Tuesday 15 October 2019

Amazon to face grilling on UK tax practices in wake of Google quizzing

Tom Bergin

Internet retailer Amazon.com will be called back to the British parliament to clarify how its activities in the UK justify its low corporate income tax bill..

Amazon will follow search giant Google, which attended  another grilling by parliament's Public Affairs Committee (PAC)  over its tax affairs yesterday. A Reuters report earlier this  month raised questions over Google's earlier assertions that its  UK-based staff don't sell to customers.

 Over the past six years, Amazon has paid around $9 million  in income tax on over $23 billion of sales to British clients,  because it says it operates a single European business out of  Luxembourg, rather than a multinational structure of independent  subsidiaries in different countries, and should therefore pay  tax in Luxembourg.

 However, Reuters has uncovered evidence from the company's  own statements, job advertisements, statements from three  suppliers and five former employees, as well as the profiles of  over 140 staff on networking website LinkedIn, which suggests  the UK unit has a high degree of autonomy, with local managers  deciding on many aspects of its business.

 The information, collected during a three-month  investigation, suggests that while Amazon depicts itself as a  virtual business, its structure may not be so different from its  bricks-and-mortar rivals.

 "The basic business model wasn't very different to a mail  order company in the 1970s or 80s," said Mark Riley, a Business  Development Manager at Amazon.co.uk between 2005 and 2008.

 Bryan Roberts, Retail Insights Director for consultants  Kantar Retail, said apart from the fact buyers seal deals over  the Internet, Amazon's UK unit Amazon.co.uk Ltd, which is based  in an office block in Slough, near London, was essentially a UK  retailer.

 "Amazon.co.uk is a British business in that 99pc of  the people who are responsible for merchandising, buying, the  online activity, fulfilment, are based in Slough," said Roberts,  an expert who advises many Amazon suppliers.

 Amazon declined to answer any questions about its UK  business.

 Yesterday, the Guardian newspaper reported that it had  found "extensive UK activities" for Amazon that suggested the UK  tax authority could be tougher on taxing its British operations.

 Companies, especially those which sell over the Internet,  increasingly designate their British subsidiary as a supplier of  support services to an affiliate in a low-tax jurisdiction,  through which sales are then booked. Firms including Expedia and  Microsoft have used such arrangements to minimise tax bills  while also employing people in a wide range of roles in Britain,  their accounts, employee profiles on their web pages, job  advertisements and the LinkedIn profiles of staff show.

 Amazon and Microsoft say they follow tax law in every  country where they operate. Expedia declined to comment.

 The practice is based on international tax rules which allow  companies to conduct "preparatory and auxiliary" activities in a  country without creating a taxable presence there.

 The UK tax authority, Her Majesty's Revenue and Customs  (HMRC), has never sought to define in court the limits of what  an internet company can do in Britain before it is deemed to  have a taxable presence. Lawyers and academics say this has  allowed a wide grey area to emerge.

 In the case of Amazon at least, some tax experts said that  in conducting a wide range of activity in the UK, it may be on  the wrong side of the hitherto undefined boundary.

 Yet Jacques Sasseville, head of the tax treaty unit at the  Organisation for Economic Co-operation and Development (OECD),  which advises rich nations on tax policy, said he wasn't sure if  a boundary exists. He said where sales were conducted online, it  was almost impossible to prove a taxable presence in a  jurisdiction, irrespective of how much activity is conducted in  that country.

 Member of Parliament Margaret Hodge said she wanted HMRC to  look more closely at the company's affairs, to see if Amazon was  paying all the tax it should.

 She also said she planned to call Amazon representatives  back to testify to the committee which she chairs and clarify   written evidence and witness testimony the firm gave in  November, in which it downplayed its activities in Britain.

 "We need to very urgently call back Amazon to question them  around what you've uncovered; to look at that in relation to  what they actually told us when they gave evidence to us and of  course if they were economical with the truth or not totally  honest in their evidence to us last time, that is a very serious  thing," she said.

 Amazon declined to say whether staff at Amazon.co.uk had  management oversight or were responsible for profitability for  different retail product lines. Amazon's auditor Ernst and Young  declined to comment.

Amazon.co.uk is funded by fees from Amazon EU, which are  just enough to cover its costs but leave little profit to tax.

