Over the past decade the new breed of technology giants such as Google, Facebook, Amazon and Apple have transformed the media landscape and, revolutionised our lives, and they deserve to profit from their success. But are they also paying their due?
Last week, I revealed that Facebook's main UK operating company paid only £238,000 in corporation tax last year on an estimated £175m in revenues – part of a pattern of behaviour whereby big media companies exploit tax loopholes to avoid corporation tax. And it is happening on a rampant scale.
According to its UK accounts, filed to Companies House, Facebook generated £20m in sales and operated at a £14m loss. But in reality, the social networking website processes most of its UK revenue via Ireland, where corporation tax is much lower.
Facebook can do this because when an advertiser in the UK buys ad space on the site, the sale can be processed in Facebook's Ireland office, even though the ad will be displayed to UK users in Britain.
This scheme is legal under UK tax law but is it ethical? Since Facebook first opened its office in the UK since 2007, it has paid a grand total of £1m in UK corporation tax on sales of about £340m over a four-year period.
However, these sums are paltry compared to Google, which has been processing most of its UK revenue offshore since before Facebook even existed. Last year, parent company Google Inc in America said it generated sales of £2.5bn in the UK. But Google UK Limited, the London-based subsidiary, declared turnover of only £396m and paid just £7.3m in UK corporation tax in its filing to Companies House. The luck of the Irish, you might say.
That £7.3m tax figure isn't new, although you could be forgiven for not noticing as Google's spinners decided to release its UK numbers on 8 August during the middle of the Olympics.
Look at Google's figures over the past eight financial years, since it floated on the US stock market, and the scale is breath-taking. Between 2004 and the end of 2011, Google INC generated £11bn in UK sales but Google UK paid only £16.8m in corporation tax – a rate of just 0.15 per cent.
Amazon and Apple also have ethical questions to answer. Earlier this year, it emerged that Amazon paid no UK corporation tax on estimated sales of £3.2bn in Britain as it has a base in Luxembourg to process sales. Meanwhile, the Sunday Times yesterday claimed that Apple appears to be processing a major chunk of its estimated £6bn-plus in annual UK revenue via Ireland.
All of these companies say that they obey all local laws, that they contribute to the local economy by creating jobs, and they can't be blamed for wanting to minimise their tax bills by legal means.
But this must also be giving these companies a huge financial advantage over local rivals and it is hard to see how it can be good for creative industries, as money is siphoned out of the UK rather than reinvested.
The problem is getting worse, as these tech giants keep growing.
Clearly, it is too much to expect them to change their tax habits of their own volition. But senior politicians appear strangely unworried. George Osborne or Boris Johnson would rather go along to attend the opening of a new Google or Amazon office and talk up Britain's digital future. Many in the media industry are also reluctant to speak out.
The Government could consider cutting corporation tax rates to Irish levels but that is unrealistic given Britain's debt problems. A small levy on tech firms' internet usage, an idea that has been raised by Labour MP John Mann, also seems impractical.
Tax avoidance by tech companies is not just a UK problem, it's a global issue. So the only way to tackle it may be for national governments to come together as one to tighten tax law, although there is little sign yet of that.
The public should be a lot angrier that some of their favourite companies are dodging tax.
- More about:
- Management Accounting
- Search Engine
- Social Media
- The Sunday Times