Is Amazon Guilty of Exploiting the British Tax Rulebook?

Just following  Google Inc.’s (NASDAQ:GOOG) denial of the claim that its business is disguising the way it operates in order to minimize its U.K. tax bill,  Internet retailer Inc.’s (NASDAQ:AMZN) tax affairs are now back under the spotlight. Reuters reported Friday that the British Parliament will re-summon Amazon to clarify how its U.K. activities warrant its low corporate income tax bill.

Because Amazon claims that it operates a single European business out of Luxembourg, rather than a multinational structure of independent subsidiaries in different countries, it believes it should only pay taxes in Luxembourg. However, recently uncovered evidence seems to say that the U.K. unit may have a higher degree of autonomy than Amazon claims, and it further suggests that Amazon may not be really be only a virtual business.

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The Guardian explains that because the company routes its sales through Luxembourg, it doesn’t pay as high a tax as it would if it were booked through a U.K. business. The British newspaper reported Thursday, “Amazon avoids paying many tens of millions of pounds in tax because it tells the taxman its main U.K.-focused business, which collects revenue from British shoppers but is incorporated in Luxembourg, cannot be classified as a ‘permanent establishment’ in Britain.” However, newly collected information suggests that Amazon has been exploiting these definitions and the U.K. tax authority, Her Majesty’s Revenue and Customs, should be pushing the way it wants to tax the company’s multibillion-pound British operations.

The root of the problem is that HRMC has never clearly defined the limits for what an Internet company in Britain can do before it is considered to have a taxable presence. International tax rules enable companies to conduct “preparatory and auxiliary” activities in a country without creating a taxable presence there. However,  it is extremely difficult to prove a taxable presence in a jurisdiction regardless of the amount of activity conducted in that country. Reuters reports that companies, especially those with only a virtual presence, “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.” This strategy is similar to that employed by firms such as Expedia Inc. (NASDAQ:EXPE) and Microsoft Corp. (NASDAQ:MSFT).

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Margaret Hodge, chair of the Commons public accounts committee, says that Amazon will be recalled so that HMRC can reinspect its affairs, and so that the company can further clarify the tax arrangements it explained in November now that The Guardian has come out with fresh evidence suggesting otherwise. In the witness testimony the firm gave in November, Amazon’s Brussels-based Director of Public Policy, Andrew Cecil, claimed that the U.K. unit was not an independent business, urging, “We are operating a single European company … all the strategic functions for our business are Europe are based in Luxembourg.”

Amazon is now preparing to further defend itself and answer tough questions from lawmakers in the coming weeks.

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