What fun with Amazon’s tax

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.

That’s a pretty good summation in fact. Vastly better than the longer one here in the same newspaper.

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?

11 thoughts on “What fun with Amazon’s tax”

  1. Ritchie sat in front of a select committee and said IP should be zero valued for transfers between subsidiaries of a multinational. Therefore Ritchie is campaigning to reduce the tax take in the US for Amazon.

  2. Again, people assume that what they see is all there is.

    Amazon Web Services (AWS) is a huge business which defined cloud computing. Capital costs (hardware and software) are massive, and a lot of US IP is used. Likely it makes a loss – certainly it requires constant investment.

    Nothing at all to do with books & CDs, but invisible to the casual idiot on their website, and therefore ignored by people who should, but don’t, do some research.

  3. Something I never hear mentioned. I’ve spent a considerable amount of money with Amazon, past few years. But only about £20 of it’s been books. (Hat tip Tim). Rest’s all been with Amazon Sellers & they don’t even use the Amazon distribution network. I can’t imagine Amazon charge much. They’re in direct competition with E-bay/PayPal, for a start. Or that much of the data processing’s done in Europe, let alone UK.
    I’d presume, what of this is turning up in the Amazon t/o figures is just the listing fees. Or is someone calling this “sales”?

  4. Or is someone calling this “sales”?

    We know at least one tax stump pronouncer (there doesn’t appear to be much, if any, thought involved) who would if he had a sufficient glimmer of intelligence to understand what you were talking about.

  5. “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.”

    Well, it would solve the problem of the US and the EU arguing about how to value IP. And it would solve the problem of Amazon having to pay taxes when it doesn’t make a profit. And since there’s hardly any profit, no-one’s going to be arguing much about how to apportion it.

    Which sounds good to me. Suspect Murphy wouldn’t be so pleased about his outcome though.

  6. But certain methods of unitary taxation are not profit linked so you can end up paying tax in the unitary state when the group as whole is loss making

  7. Philip Scott Thomas

    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?

    “Promptly”? As in, often, the next day? Yep.

    And it is also an on-demand video streaming service. A service which also includes “X-Ray”, the real-time information service that tells you which actors are in each scene. It means I no longer have to keep pausing the movie to jump over to IMDb to figure out what show I know that guy from, you know the one with what’s-her-name from that other show.

    And it’s also an original content producer for that video service.

    And it is also an on-demand music streaming service. A service which also includes “X-Ray”, the real-time song lyrics information service. It means that when I’m listening to the Stones I no longer have to keep shouting, “C’mon, Mick, open your damn mouth.”

    And I get all that for the low, low price of just £7.99 a month.

    As far as I’m concerned they can pay sweet FA in tax, as long as they keep on doing what they’re doing.

  8. BraveFart, that’s true, but I think Murphy’s preferred method is a global corporation tax calculation in the normal UK manner (since that’s what he knows a bit about), with the profits then allocated according to a formula.

  9. BIS – as an amazon seller we pay fees of 15% – plus VAT for those charged it. Jewellery is 25%, some electronics may be 12%.
    We also use their fulfilment services heavily, figure another 5 – 15% in real terms though save that much usually with packaging companies and royal mail spend.

  10. MD
    So, 15% commission on sales plus another 15 for most of the distribution cost, 30%. It’s a long time since I was a bookseller in the days but that would be about the margin at retail.

  11. What is that IP worth? Amazon’s cumulative flobal profits are $2.2bn (which is about $2.2bn more than my net worth to a rounding error), but although it is a tech company it has been around since 1994 and is currently making losses.

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