Opinion: Get real about corporate tax

Companies currently pay corporation tax in the country where they are incorporated. A campaign is under way, in the Guardian, and the Commons Public Accounts Committee, that companies should instead pay tax where they make their sales. The proposal has populist appeal, but is impracticable.

Many companies, including UK companies, make export sales without costly incorporation in each sales country. If a US coal producer sells 1m tonnes of coal to UK powerplants for £100m, and makes £5m profit, it submits accounts in the US for tax authority scrutiny, and pays US tax on the £5m. Should this profit be taxed in the UK instead, as the Guardian and the PAC demand?

The principle needs debate, as do practical questions. For companies not incorporated in a country where they make sales, there is no way of imposing local corporation tax. Foreign suppliers to the UK consumer market may incorporate in the UK for ease of administration, or to employ local staff. They then pay some UK corporation tax, rather than none if they did not incorporate a UK subsidiary. They then get slated by the PAC.

Taxing corporate profit in the country of sale rather than of incorporation requires all companies’ international accounts to be partitioned to every sales country. These accounts would be very large and very obscure. Proportioning revenues might be easy, but cost allocation to each country market would be problematic. It would need all countries to agree the scheme, define the accounting standards, and a supra-national tax agency to scrutinise accounts. This is all totally impractical. The US would object to losing US companies’ tax payments to the UK for US companies with UK sales. Try getting Brazil, Russia, India and China to agree to such a scheme.

What about UK companies? Take Rolls Royce. RR has sales of £11bn and profit of £850m, accounted and taxed in the UK. Most RR sales are exports to international airlines. A local corporation tax would mean RR paying tax in each of these markets. The UK tax paid by RR would decline.

The Guardian and PAC haven’t thought through the justification, definition, operational logic, and substantial requirements of their proposal. The result was this week’s ill-informed PAC ritual humiliation of 3 US execs. I have no interest in these companies (Amazon delivers a pretty good service for a profit rate of only 1.3% of its sales revenues, and Google search is free), but I cringed to hear the aggressive and often impolite questioning. Members regularly scoffed loudly over respondents’ replies. They had made up their minds before asking each question, and showed no interest in any response. In the meantime we probably have to live with companies paying corporation tax where they are incorporated, with national corporation tax gains and losses balanced in mutual trade, and seek to ensure that this incorporation is legitimate and not contrived.

* Geoff Crocker is a professional economist whose book A Managerial Philosophy of Technology is published by Palgrave Macmillan.

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29 Comments

  • Martin Veart 14th Nov '12 - 2:42pm

    It isn’t straightforward as it pointed out in the article but if only it was the case that tax is paid in the country of corporate origin. What frequently happens is that a third nation is selected to minimalise the tax burden or avoid it all together. This may work as goods are made in, say, the USA, and then sold at cost to a holding company offshore. This company brands the goods and from there it is imported to the target markets at a greatly inflated cost. The goods or service using the goods are then sold at cost or even a small loss.

    So the tax paid is minimal, at point of origin, offshore and in the consumer market. Some form of sales tax may well be the only way to ensure a nation gets a share of the profits generated.

  • jenny barnes 14th Nov '12 - 3:04pm

    Maybe these “global companies” along with their “global” highly paid executives should be taxed by the UN; funds to be used for UN peacekeeping operations and other activities and to support the IMF, and world bank. Right now, these people and companies are not paying their social dues. The police, courts, roads, education for the workforce, international laws, etc etc etc are provided by states, and they are free-riding. Meanwhile, austerity is available for the poor.

  • This has long been an issue for US states that levy corporate taxes. Delaware is a popular state for incorporation as no state taxes are levied. However, most states require incorporation in the state that you are conducting any kind of licensed business.

    Most states tax domestic and foreign corporations on taxable income derived from business activities apportioned to the state on a formulary basis. Many states apply a “throw back” concept to tax domestic corporations on income not taxed by other states. Tax treaties do not apply to state taxes.

    Under the U.S. constitution, states are prohibited from taxing income of a resident of another state unless the connection with the taxing state reach a certain level (called “nexus”). Since the tax must be fairly apportioned, the states compute income of out of state corporations (including those in foreign countries) taxable in the state by applying formulary apportionment to the total business taxable income of the corporation. Many states use a formula based on ratios of property, payroll, and sales within the state to those items outside the state.

