Was Amazon diverted, and is it now back on course?

Clearly Amazon is not the only multi-national enterprise (“MNE”) to have been challenged over its approach to tax. The spotlight continues to sweep the horizon waiting for another company to be caught in the glare. However, it looks as though Amazon has blinked first.

The news initially broke that, from 1 May, Amazon has been booking all sales made to UK customers through a UK branch, rather than Luxembourg. So profits on those “UK sales” currently taxed in Luxembourg will suddenly start being taxed in the UK.

It soon became clear that Amazon Germany was also moving to record sales locally. Now it appears that this is an EU wide change.

Is it that Amazon is now having a change of direction, admitting that it diverted profits to Luxembourg in the past? Or is it that factors outside of Amazon’s control are now causing it to divert in a new direction?

And this raises two further questions:

• What is the catalyst of this change?
• What will the tax impact of the change be for the countries involved?

The catalyst

Here are the options:

The UK “Google Tax”, or more correctly the Diverted Profits Tax (“DPT”) – Well, this is a good contender. For the UK, the economics make sense. DPT is charged at 25%, which is higher than the UK statutory tax rate of 20%. So if Amazon has concluded that DPT would catch their Luxembourg profits, it makes more sense to book revenues in the UK and pay tax at 20% on the resulting profits.

The obvious counter argument is that Amazon is changing their activities across the EU, not just in the UK, so how can it be DPT causing it?

Perhaps Amazon think that other EU member states might follow the UK DPT lead, and so it is better to pre-empt that. Or perhaps their systems are such that is makes more sense to change all sales to being recorded locally, rather than ending up with a mixture of structures.

One thing is for certain. George Osborn will be claiming the credit.

Sticking with the UK, some are hailing Margaret Hodge MP, former chair of the UK Public Accounts Committee and high profile griller of MNEs for this change. I think there is little doubt that Mrs Hodge raised the public and media profile of the tax debate, and helped those campaigning for tax reform to add pressure to MNEs. However, I question whether Amazon’s actions in mid 2015 can be directly attributed to her quizzing of the company back in 2012.

In the meantime we have seen the G20 instigated OECD BEPS project. Clearly this is going to produce some results, whatever they might be. And there will be an impact on businesses like Amazon. Whether it’s country-by-country reporting or more direct legislative changes, there will be a lot of businesses currently uncertain as to what BEPS will mean for them.

For that reason, I’m equally sceptical as to whether Amazon is directly reacting to BEPS. There is too much uncertainty as to what we are going to end up with, and there will be plenty of businesses considering possible changes to their operating methods in due course, but there is little to be gained from being the first mover.

Then there are the State Aid challenges by the European Commission. However, it is important to remember that the State Aid case hinges on whether the tax paid by Amazon in Luxembourg is lower that it should be, as a result of allowance made by Luxembourg that might fall foul of State Aid rules. They do not challenge whether the sales revenues arise in Luxembourg in the first place.  

So what are we left with? The elephant in the room.

Amazon is not a highly profitable business. The margins are low, and competition is high. Recording the sales in the UK (and elsewhere) will mean Amazon records very high UK turnover. However, it will also record correspondingly high UK costs. Indeed, there may well be a royalty payable by the UK branch that might leave precious little by way of UK profits to tax.

So perhaps the answer is quite simple. Has Amazon looked at what its profits would look like in each country, and decided that there isn’t a lot of tax to pay? Perhaps Amazon just saw little downside to being seen to “clean up its act”.

The tax impact

And here is the interesting part. The UK Government has high expectations of the taxes to be raised by tackling tax avoidance. The election manifesto claimed that they have £5 billion in their sights. But what impact will Amazon’s move have?

Well, for a start it will make a hole in any estimates as to what DPT might raise. Ironically, Amazon has avoided that tax.

But the flip side is that it might not generate any material extra corporation tax.

Has Amazon admitted that it was diverting profits to Luxembourg, or has it now realised that there is a tax advantage in diverting profits to the UK?

Mr Osborne might want to be a little careful about how he words any self-congratulatory announcement.