Amazon proves the taxman can make multinationals pay their fair share

There have been endless suggestions over the last few years that developed countries should stop bothering to try and collect corporation tax. The global multinationals can effectively choose where they pay tax these days, the story goes. So trying to pin them down is pointless. Better to abolish corporation tax and to try and get extra revenue in from consumption taxes to compensate.

Regular readers will know that I don’t buy this. Multinationals may think they rule the world, but when it comes to a fiscal crisis, sovereign means sovereign. The countries in which multinationals want to do business can tax them as they like, as George Osborne made clear when he introduced the concept of the diverted profits tax (DPT – or Google tax) last year.

Amazon appears to have recognised it, too. It is about to start counting the profits it makes in the UK as being made in the UK – by running them through a new UK branch of its Luxembourg company.

It is doing  this for exactly the reason I mention above – political pressure.Look at the notes to Amazon’s 2014 accounts, says accountant Baker Tilly, and you get the idea.

“In addition to acknowledging the public and political pressures to which they have subjected themselves as a result of their tax planning strategies”, Amazon recognises several specific threats: there is a transfer pricing challenge in the US, an EU Commission investigation into arrangements agreed between Amazon and the Luxembourg authorities and the OECD attack on corporate profit shifting.

Since then the pressure hasn’t exactly eased: the UK diverted profits tax came into force in April this year. Add it all up and “from Amazon’s perspective, it’s likely that corporation tax at 20% on the audited profits of a branch operation look like a better risk than a DPT liability at 25% of a figure determined by HMRC, which Amazon then has to contest.”

We won’t know for a while how much extra tax this all means Amazon ends up paying in the UK (possibly not much given that Amazon isn’t exactly a profit making machine). But what I think we do know is that, while it certainly isn’t over, the tide is turning in the battle between big companies and tax authorities.

More evidence of this came in the FT this morning. It seems that, while one in six of the world’s largest firms are either based in a tax haven or have a majority-owned subsidiary in one, the proportion of MSCI World companies with the latter has “actually fallen” from 10.8% to 7.1% in the last two years. According to MSCI, this is because the “regulatory spotlight has intensified”. Amazon has a history of being a first mover in markets. It looks like it might be this time too.