 It employs 4,191 full-time staff and thousands more contract  staff via outside firms, compared with 500 Amazon staff in  Luxembourg.

 Amazon.co.uk's principal activity is "the provision of  fulfilment and corporate support services to other group  undertakings", according to its 2012 accounts.

 Amazon's Brussels-based Director of Public Policy, Andrew  Cecil, told the committee in November that the UK unit did not  operate as an independent business.

 "We are operating a single European company ... All the  strategic functions for our business in Europe are based in  Luxembourg," he said.

 Amazon said in subsequent written testimony to the Public  Affairs Committee that the UK's roles included customer support,  accountancy, tax, legal, human resources, localisation and  similar back office services; merchandising and marketing  support services; and purchasing assistance.

 Amazon supplier Gary Braithwaite, who helps manage the  Amazon relationship at Elland, North of England-based organic  and vegan food distributor Suma Wholefoods, said his cooperative  has had no dealings at all with Amazon in Luxembourg, but works  with its UK staff.

 "We actually deal directly with them. Every so often we go  down to visit them in Slough. They're really nice people," he  said.

 The employment section of Amazon's own corporate website  says: "Our Slough teams manage all corporate functions,  including vendor management, marketing, software development and  legal."  In late March, the careers section of the website advertised  dozens of Slough-based jobs in these categories.

 A "Senior Vendor Manager - Beauty" with Amazon.co.uk was  expected to "Seek out, engage, motivate and build new and  existing supplier partnerships," while prospective candidates  for Senior Vendor Manager - Mobile Communications were told the  job would require them to "Manage existing supplier  relationships maximising sales, market segment share and  profitability."  Some former staff said UK-based managers had responsibility  for the profitability of product categories. This started with  negotiating the best deals with suppliers.

 Matt Henderson, who worked in a variety of managerial roles  at Amazon from 2004 to 2011, said that little, if any,  purchasing occurred on an international level because even  international suppliers preferred to deal with Amazon on a  national basis, partly to moderate the company's ability to  squeeze discounts from them.

 Some UK-based managers also had to decide on product  pricing, constantly seeking to balance margin against volumes,  and decide how products were displayed online.

 "The UK front page was owned by the UK category manager,"  said the former business development manager Riley.

 The LinkedIn profiles of current and former staff show  employees closely involved in driving profitability at Amazon's  UK business.

 Aimee-Joanne Teather, Buyer - Kids Clothing & Accessories,   said her responsibilities included "Signing new brands,  negotiating terms with vendors. Analysing sales figures and  reaching targets."  Teather did not respond to requests for comment.

The issue, say lawyers, is one of 'substance'. Amazon UK is  a subsidiary of Amazon EU, the official supplier of Amazon goods  across Europe.

 It pays almost all its profit to a tax-exempt affiliate,  also registered in Luxembourg, in fees for the use of Amazon  group intellectual property.

 The tax authorities in the United States and France have  each demanded hundreds of millions of dollars in back taxes from  Amazon in relation to this arrangement, Amazon's regulatory  filings show. US authorities have argued the price at which  Amazon transferred intellectual property between affiliates was  inappropriate; Amazon did not specify the French tax authority's  objections.

 Amazon EU can sell into Britain from Luxembourg without  creating a taxable presence because, like most developed  countries, the two have a treaty aimed at avoiding  double-taxation of profits. That lets its home base Luxembourg  collect the taxes instead, said David Quentin, at law firm  Farrer & Company, after reviewing the Reuters material.

 International tax law deems storage as 'auxiliary' to the  main trade of a manufacturer or retailer, so Amazon's vast  warehouses, which it calls fulfilment centres, do not create a  permanent establishment.

 That works up to a point, lawyers say. Amazon EU's  activities in Britain do not constitute a taxable entity known  as a permanent establishment so long as they are of a  "preparatory or auxiliary character".

 "If a UK company is conducting the operations from which the  profits in substance arise, HMRC could seek to treat the trade  as being conducted through the UK company and tax it here,"  Quentin said.

 Whatever the legal situation, Amazon is likely to face tough  questions when it appears again in front of lawmakers in coming  weeks.

 "We will take a much closer look at their internal financial  arrangements," said member of parliament Nick Smith, who also  sits on the PAC. "Whilst they will be shown every courtesy,  Amazon had better put on their tin hats."  

Reuters

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