    In the EU, the Common Consolidated Corporate Tax Base is a single set of rules that companies operating within the EU could use to calculate their taxable profits. In other words, a company or qualifying group of companies would have to comply with just one EU system for computing its taxable income, rather than different rules in each Member State in which they operate.

    In addition, under the CCCTB, groups using the CCCTB would be able to file a single consolidated tax return for the whole of their activity in the EU. The consolidated taxable profits of the group would be shared out to the individual companies by a simple formula so that each Member State can then tax the profits of the companies in its State at the tax rate that they – each Member State – chooses, (just like today.).

    If progress can be made with the CCCTB we could go a long way to mirroring the US state tax system for physical prescense tests and ‘throw back’ rules in EU and EEA countries. The next logical step (albeit longer term) would be agreement of basic principles and standardisation of double-taxation agreements among the OECD counties.

  • The ‘problem’ as presented by the media et al seems to be more related to companies operating in the consumer products and services space rather than with those operating in the B2B (business to business) space.

    What is not being presented is the VAT tax take from these companies. This would be interesting to know so that we can put the total tax take into context, however, I suspect that only the company and HMRC actually know whether VAT returns truly reflect the actual level of trading performed in the UK or whether the schemes for reducing corporation tax liabilities are also reducing VAT liabilities.

    Finally, we shouldn’t forget that UK exporters such as Rolls Royce, do not directly pay tax on exports (outside of the EU), their customers will pay import duties on these products. Similar conventions will apply to products imported into the UK.

  • Geoff Crocker 14th Nov '12 - 5:45pm

    Martin Veart

    Agreed that if we think tax should be in the country of sale, then higher VAT might seem the answer. The problem is that sales taxes are notoriously regressive since low income people spend a higher proportion of their income.

    There are 2 points though. My article refers to companies who are legimitely incorporated eg in the US or UK. We need to decide in this case whether tax is more appropriate in the coutry of sale rather than the country of origin/incorporation. Your further point as to whether a company incorporation is legitimate or contrived for tax purposes is a good point but a separate one.

    Joe Bourke

    Thanks for this very useful outline of how the US works this problem out between states and as you say CCTB could form a basis for an EU system. However it still leaves us the question as to whether tax is morally best applied in the country of production, incorporation or sale? I’m not sure this is easy to settle morally?

    Roland

    Good point about VAT, but import duties will have only a small impact in a WTO world?

  • Geoff,

    I agree with yout comment on the question as to whether tax is morally best applied in the country of production, incorporation or sale? Recently, including in the Public Accounts Committee hearing you refered to in your article, politicians (who make the tax laws) have resorted to moral arguments to counter the position of companies that they are complying with existing UK tax legislation.

    In a world of mult-national corporations, moral arguments are in my view somewhat nefarious. There has to be a mult-national rules based regime. This would be greatly facilitated by common standards being adopted within the EU and/or OECD i.e.

    – International Accounting Standards (currently applies in EU except for SME’s).
    – Common Consolidated Corporate Tax Base
    – Standardised double-taxation agreements and comon rules on foreign controlled corporations.
    – Transfer pricing rules that adopt the methodolgy used by the US states for overhead allocation and cost mark-ups..

    While this may be achievable within the EU, I suspect most-favoured status free trade agreements would need to be predicated on adoption of such standards to provide sufficient incentive for OECD countries to contemplate such harmonisation.

  • Liberal Eye 14th Nov '12 - 6:43pm

    Geoff – I don’t think many people are calling for a tax on ‘sales’ or even that they should in some sense be deemed as domicilled for tax purposes in countries where they make sales. If anyone has argued this I suspect it was only loose phrasing. Indeed the Guardian article at your first link explicitly mentions ‘profits’ which makes a lot more sense.

    Profits are notoriously hard to compute and easy to distort. Specifically, the suspicion is that many multinationals are keeping two sets of books, one for managment purposes and one for tax purposes and never the twain shall meet.

