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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Neil McEvoy
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Neil McEvoy

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.… Read more »

Quentin Vole
Member
Quentin Vole

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.)

Neil McEvoy
Member
Neil McEvoy

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… Read more »

Bongo
Member
Bongo

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.

Spike
Member

Not necessarily. Trump’s “tax return on a postcard” drastic simplification now lets consultants deduct 20% of income before computing taxes. But the Usual Suspects drafted it to apply to the pitiable and not the enviable, spawning a new industry to help the enviable seem pitiable. For example, a law firm puts its secretaries in a separate new corporation so both entities can come in under the threshold. Easy as spaghetti! https://www.foxbusiness.com/markets/whos-in-out-in-small-business-tax-break-its-complicated

jgh
Member
jgh

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.

Lionage
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Lionage

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… Read more »

BniC
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BniC

You’d think he would play up his credentials as an FCA and accounting career to add weight to his points

john77
Member
john77

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!