On the May 4th online edition of the Guardian (https://www.theguardian.com/technology/2021/may/04/amazon-sales-income-europe-corporation-tax-luxembourg)
there was a story about how amazon is avoiding taxes by accumulating losses in its Luxembourg company, notwithstanding an explosion of Revenues soaring from roughly 33 euro billions to 44 Euro billion in a year.
Notwithstanding this revenue performance, the profit and loss closes with a net loss close to 1,2 billion, a half a billion increase compared to the losses of 700 million in the previous year.
The Guardian reporter is quick to point out that, with a cumulated losses carried forward of roughly 2.7 billion Amazon EU Sarl (the legal entity name under which Amazon conducts its business in the European Union) is unlikely to pay any income taxes any time soon. (Losses carried forward are losses incurred in previous years that can be offset against profits once these materialize).
Although the point of the guardian correspondent is technically correct, there are a few questions that arises by reading this document. Questions that, by looking at this document alone, cannot find answers, for various reasons, the main which is: without knowing the tax structure of amazon, which is not disclosed in the accounts, it is impossible to answer meaningfully any questions on the numbers that we are reading in this document. The document itself is almost pointless to read.
What is a tax structure? It is the way a company structures its subsidiaries and flows of goods/services (like royalties, interests, dividends) in order to minimize its tax expenditure.
To be clear: this is perfectly legal, and is a common practice for every international group.
The first thing that I find puzzling is the accumulation of losses in what is known as a low income tax jurisdiction, Luxembourg. Although the nominal tax rate for corporations in the Grand-Duchy is technically not too low by global standards (24.94%) the devil is always in the details i.e. how the taxable income is determined. If for example there is an allowance to exclude certain type of income (say, Royaties) from the taxable income, said tax rate can be applied to a much lower base, hence the actual tax charge is much less than 25%.
Now, given this, I would expect Amazon to turn profits in Luxembourg, however this does not seem to be the case. Where are the profits booked then? Hard to answer without knowing the full picture of the group. This can be achieved by looking at the consolidated accounts, where Amazon books, on profits of USD 26 billion, 2.8 billion of taxes. By looking at the notes, however, seems like what is called “international business”, which is mostly Amazon EU, is in fact turning losses.
So the reality is that actually Amazon EU might be really losing money, whereas Amazon as a group turns out profits.
According to the segment information in the consolidated annual report, Amazon turns USD 7 billion of profit for its North American business and about the same amount for its Amazon Web services unit. Whereas it loses in the “International business” which mostly contains the EU.
This much we know. Why it loses money? Difficult to say, from the very limited information of its Luxembourg accounts. We know that vis-a-vis of 44billion of revenues, we have 31.7 billion of cost of good sold (with a gross margin of 28%) costs and 12 billion of “other external cost”. Which drive the margin essentially down to zero. At the note 15 of the accounts it is explained that “Other external expenses are related to the operations of the Company, including provision of services from affiliate undertakings”. In laymen terms this is quite a bit of intercompany charges, for which is not possible to understand the nature of, or the amount, just looking at this annual report. Or looking even at the consolidated one, for that matter.
How should we read this number? A first conclusion to draw is: by looking at this document there is no way to understand how Amazon is planning its tax expenditures and how aggressive it is.
Is amazon evading taxes? Probably not. Is avoiding them in a very aggressive way? Probably yes. However any claim of how much taxes is avoiding, is going to be a wild guess, due to the lack of transparency in its reporting.
One thing is sure. By looking at the annual report for the group filed to the SEC (The American Security and Exchange Commission) the list of significant subsidiaries of Amazon Inc is very short:
So Amazon EU Sarl is not a significant subsidiary of Amazon Inc. Why? Because it is most likely a significant subsidiary of one of the entities in the above table. Most of which are located in Delaware.
Conclusions? Is really Amazon the parasite that Natalie Bennet, the UK green party peer, has singled out in one of her tweet?
I cannot answer this question, because the data that we have available are way too little.
What it is sure, is that there is a distinct lack of transparency, on tax matters, both in the Amazon EU Sarl annual filing and in the consolidated accounts. This lack of transparency is NOT the fault of Amazon. Amazon is most likely complying with all rules and regulations.
The problem lies in the rules.
And the problem is two-fold:
- The rules on disclosure do not allow regulators and the public to figure out how amazon, and all other multinational companies plan and optimise their tax expenditures
- The tax regulations, both in the USA and in Europe have grown so complex and inefficient that allow big corporation to pursue, legally, aggressive tax planning while leaving the little guy on the hook for the full tax charge.
This is obviously both inefficient and unfair.
So what could be possible solutions? A first step should be a push for a higher level of disclosure on these matters. However that alone would not be enough as the vast majority of the public would not be able to understand technical matters.
Other solutions could be far more radical, from abolishing the corporate tax altogether (and shift taxation to other areas) or reach a consensus to limit the ability of multinational corporations to reduce its tax charges.
Both solutions are politically hard and not likely to be considered in the near future: although the Biden administration is pushing for a global tax reform, this will require the agreement of many different countries with different interests. Plus some of the jurisdictions that allow some of the most egregious tax planning are within the USA, hence other countries will be quick to point out the hypocrisy and use this as an excuse to drag their feet on reaching a global agreement.
I for one, would support the complete abolition of the corporate income tax, as a way to level the playing field for every competitor and reduce the waste of resources that is going in “tax planning”. There has to be a better way to make sure everyone pays the fair share.
At the end of the day, Amazon is paying, globally, 2,8 USD billions of taxes on 24,1 USD billion of profits. An actual tax rate of 5.2%. I leave to the reader any consideration on the fairness of this, considering the taxes a small business pays. Wouldn’t it be better to end this charade and putting every business on the same footing?
Chainergy 
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