    Typically this includes fiddling transfer pricing – the internal price used to move goods or services between a subsidiary in country A and another subsidiary in country B – a huge proportion (I think a large majority but perhaps someone can enlighten/confirm) of international trade is within multinational groups. For instance, suppose widgets are exported from China at 10 pence each including shipping costs delivered to Britain. The Chinese manufacturer actually bills (and hence ownership formally passes to) a subsidiary of MegaCorp in, say, the Cayman islands. Meanwhile the ship arrives in Britain and the Cayman island subsidiary reinvolces the goods to the UK sales subsidiary of MegaCorp at, say, £0.95 each just happens (!!!) to be remarkably close to the UK selling price of £1.00. All the necessary bookkeeping is done out of a MegaCorp office in West London (or perhaps India) as the Cayman subsidiary has no staff on the island. Hence MegaCorp pays little tax on UK profits because there are almost none – it has arranged for them all to arise in some convenient low-tax haven although the goods in question have never been anywhere near the Caribbean.

    This is not the only dodge but it’s a very popular one. It’s counted as ‘tax avoidance’ i.e. legal but is it really? It involves making up costs with little or no basis of fact. If I did that in another context I would be done for fraud. Shockingly it has now been revealled that HMRC have not mounted a single investigation into tax avoidance since 2004.

    http://taxjustice.blogspot.co.uk/2012/11/uk-has-not-taken-single-tax-avoidance.html

    The uncomfortable conclusion is that Osborne – and the HMRC senior management – are signed onto the notion that they should wink at even the worst abuses even though the scale is such that, if rectified, it would end the government deficit. I can see why the Tories don’t want to level with taxpayers about this! It is one law for blue collar crime, another for white collar crime.

  • Geoff Crocker 14th Nov '12 - 10:15pm

    Liberal Eye

    Initially I wasn’t discussing a sales tax, but the proposal to tax profits in the country where sales are made. One subsequent suggestion then was for a sales tax as the only way to capture an imported sale for local tax. But sales taxes are regressive.

    You’re conflating the separate issue of tax havens. Let’s start without that complication and take a legitimate case of a US company naturally incorporated in the US which makes a sale in the UK. Where has the profit arisen? In mid Atlantic probably :). I do not see this claimed huge moral imperative that the profit has been made in the UK. And yet everyone is jumping on their moral high horse about it. Just the latest bandwagon?

    In fact it’s easier and more effective for the US tax authorities to levy the tax on this trade whilst UK authorities tax UK suppliers to the US. If trade is anywhere near balanced, then the tax balance will even out?

    Tax haven manipulation is not as easy as you suggest. Many trading companies are incorporated in Zug, Switzerland for low local tax reasons. But the Swiss authorities are very strict about reasonable transfer prices for goods in and out of Swiss filed company accounts. HMRC are not the fools they are often made out to be. They are cynical, determined and can be vicious (and that’s when you’re in the right :).

  • Sorry, Geoff, this IS a moral issue. As a professional economist and, presumably (? I can’t remember what you have said about this) a Lib Dem, you should be bending your intellect and expertise to find a way that might work, not justifying current practise with the term “impractical” for alternatives which try to address the clear moral problem.

    It does seem to need an international dimension, but it does seem that the solutions to this await the majority’s view (in the developed world) that neoliberalism hasn’t worked being adopted by those with power and influence to make changes. Ultimately for “markets to work” (for democracy and for the overall benefit) there need to be constraints built in. There was no problem with globalisation as an idea, just with the way it was implemented. Those pushing for it were mainly those who wanted to make profits from it, not those who genuinely thought it would benefit people in all economies and all levels of the economy. We are not starting from the right place now – it would have been so much better had we not had Thatcher Reaganite Governments in the 80s and 90s, when the controls could have been developed internationally alongside the markets and business / trading practices. But we are where we are, and we need to show why reshaping the world economic and political systems is truly necessary at this time.

  • jenny barnes 15th Nov '12 - 9:03am

    Tim13 await the majority’s view (in the developed world) that neoliberalism hasn’t worked being adopted by those with power and influence to make changes.

    But neoliberalism has been a very successful pro business/elite class war project to move wealth and income to that elite. For them, it HAS worked. So why would they want to change it?

  • Geoff Crocker 15th Nov '12 - 10:13am

    Tim13

    I didn’t say it wasn’t a moral issue. I simply said that the moral issue is difficult to call. It is NOT morally clear whether corporate tax is more justifiably raised in the country of production, incorporation, or sales. Which do you think? Amartya Sen makes a similar point in his 2008 ‘Idea of Justice’ where he finds it impossible to determine whether a flute should be given to a child who has made it, a child who has no other toys, or a child who can play it. Distributional justice is not definable objectively. Which is why LibDem campaigning for fair taxes also needs deeper thought. And yes I am a longstanding LibDem member.

