Will the 4G Auction exceed £3.5bn? You bet!

Although Chancellor George Osborne is unlikely to raise anywhere near to Gordon Brown’s £21bn for 3G licences, I believe he may do rather better than is being reported.  Recent auctions in Europe have raised £3bn which suggests that the UK 4G licences will achieve £3.5bn.  However, it is suggested that Private equity firms, retail groups and banks as well as international telecom players have entered the fray alongside the UK’s Big Four mobile operators, EE, Vodafone, O2 and Three to win a slice of these 4G licences.

Ed Richards, chief executive of Ofcom, the telecoms watchdog, said that it had “fired the starting gun” on an auction process that would “release crucial capacity to support future growth, helping to boost UK productivity”.  Even in these recessionary times, the total U.K. Internet traffic is currently projected to increase by an average of 37 per cent each year until 2015. Although the majority of traffic remains on fixed networks, traffic on mobile networks is growing at a faster rate of 84% year-over-year and is expected to account for 11% of total traffic by 2015. 

Mobile access to the Internet accounts for even more time spent browsing, communicating, and transacting than this traffic data suggests, with fixed lines being used to consume bandwidth-intensive services such as video and mobile used more for social media. Indeed, the Internet is increasingly being accessed on mobile devices, whether through mobile connections or Wi-Fi networks, and the next generation of mobile communications of 4G will continue to shift this dynamic and economists have suggested could add as much as 0.5% to GDP in infrastructure investment alone not to mention the enhanced capability of the mobile web usage.

The superior quality of coverage and speed of performance offered by 4G’s 800MHz network offers significant improvement over the current 3G licences.  This superior system will add significantly to the opportunity for both network providers and service providers to make significant revenue.  The UK is one the largest mobile internet markets and consequently the opportunity  to own a slice of this market will in my opinion drive the value of these licences far beyond the projected £3.5bn and along with the additional impact 4G will have on the UK economy, the auction could bring a welcome additional windfall for Mr Osborne.

Guess who will ultimately pay Amazon’s UK Taxes?

The recent moral crusade waged by the Press to get the major American Corporations such as Starbucks, Amazon and Google to pay more tax may seem at first sight entirely laudable.  Previous campaigns by Occupy Wall Street to embarrass the likes of Vodafone and Top Shop to pay more tax have had little effect.  Certainly the press didn’t seem that interested in pursuing Sir Philip Green as much as they seem to wish to pillory Google.  Maybe we are only affronted by foreign companies that appear to be ripping off the state and are quite happy for home grown companies such as Arcadia and Vodafone to avoid their share of the tax burden.

In truth, none of the companies are to blame.  Rather the issue lies not with the smart accountants exercising their abilities to save businesses millions of pounds in tax, but rather in the labyrinthine tax system Government have evolved not only domestically, but internationally.  Government not only use the tax system to generate income to spend on the defence of the Realm and the NHS but they also use it to achieve certain strategic and tactical objectives such as encouraging investment by foreign nationals to create jobs.  Equally foreign powers user their tax systems to attract companies to their jurisdictions.

So just how much is George Osborne missing out on.  So let us examine the case of Google.  Last year Google paid £6m on revenue of £395m. However, the UK is the largest online ad market in Europe and Google is the largest player in that market and given that Google’s EMEA (Europe, Middle East and Africa)  operations generated €12.5bn (£10.1bn), the Google’s UK turnover was in the region of $4bn (£2.5bn) and paid just £6m in corporation tax.  Google has located its European headquarters in Dublin where Google Dublin employs 2,500 employees to take advantage of Ireland’s favourable capital arrangements and consolidates its ad revenue through this subsidiary. Google Ireland had pre-tax profit of just €24.3m last year on turnover of €12.5bn.  Google’s consolidated accounts suggest a different picture of earnings generated by their operations of $11.7bn on just under $38bn turnover.  This suggests the true profit contribution from Europe should be in the region of $3.85bn.  By the same logic, the earnings contribution for the UK market would have been $1.2bn or approximately £800m profit or equivalent to £208m in Corporation Tax.  So there we have it, the UK Treasury is missing out on just over £200m in corporation tax.  Given that Google employ just 1,500 people in the UK there can hardly be said to be a jobs bonus whereby we are getting significant PAYE revenues instead.

Amazon is a somewhat different case.  Amazon is the largest on-line retailer in the world and has come to dominate the market.  However, in the UK, Amazon generated sales of £3.35bn, 25% of Amazon's sales outside of the US and paid just £1.8m in Corporation Tax to the UK Treasury.  However, in fairness to Amazon they have created 15,000 jobs in the UK, which is ten times that created by Google, and make a far smaller margin on sales of the many products they ship from Books to Microwaves.  Equally those 15,000 employees are significant payroll taxes and Amazon continues to invest heavily in the UK infrastructure.  Yes Amazon the Luxembourg holding company rouse, but I believe their contribution to the country is far greater than Google’s.

Harmonisation of the European Union’s Tax laws as regards companies and individuals would eliminate many of these distortions and clamping down on the BVI (British Virgin Island) corporations would also eliminate many of the tax loop holes that multi-national companies take advantage of.  However, these are probably a step too far for most UK based politicians and unlikely to occur.  

The HMRC could go toe-to-toe with these multinationals and try and get more out of them.  However, the most likely outcome is the cost of all these activities will eventually be borne by the consuming public through increased prices.  Years ago we used to consider that the same cost of a good in the US compared to the UK was on the basis what cost $100 in New York cost £100 in London.  Much of this Atlantic Margin has been eroded by the Internet and in no small part in the role taken by both Amazon and Google.  So I would not necessarily jump to the conclusion that we would be better off if the HMRC managed to get more out of the likes of Amazon and Google.