If you had to sum up Amazon’s core business in a single sentence, how would you put it? Is it a website where you can order almost anything? Or is it a quick and convenient delivery network allowing you to receive the goods you need promptly?
Clearly, it is both. But precisely how the group’s economic value is split between the two is now a vexed question at the heart of tax disputes on both sides of the Atlantic.
In Europe, regulators believe high royalty fees paid by Amazon’s European HQ – bills, that is, for use of web technology and the brand – have allowed too much taxable income to be spirited away. As a consequence, the value of the group’s European activities, its buying and warehousing operations, is not properly appreciated.
US tax officials take a different view. They insist that Amazon’s intellectual property – the rights to charge royalty fees for the use of brand and web technology – was grossly undervalued when it was sub-licensed outside America. As a result, they say, the value created by Amazon’s tech experts in Seattle is not properly appreciated.
IP has economic value. That’s actually why we have patents and copyrights, to make economic value. Tax is, under the current system, supposed to be paid where the economic value is created. Even Ritchie says that is how it should happen in fact.
Here, the core of the argument is quite simple. The basics of the technology and brand were clearly created in the US. When the European operation started up equally clearly there was some transfer of said value. So, what should have been the price of said value? Under American rules foreign Amazon must pay that value to US Amazon….and tax must be paid on that value paid. Under European rules (not EU, just the rules that apply here) whatever that value is can be used as the justification for charging royalties. Which can be moved offshore without taxation of anything very much. Although not actually into the US, where they would become taxable again.
So, obviously, the US wants that tech IP to have a high value, Europe a low.
Note that this doesn’t get solved by Ritchie’s solution, unitary taxation. Because the company normally makes a loss, or a very small profit, overall. Thus on a unitary basis there’s pretty much nothing to tax.
But it will be interesting watching him trying to claim that his solution does fix it, won’t it?