    My contribution to the debate, for what it’s worth, was that we probably have to live with taxation in the country of incorporation subject to i)reasonably balanced levels of trade between the two countries concerned so corporate tax balances out in mutual trade ii) elimination of tax havens (special super VAT on supplies from tax havens?). We have to face reality, and I suggest that it will be impossible to get important countries to agree to the global accounts harmonisation and determination which would be required. It just won’t work despite your challenge to me to suggest a scheme. I return the challenge to you since you seem to suggest that it is possible?

  • Geoff,

    the task of harmonisation of taxation standards may seem daunting at first, but there is actually quite a bit of impetus for change in this area.

    International Financial Reporting Standrards (IFRS) are used in many parts of the world, including the European Union, India, Hong Kong, Australia, Malaysia, Pakistan, GCC countries, Russia, South Africa, Singapore and Turkey. As of August 2008, more than 113 countries around the world, including all of Europe, currently require or permit IFRS reporting and 85 require IFRS reporting for all domestic, listed companies,

    George Osborne together with the German finance minister recently issued a statement backing the OECD – BEPS (tax base erosion and profit shifting) initiative of the OECD and expect its first analysis report to the next G20 meeting in Russia in February 2013. Base erosion and profit shifting.

    The OECD outlines the background to this initiative as follows:

    In the aftermath of the biggest financial crisis of our lifetime, many governments across the world are faced with high levels of debt and large budget deficits. Governments need revenues to operate effectively and taxation is the mechanism to collect that revenue. Fiscal consolidation is an inescapable reality as governments seek to rebuild solid foundations for growth. The promotion of private sector growth is fundamental as governments look to move along the road to economic recovery and deficit reduction. One of the keys to this is the creation of a competitive tax environment for business. However, governments must also ensure that business bears a fair share of the tax burden and takes necessary measures to step up tax compliance.

    Many are questioning the fact that most MNEs, and in particular those that are IP-intensive, have effective tax rates dramatically lower than the statutory rates of the countries in which they operate. An MNE’s effective tax rate is the average rate at which an MNE is taxed on its pre-tax profits. Disregarding the use of tax planning, whether aggressive or not, effective tax rates are often much lower than the statutory rates of the countries in which an MNE operates. A main reason for this is that certain items of income may be tax-exempt or taxed on a deferred basis. At the same time, a number of MNEs are also using aggressive strategies to minimise their tax burden.

    Other related initiatives, such as the EU Common consolidated corporate tax base have received very strong support from the business community as a promising tax simplification proposal.

  • Surely the key issue is not where sales are made, but where the company operates. There is a big difference between a company that sells an engine into the UK, and a company that sells millions of cups of coffee, made and sold, in the UK . If a company makes profit from UK operations, then tax should be paid here.

  • Liberal Eye 15th Nov '12 - 2:51pm

    Geoff – Ah! I think I see what you are saying when you say of a US company exporting to the UK that profits arise “In mid Atlantic”. You are, so to speak, splitting the difference between where the revenues arise (UK) and where the costs are incurred (USA).

    AFAIK this is a unique interpretation. Certainly it is one I have never come across before. Profit is an accounting measure of value added so if coal is mined in, say, West Virginia and shipped to acustomer in the UK, then the profit is based on the revenue net of shipping costs that gets back to Vest Virginia. Ultimately it arises from the difficult and skilled job of getting the coal out of the ground. The company might reduce its taxable profit in the USA by over-egging its sellng costs in the UK (whether incorporated here or not) if UK tax rates are lower. (If they are higher it has no incentive to do so). Alternatively, it might route the paperwork (but not the coal) through some tax haven and claim costs that do not in fact exist so reducing the reported revenue that gets back to its mine and hence the profits tax.

    I have read somewhere that it is estimated that the amount of tax lost to Africa each year is several times the total aid given. In other words if we fixed tax abuses we could cut our aid budget to zero and Africa as a whole would still be ahead.

