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.
