UK: A Taxing Future?

Why does Amazon not pay much tax in the UK?

The answer is because it doesn't have to. Amazon is adhering to the international tax agreements signed with the UK which specifically allow this to happen. In particular Amazon relies upon the internationally agreed principle that when goods are sold over the Internet, the point of sale is the place where the server is located. In the case of Amazon that happens to be in Luxembourg.

Tax treaties signed by the UK typically contain a 'permanent establishment' (PE) article, which provides that a company can maintain stocks of goods for storage, display or delivery in the UK without creating a PE in the UK. If there is no PE there is no taxation. The Amazon warehouses in the UK are not Pes. They do not create a taxable base.

Amazon is doing nothing more than was specifically envisaged and intended by the the tax treaties signed by the UK. It may seem strange that Amazon can do all those things in the UK without paying tax here but that is precisely what the UK agreed and used that very provision to encourage Amazon to invest in the UK and create jobs here. It is a little rich to suggest that now they are making lots of money by doing exactly what they are allowed to this is in some way unfair.

Ultimately, if the UK imposes tax on Amazon it is the US that will lose out because, somewhere down the line, the US will be obliged to offset any tax paid in the UK paid against Amazon's US tax liability. That is why the US is resisting attempts by the UK to impose tax on one of its companys contrary to the tax agreements signed by the UK.

Amazon is booking its profits in Luxembourg, which means that neither the US nor the UK is currently getting much in the way of tax. It is therefore down to the US to alter its legislation to tax the undistributed profit in Luxembourg, instead of allowing that profit to be transferred and rolled up offshore. It has made some changes along these lines but doesn't want to go further.

If we took Luxembourg out of the equation completely, all Amazon profits would be taxable in the US and the UK would still get nothing. We should stop complaining that Amazon is making lots of money and that the UK is not getting its 'fair share'. This 'fair share' concept is a simple envy. Amazon is making lots of money so why shouldn't we have some? It may well be that if Amazon was not allowed to do all those activities in the UK without paying tax Amazon would not have warehouses and employees in the UK. It may have decided to do it all in Ireland and they would get the jobs, the PAYE, and all that money entering the economy. Tax treaties were designed and agreed to try and encourage investment and give certainty to taxpayers on how they would be treated if they did invest. It seems that certainty exists just until the investor makes lots of money and then all bets are off.

Starbucks

Starbucks also doesn't pay any tax in the UK but for a different reason to Amazon. The US coffee giant charges a royalty to its own outlets for the use of the Starbucks name. Again, this is specifically permitted in the various tax treaties that the UK has signed. A royalty payment can be made pre-tax. Typically the royalty is around 15% of turnover. There is not much profit left after that has been paid.

But why should a Starbucks shops in the UK have the benefit of the Starbucks name, knowledge and branding without paying for it? The value of the Starbucks name has been created by them spending billions of dollars spent on marketing. It seems only right, proper and 'fair' that anybody who wants to use it should pay for it.

Starbucks is not allowed to charge its own shops any more than it would charge a third party franchisee, so the royalty amounts are negotiated and not artificial. This seems reasonable and, again, the complaints against Starbucks seem mostly to do with envy. It's the 'fair share' concept at work again. The tax treaty says you can do this but now you are making lots of money we want to change the rules and grab more of it.

Reforming the tax system.

The existing tax system allows apparent anomalies like Amazon to happen and is in need of reform. It was developed in a world of physical goods and in-person services before the arrival of the internet and before it was appreciated that businesses could be totally mobile.

It might now seem fairer that taxes should be levied wherever the money is made. That generally means at the point of sale. A straightforward tax on turnover would not be equitable because many businesses would be unable to pay unless and until they were profitable. Such a law would kill many businesses before they had started.

Perhaps a fairer system would be to calculate the worldwide profits of multinationals and then assume that the percentage of profit made in each country is the same as the percentage of sales generated in each country. For example, if Amazon's worldwide profits were US$1 million and 10% of its sales came from the UK, then US$100,000 of Amazon's worldwide profits would taxed in the UK at UK rates. Does that seem fair?

Are tax authorities getting more aggressive and less rational?

Yes they are. Just consider the trouble that sportspeople like Messi, Ronaldo, Mourinho and Alonso have got into in Spain. They all sought to reduce taxes in Spain by assigning their image rights to a foreign company. If they opened a supermarket in Germany, for example, their fees would be paid to the company rather than to themselves directly. There would be no tax payable in Spain on those amounts.

The Spanish tax department – the Ministerio de Hacienda – contended that it should have received tax on those payments and prosecuted the individuals on the basis that they had illegally avoided tax. It did not cite any section of the tax law that had been infringed. Instead, the basis of its case was that the company that owned the image rights did not really exist and therefore that the money should be treated as belonging to the individual. This is an extremely unusual argument with no basis in law.

The Hacienda has claimed a massive victory in these cases but, in reality, the taxpayers paid only a small proportion of the tax claimed and received deferred criminal convictions. The poor footballers no doubt calculated the potential costs of challenging the Spanish government and decided it was better to settle quickly. In the opinion of this writer it has been a travesty of justice. I doubt many will have any sympathy with these individuals who remain very rich.

Substance 'abuse'

No, not the illicit use of recreational pharmaceuticals, pressure from the OECD and now the European Union on 'offshore' financial centres obliging them to introduce a requirement for substance. The idea is that any company incorporated in these jurisdiction should also have offices, bank accounts, employees etc. in that jurisdiction.

This requirement does not apply if the company in question is managed and controlled from outside the jurisdiction. In most cases it will be. However we believe that in the future it may become necessary to demonstrate substance wherever that company is managed and controlled outside its place of incorporation.

Again, this is an unusual obligation because none of the major onshore nations requires that a company must have substance in its place of incorporation. It is possible to go online and incorporate a UK company for £49. There is no need to adhere to any of the requirements that the UK is trying to impose on others.

CRS, FATCA, registers of beneficial ownership and other transparency initiatives.

Most right minded people do not have any issue with the principle that tax departments around the world should be able to obtain the information that they need to calculate the liabilities of their taxpayers correctly. It is not unreasonable to take countermeasures against jurisdictions who facilitate tax evasion through secrecy. The writer would however suggest that there is a big difference between secrecy and confidentiality. The tax authorities may need all this information but the nosy neighbor does not.

Other countries don't agree. In Norway, for instance, every taxpayer is required to file a tax return on a public platform. Any member of the public can see exactly how much someone earns, what taxes they have paid and, to a certain extent, what assets they own.

Perhaps everybody should be posting their payslips, bank statements and tax returns on to a public register? I don't believe so. I still think that everybody has a right to keep their affairs confidential and can see no reason why the general public should have the right to look into other people's private finances.

The future

Clearly the flow of tax-related information is only going to get greater. There is a need to balance the rights of the individual to confidentiality with the needs of governments to ensure that they are receiving the right amount of tax. That balance does not require public registers of beneficial ownership of property, shares or other assets any more than the authorities should be allowed to have CCTV in our homes.

International agreements, including tax treaties, that have been signed by countries should be respected and adhered to rather than ignored whenever it is convenient for them to do so.

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