    Obviously, there are practical problems involved. For instance, much international trade is within multinationals and for components for which there is no transparent benchmark price so it is fairly easy for companies to cheat a little. The problem then is that if no serious action is taken companies are incentivised to try cheating a lot and if they still get away with it, blatently. There is evidence (per the link in my earlier commenton this post) that HMRC has set its face against any meaningful enforcement for several years now so the cheating has indeed become rampant. So the problem isn’t technical difficulties but lack of will in high places.

    At first sight it’s curious that a Tory led government should fall for this. After all it is Tories that are keenest on the deterrant effect of policing when it comes to blue collar crime. I think the answer is that Osborne et al have compartmentalised their minds and convinced themselves that anything that companies do must be right if they are in the private sector. Also, on the basis of never letting a good crisis go to waste, it provides the perfect opportunity to push an austerity agenda.

  • Matthew Huntbach 15th Nov '12 - 3:01pm

    The issue seems to be quite simple. These companies are avoiding tax by making fictional payments between branches based in various countries. One way of doing this seems to be that one establishes the fiction that the “brand image” resides in one country, and branches in other countries have to pay all their profits as “loyalties” to be allowed to use the brand image. The country where the brand image is supposed to reside is not the country where it was first established and built up, but wherever taxes are lowest, and the overall profits still get moved from that country back to wherever the company owners and top employees are. So, for example, we are supposed to accept that Boots the Chemist despite having originated in Nottingham and having built up its brand in the UK, is actually just a branch of a company which exists as a flat above a shop (or something like that) in a small town in Switzerland. That’s nonsense, isn’t it?

    This is unfair competition, because smaller concerns who aren’t able to establish these overseas branches and fictional payments between them can’t do it. It’s hard enough your local bookseller trying to compete with Amazon without Amazon having established the fiction that it’s really an Irish (or was it Luxembourgish?) company, with its local branch struggling to make a profit due to having to pay those heavy payments to Ireland or Luxembourg for the right to call itself “Amazon”, but somehow that money being taxed at a lower rate due to this helping Amazon cut prices globally.

    Now if I were to establish the fiction that there was another me somewhere else rapaciously demanding money from me for the right to be me, and so the me you see is a very poor person, or actually if it doesn’t look like that it’s because you’re looking at the other me who isn’t me, whatever, when it comes to paying taxes it’s not me so I don’t have to pay any, you’d think that a trifle unfair to all those people who have only one me and so have to pay their taxes, wouldn’t you? Particularly as I still expect to have all the benefits of what those taxes pay for.

  • James from Durham 15th Nov '12 - 4:00pm

    Surely the point is not that tax is paid in one place rather than another but tat through use of tax havens such as Luxembourg, Netherlands (yes, I mean those nice Dutch people) and shadier islands, no tax is being paid at all. There is a feeling that this is largely sleight of hand. I didn’t cringe at all – I was delighted that these freeloaders were being called to account. Of course, we are probably powerless to prevent their rape of this country, but at least we can be open-eyed.

  • Geoff Crocker 15th Nov '12 - 4:07pm

    Joe,

    Thanks again for a very interesting contribution. It’s encouraging that accounting and tax harmonisation is making some progress. However, particularly given the obdurate UK insistence on sovereignty, I doubt that we are going to cede sovereignty on determining tax on UK companies to a supra-national authority? Perhaps the best we can hope for are commonly applied principles to limit profit shifting, But as you and I agree, the moral question as to where profit is deemed to arise in an international value chain is problematic and maybe irresoluble.

    I don’t actually agree with your point on a need to tax to reduce deficits. I take the heretical view that the crisis is due to productivity exceeding real wages thus leading to inadequate demand, and that such deficit and accumulated debt is inevitable in a technologically advanced economy. I think a citizen’s income funded outside PSBR is the only ultimate solution technically. I’ve posted some earlier articles on LDV about this.

  • Geoff Crocker 15th Nov '12 - 4:53pm

    Tom Snowdon and Matthew Huntbach

    I agree that determining how much of profit is due to brand is also very difficult. I don’t personally understand why people want to drink coffee in the UK in a US branded chain, rather than a truly local coffee shop, but apparently they do. Maybe one way would be to compare a representative business model of a truly local unbranded coffee shop with that of a Starbucks franchise? Any difference in profit would presumably then be derived from the franchise brand and be fairly considered the profit of the brand originator to be taxed wherever that company was legitimately incorporated?

