How Amazon can avoid UK’s new tax on technology companies, but small businesses will pay

The new ‘Google tax’ will have very little impact on companies it is supposed to target – only an international agreement can do that

Amazon accounts for its logistics business in the UK but its European sales in Luxembourg, a country with an extremely welcoming attitude to big businesses that like paying low tax rates (Reuters)

Amazon will not have to pay a new tax on digital services, but smaller businesses that use the tech company’s platform will have to cough up.

So much was revealed this week when HMRC confirmed the fact to the Times.

Except we knew this earlier in the year when the government confirmed it would go ahead with the tax and how it would work; and we had a pretty good idea back in 2018 when Philip Hammond first announced it.  

By design, the tax is levied on digital services, not online sales. For Amazon, this means the fees it charges thousands of businesses to use its online marketplace. Amazon said in August that it would simply pass the charge on to its customers. Apple has said it will pass the tax on to app developers and Google announced it will raise fees for advertisers.

So why is a tax sometimes referred to as the “Google tax” unlikely to have much impact at all on those it was aimed at?  

The government does not want to charge a levy on the sales of all online retailers. Instead, it is trying to collect a slither of the vast profits made by multinational technology platforms, some of whom, it’s fair to say, have been running rings around outdated tax systems for years.

To do this, it has targeted digital services, with some unintended consequences.

What is really needed to level the playing field, save UK town centres and ensure global tech monopolists pay their fair share is a proper international agreement on tackling tax avoidance.

The UK’s digital services tax (DST) is a poor consolation prize, as are similar measures in France, Italy, Turkey and elsewhere. Multinational tech firms will pay 2 per cent to HMRC on revenues related to “provision of a social media service, internet search engine or online marketplace”.

The issue is not Amazon’s digital services but that the “broader structure that allows it to shift most of its taxable profits out of the UK”, he says.

Amazon accounts for its logistics business in the UK but its European sales in Luxembourg, a country with an extremely welcoming attitude to big businesses that like paying low tax rates.

Not only does Amazon’s Luxembourg subsidiary enjoy a low tax rate, it often reports a loss, explains Paul Monaghan, of Fair Tax Mark (Amazon argues these losses are due to its high level of investment).  

“This generates enormous tax reliefs that can be used in the future to ensure that little or no tax continues to be paid,” says Monaghan.  

Even a broader DST would make little difference to this reality, and would not address tax avoidance by non-digital multinationals.

Alex Cobham, chief executive of the Tax Justice Network, adds: “More than a trillion dollars of profit worldwide is currently declared in jurisdictions other than where the real activity takes place, so this is a first-order problem for the global economy that goes well beyond Amazon or a handful of digital companies.”

That means progress on reducing the $500bn thought to be lost to corporate tax avoidance each year is reliant on an international agreement which, after years of negotiations, is not yet close to a satisfactory conclusion.

The OECD, which has taken the lead on negotations, this week unveiled deeply disappointing plans to clamp down on corporate tax havens, but Cobham remains hopeful that the process can succeed.

“The central logic is correct: we need to tax multinationals according to where their real activity is.  

“That would mean the UK taxing a share of Amazon’s global profits in proportion to the share of Amazon’s activity that takes place in the UK – the share of employment and sales, that is. And that approach needs to be applied to all sectors.”

An Amazon spokesperson said: “Like many others, we have encouraged the government to pursue a global agreement on the taxation of the digital economy at OECD level rather than unilateral taxes, so that rules would be consistent across countries and clearer and fairer for businesses. 

“As we’ve previously indicated, the way that the government has designed the Digital Services Tax will directly impact the businesses that use our services.”