In defence of low corporate tax bills – James Paull
James Paull, Head of Incentives Group, examines the tax practises of Google, and other similar companies, and explains why low corporate tax bills are not always the whole story, in Taxation.
James’ article was published in Taxation, 29 July 2021, and can be found here.
Google pays £50m corporation tax on £1.8bn of revenues, proclaimed the headline in inews in April. It seems rare for a week to pass without a multinational giant featuring in a story of a similar nature. Amazon, Netflix, Facebook and Starbucks have all experienced excoriation in recent months based on the size of their UK corporation tax payments.
The implication of these stories is that these organisations are not paying their way, employing nefarious means to reduce their bills, while other ‘ordinary’ taxpayers pick up the tab. But is this fair or accurate? Are they really artificially achieving miniscule effective tax rates? Are they doing only what any other taxpayer would do? Is it right to view their tax contribution simply through the lens of corporation tax? It is generally difficult to draw any conclusions from the articles behind the headlines one way or another, but it is absolutely necessary to consider whether this could all be happening through completely legitimate and routine means.
How can the bill really be so low?
Successful businessmen have, since time immemorial, lived by the mantra ‘turnover is vanity, profit is sanity’. Anyone wanting to create a high turnover business could do so quite easily by selling £10 notes for £5 each. They could not expect much in the way of profit. Clearly, multi-billion dollar groups have more sophisticated business models than that, but the point remains: it is a mistake to conflate revenue and profit when assessing the amount of tax which should reasonably be expected to be paid. Any analysis which uses this juxtaposition as its starting point should immediately be taken with a pinch of salt.
There are long established rules for the calculation of profits and the payment of tax on them. One of the fundamental principles is that costs incurred in generating turnover should be deducted from revenue before arriving at profit. Multinationals have a lot of these costs.
The workers who contribute to generating these revenues will rightly expect to be paid. In the case of Google, they are paid very well: £240,000 a year on average for the year to June 2020. Based on their accounts, that is a wage bill of almost £1.25bn: a big chunk of that £1.8bn of revenue. A significant proportion of this is delivered in the form of share awards, for which UK tax legislation allows a tax deduction regardless of whether any cash cost has been incurred.
Given the share price performance in recent years, it is not surprising these sums are often material. It is open to debate whether a deduction should be offered on these terms, but it seems unfair to lay the blame for this at the door of the taxpayer, when they are doing only what any compliant business would do.
Another major contributor to the ability to generate revenues is the strong brand these businesses enjoy. This did not happen overnight nor did it happen for free. These businesses will seek to deduct the expenses of the creation and maintaining of this brand, and it seems difficult to argue in any objective way that they should not be allowed to do this. A similar story applies for property costs, administrative expenses and carried forward losses all of which can legitimately reduce taxable profits.
Does the UK get its fair share?
Some costs will be borne directly in the UK, others will take the form of a fee paid to a group member overseas. In the latter case it is appropriate to consider whether these businesses are using their multinational status to siphon profits from the UK into low tax jurisdictions and whether this is fair when UK-centric businesses do not have the ability to do this. It is worth noting that the existing UK tax rules would expect a UK headquartered business to levy a charge to its overseas subsidiaries for services it provides, so by the same token the UK should be prepared to accept that some level of fee should be paid overseas.
The transfer pricing rules are supposed to regulate what is a suitable, or arms’ length, fee. Of course, there is room for argument as to what constitutes arms’ length but these rules should stop any flagrant abuses. If the rules really are being routinely side-stepped, clearly they should be tightened. The fact that they are not, suggests that artificial stripping of profits out of the UK might not be as major a contributor to low UK corporation tax bills as is sometimes portrayed.
The bigger issue, not always considered, is what the reported revenues are for. It is worth taking time to understand what the UK businesses being scrutinised do to earn the reported revenues. Google, for example, is in essence a marketing, research and development business supporting group companies. Amazon provides fulfilment and corporate support services to other group companies. Starbucks is primarily a franchise operator which receives licensing royalties from its franchisees, all of which, it is assumed are taxable in their own right.
It is true that, according to Statista, Amazon made sales to UK customers of $26bn in 2020. These sales are concluded in Luxembourg and taxed there – or would be if the Luxembourg entity did not have substantial carried forward losses – and this seems to be the main bone of contention for some. However, a UK company would be taxable in the UK on its exports so it is perhaps unreasonable to baulk at this too much.
