from £7.4 million to £4.6 million.

One might ask “How does Amazon pay so little tax?”. This question has a complicated answer. Firstly, Amazon lowers the amount of tax it pays by paying employee’s in terms of shares. This means (HMRC) miss out on the corporation tax and other revenues it would have gained, through taxing the employee’s salaries. Another part of this answer is somewhat geographical.

Amazon sales are online through a ‘server’ and sales made to UK customers are booked through the UK branch of a Luxembourg company called, Amazon EU Sarl. The fact sales are made through a ‘server’ which can be located anywhere around the world, brings into question where the sale has actually occurred and should tax on the sale be recorded in the UK, or the place where the server is located?

As a result of the perception of Amazon not paying enough taxes, this has angered high street retailers because not only is Amazon saving money on business rates, it is also saving money on other taxes. Business rates are taxes paid on non-residential properties including shops and factories. Since, Amazon doesn’t have many retail shops, this again saves Amazon money. In addition to this, Amazon factories are often located in out-of-town locations, which are cheaper.

Due to the reduced costs that Amazon incur, high street retailers and local businesses struggle to compete with the lower prices that Amazon can charge for their products.

Recently, France has passed a similar tax to the “Digital Services Tax”, a 3% tax on revenue of major multinational companies, including Amazon, conducting business in France. This has angered the 45th US President Donald Trump, who believes the tax is not fair on US companies and has threatened tariffs against French products being sold in the US.

It is evident to see that taxing major digital companies is very problematic and risky; a government must balance politics and fairness. A government must show its citizens it wants to tax digital companies ‘fairly’, without dissuading the companies from investing into that country and economy.