    Matthew criticises Amazon for basing their European operations in Luxembourg. But Amazon is a US company legitimately incorporated in the US. When it extends its business to Europe, surely it is entitled to choose where to locate its European business hub, and cannot be blamed if it chooses a low tax location. Stopping this would have drastically reduced the inward investment which has helped the Irish economy. And in any case Amazon’s 1.3% profit rate on sales seems pretty reasonable? It’s Microsoft’s 23% margin we should be targeting.

    The Boots example is more complicated too. I happen to regret the widespread sale of UK companies to foreign owners, eg Boots to Alliance Italy, Pilkington to Japan’s Nippon Glass, Heathrow Airport to Spain’s Ferrovial, O2 mobile telecoms to Spain’s Telefonica, Abbey National to Spain’s Santander, British Steel and Jaguar/Landrover to India’s Tata etc several of which we can thank Sir Nigel Rudd for. Michael Heseltine is critical of the ease of this process. But they are then no longer UK companies. So where they are incorporated is no longer our call. It’s not as simple as Matthew Huntbach suggests.

    Back to Liberal Eye on the separate question of tax havens, we could impose some heavy import or VAT tax on anything originating from tax havens?

  • “we could impose some heavy import or VAT tax on anything originating from tax havens?”
    With respect to VAT, Luxembourg is a tax haven – well for goods sent to non-VAT registered entities in the UK such as consumers; hence one of the reasons why it was chosen by Amazon, I’m not sure if we could discriminate against it without the consent of the EU …

    With respect to my comment, I should of been clearer and stated that imports into the UK attract both import duties and VAT, although the exact rates is dependent upon the origin of the goods and the VAT registration status of the UK company.

    I see that John Lewis have stepped in to the affray, raising the not unreasonable question of whether the tax games played by some companies put them at an unfair advantage over companies, like John Lewis, who are wholly onshore..

  • Geoff Crocker 16th Nov '12 - 12:18am

    Roland

    Yes this is probably right about Luxembourg, but then UK can’t have it both ways, ie insisting on fiscal sovereignty for the UK, and then complaining that Luxembourg uses its sovereignty to determine a rate of VAT we don’t like?

    But I had in mind more notorious non-EU global tax havens like the Cayman islands in my suggestion that UK could impose import or VAT taxes on such imports. Do you think this could work and penalise such schemes into inoperability ?

  • >more notorious non-EU global tax havens
    But I thought many of these tax havens where UK protectorates, but maybe not the more notorious ones …

    With respect to Luxembourg (and France) the EU has an on-going investigation into their rates for digital books (7% for France and 3% for Luxembourg), so I would hope that sometime the EU will demand that they bring their rates into line with the rest of the EU.

    The problem as I see it is with the consumer space. whilst there are a large (and growing) number of individual imports, the individual value of each is very low, so the amount of VAT owing on each is small and hardly worth incurring the collection cost – hence why I’ve often had packages left with VAT payable sticker attached.

  • Matthew Huntbach 17th Nov '12 - 1:13am

    Geoff Crocker

    Matthew criticises Amazon for basing their European operations in Luxembourg.

    But are they based in Luxembourg? Do they have a big warehouse in Luxembourg with lots of Luxembourgish people busily packing up the books and sending them out? Or is it a purely notional basis, a brass plate on a door somewhere, with payments routed through the Luxembourg office for purely fictional reasons?

  • Geoff Crocker 17th Nov '12 - 7:22am

    Matthew

    I don’t know. It’s your criticism, so up to you to establish the facts.

  • Geoff,

    for those that want to express their displeasure, Stephen Williams has launched an online petition at Fairer Tax

  • Liberal Eye 17th Nov '12 - 6:05pm

    When Amazon first oped in the UK in the mid nineties they based themselves in Milton Keynes just off the M1. They’ve since added several other locations, most recently and somewhat controversially in Scotland.

    The move to Luxembourg seems to have been more recent, at least on any scale; their operation selling ebooks into the UK is based there so they have been paying only the local 3% VAT instead of the 20% that would be payable in were they based in the UK. They have however used their market power (90% market share in ebooks) to force UK publishers to cover the cost of a 20% VAT and pocket the difference. The EU has now weighed in on this but apparently it’s gone to appeal so don’t hold your breath.

    http://www.guardian.co.uk/technology/2012/oct/24/amazon-tax-loophole-ebooks

    Incidentally, if this isn’t abuse of a dominant market position – an offence in competition law – I don’t know what is. Are the regulators asleep in charge of a handsome salary yet again?