What is a fair amount of tax planning?
It would be naïve to assume that these businesses do not engage in a degree of tax planning. They are under no obligation to maximise their bills. Indeed, it could be argued that they would be in breach of their duty to their shareholders if they did not take reasonable steps to reduce them. In the same way as we would not criticise someone for paying into a pension or an individual savings account, it seems consistent to apply this acceptance to ‘routine’ tax planning by corporations.
What amounts to routine tax planning is a matter of opinion. There are some cases which are almost universally condemned: offshore structures enabling individuals to pay as little as 1% tax on their earnings, for example. Between these extremes is a large grey area and it seems like a futile exercise to pontificate on whether a business in this middle ground is right or wrong to prefer to be taxed in a lower tax jurisdiction if it is commercially able to do so.
The be all and end all?
When considering the tax contribution of the global giants, it is also important not to lose sight of the fact that corporation tax is not the only tax they generate.
I have already mentioned the size of wage bills. These employees will pay income tax and National Insurance on these wages – somewhere in the order of £450m for Google. This is the employee’s liability, but it is the success of the business which has allowed them to be paid these sums. Many could, of course, seek employment with other, UK based, businesses but it is by no means certain that all would be successful or would be able to obtain similar packages without the competition provided by the multinationals.
What is more certain is the employers’ National Insurance liability, levied at 13.8% on the wage bill. This bill, around £120m for Google, dwarfs its corporation tax bill. It is also worth noting that this cost is included as a deductible expense for corporation tax purposes.
Sales in the UK attract VAT which is collected by the company. A large proportion of Amazon’s £26bn sales will be subject to VAT so this is a not insignificant by-product of Amazon selling into the UK.
Business rates, apprenticeship levy and stamp duty also add to a much greater tax contribution than is suggested by looking at corporation tax in isolation. And that is before considering the tax paid on profits made by businesses in the supply chain, franchisees or those using technology platforms such as those provided by eBay or Amazon to generate their own UK sourced profits.
In all, these add up to a significant contribution to the exchequer. Certainly much more than the headlines lead us to believe.
What’s in the pipeline?
We have seen repeated attempts to counter this perceived inequality of tax rates. The 2% digital services tax introduced on certain technology driven revenues in April 2020 seems to have made little difference, with businesses using their market strength to pass it down the supply chain.
Next we have Organisation for Economic Co-operation and Development proposals and potential Biden reforms, which propose a global minimum tax at 21%. It remains to be seen whether these will gain sufficient traction, but if the claims of Google, as reported in the inews article, that it has paid at least 20% tax globally in the past four years, are to be believed it will not make much difference to the overall tax paid. So, there will be some winners and some losers on a country-by-country basis. Which category a particular country falls into could vary depending on the global revenues of each business.
Most recently, the G7 has agreed a ‘two pillar’ approach to the corporate taxation of multinationals. The first pillar applies to multinationals with at least a 10% profit margin and would result in a reallocation of 20% of the profits in excess of the 10% margin to the countries in which the group does business. The difficulty in avoiding unintended consequences is again highlighted by the fact that one of the businesses with the highest profile tax affairs, Amazon, with a 2020 margin of 6.3% would not be caught.
The second pillar will impose a global minimum corporate tax rate on a country-by-country basis. This is currently set at 15%, below the Biden rate but still predicted to lead to significant increases in corporate tax bills. It has taken years to reach this point and it is likely to be a long run to the finish line, with further stakeholders likely to demand a say before the matter can be finally settled.
Where does that leave the media?
Big business has always had a role to play as pantomime villain. In some cases, its behaviour can be much worse. The media has an important part to play in calling out examples of egregious tax planning, among other misdemeanours. Where there are examples of individuals or companies using artificial structures to generate unacceptably low tax bills then the media can and has performed a valuable policing function, as various comedians, sportspeople and other celebrities would no doubt testify.
If similar activity is happening here, we need clarity as to what is being done. Without it, as long as articles focus on misleading headlines without setting out clear details of wrongdoing, there is a danger that we end up with the fiscal equivalent of the boy who cried wolf.