    Separately, Amazon until recently had a warehouse (or a subcontractor) based in Jersey to exploit ‘small value consignment relief’ to avoid VAT on low value sales. I once ordered 3 printer cartridges from them in one go which came in three separate packages – no doubt because together they would have exceeded the value limit for relief. The relief has now been abolished or reformed (not sure of details) but their record on it speaks to past form.

  • Matthew Huntbach 17th Nov '12 - 11:42pm

    Geoff Crocker (in response to my remark re Amazon “But are they based in Luxembourg?”

    I don’t know. It’s your criticism, so up to you to establish the facts.

    Well, let me quote you your words:

    “Matthew criticises Amazon for basing their European operations in Luxembourg. But Amazon is a US company legitimately incorporated in the US. When it extends its business to Europe, surely it is entitled to choose where to locate its European business hub, and cannot be blamed if it chooses a low tax location”.

    That seems to me to be very much you stating that Amazon ARE based in Luxembourg. It was that which I was replying to. Now you are saying you don’t know if that was true. So you have changed your tune.

    My point is clear, and unlike yours has not changed. If we find a company doing a great deal of operations in one country, employees busily doing things there, customers busily buying things from the company there, then it would see to me that is where the company is based and should be taxed. If the company claims to be simply a branch office of some other company in some small country where it doesn’t do much but have a small office, I think they are telling a lie. If they set up some system whereby the office in the small country where little real work is done somehow holds some sort of rights which the branch in the big country which does a lot of work has to pay to use, I think we are entitled to say “In what sense are you really based there?”. If that is where the company historically originated, started off and still has obvious long-standing links, OK. If they have no particular history there and no reason to have a formal base there apart from dodging support for state infrastructure which they still expect to be present for their benefit, then I think what they are doing is purely fictional. It is as if I were to make up some other me who takes all my money so I don’t have to pay income tax. So you might see me living a very rich and prosperous life, but I say “Oh no, that’s the other me who’s rich and prosperous, I’m a pauper due to his rapacious demands”.

    You seem to be saying this is all very fine and legitimate, and it’s very rude and nasty for anyone to question it.

  • Geoff Crocker 18th Nov '12 - 1:43pm

    Matthew Huntbach

    On the contrary my comment is clear and yours is not. I agree that Amazon have their European base in Luxembourg. I wrote that I did not know the answer to your wider question as to what extent of operation they have in Luxembourg. Here it is you who is making, or at least implying, an accusation and therefore you who should come up with the evidence for your claim. This seems to me to be the normal way science proceeds? Why do you use emotive terms like ‘rude and nasty’?

  • The thing I find quite concerning about the PAC is that they seem to be getting very little hard information about how the existing trade and taxation arrangements are being legally used and abused; I would of thought that a key part of moving forward is the gaining of a better understanding of how businesses are exploiting existing arrangements. Hence I would expect to see a few arms dealers being interviewed (see below).

    I think with respect to Amazon and other online businesses what we are seeing is the result of several differing related issues. Firstly, with internet purchases just where is the purchase taking place for tax purposes and between whom is it taking place? is it in the US where the servers hosting the .co.uk website probably happen to be, or is it in Luxembourg etc where the trading entity (operating the .co.uk website) is notionally based. The odd thing about this is that this question was raised way back in the 1990’s. Secondly, should the goods follow the paper/money trail or are they (as at present) subject to different rules and hence your purchase on a .co.uk website with a Luxembourg registered trader is physically fulfilled from a warehouse just outside of Milton Keynes; even though all the paper work indicate that the transaction was with a company located in Luxembourg and hence the goods were officially ‘shipped’ from Luxembourg. With e-content such as eBooks and music (aside: odd how we don’t call this eMusic) the fulfillment part becomes even less tangible.

    What is interesting is seeing practices that were largely utilized by arms dealers, now being taken-up by mainstream businesses…

    Recently, I cleared some papers out and an article published in 1998 made me smile. In it was a comment to the effect that it was natural for businesses to set themselves up so as to reduce tax and regulatory burdens (off-shoring isn’t something that has suddenly started to happen in the last few years), and that the logical next step was for both businesses and banks to take advantage of satellites and move into space…

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