Amazon is in its second year of negative taxation obtained through billionaire investments, but also through the wise use of tax havens for the leasing of group companies.
Amazon, the huge E-commerce company is often accused of not paying taxes or paying very little.
According to an analysis by the Institute for Taxation and Economic Policy (ITEP), (one of the leading tax justice groups in the United States), last year Amazon obtained a tax relief of 129 million dollars, the equivalent of a ‘ negative federal tax rate of one percent.
For Amazon it is the second consecutive year of negative taxes.
It appears that Amazon is trying to get US locations to offer him the largest subsidy packages to try to force it to locate its second headquarters there.
How is Amazon running away from taxes? a recent public document says that:
“We have tax benefits related to stock-based excess deductibles and accelerated depreciation deductions used to reduce US taxable income [e]. . . As of December 31, 2018, our federal net operating loss carry forward was approximately $ 627 million and we had approximately $ 1.4 billion of federal tax credits potentially available to offset future tax liabilities. “
The company does nothing illegal, but it is very good at exploiting the permissive US legislation and the holes in the European one (in which the web tax is discussed), so as to pay very few taxes without committing crimes.
Lack of transparency in tax data
The first thing to keep in mind is that Amazon does not publish its full US tax return. For this reason, we cannot know exactly how many taxes he pays, where and why. Only a few tax statements are included in the financial statements intended for shareholders: useful for getting an idea, but they are not the actual tax return.
Amazon’s 2018 data is sobering. As you can see from the graph below, compared to 11 billion dollars of taxable income in the US, the value of the taxes due “current provision“ is negative for 129 million dollars. This item includes the provisions for future tax payments.
What does all this mean?
Well, substantially Amazon in 2018 did not pay a single dollar of tax, but rather received a credit from the US tax system (from the IRS) a tax credit of 129 million dollars.
The important observation that we can draw from this data is that Amazon accumulates a lot of tax credits that allow it to cover the taxes on its income. For example deductible losses, or tax credits related to investments. The aspect that should be of interest is that this company, thanks also to its high margins, invests a lot of resources in investment and this allows it to be able to reduce its tax burden. For this reason, he has been in a credit position against the US tax system for two years.
What this figure shows is that Amazon accumulates a lot of tax credits that allow it to not pay taxes, such as deductible losses or credits due to investments, and that it does so faster than it accumulates taxable profits. This allows the company to be in a “credit” position against the US tax system.
The complex tax system of amazon
Amazon has long been criticized, along with all the other large companies on the web, for the complex tax planning schemes used. These are schemes, more or less known, created (by exploiting the regulatory requirements in international taxation) to minimize the taxes due.
In particular, US companies use tax planning schemes especially to try to reduce taxes due in the European Union.
For example, when Jeff Bezos was looking for a location for his online bookstore, Amazon.com, in 1994, his first choice was a Native American reservation. This would have brought him major tax breaks, but then the California government blocked everything.
The next stop was Seattle, the company’s first headquarters, which Bezos chose because the state of Whashington had a small population. At the time, only those retailers with a physical presence in one state paid sales tax, so a home state with a small population meant the lowest possible tax burden. Sales made in other more populous states would not be taxed.
In particular, the elaborate tax scheme used by Amazon in Europe in recent years has Luxembourg at its center. This country is at the center of a large part of the tax planning schemes of many multinationals that use it as a holding company, or as the final recipient of the activities, in the form of a non-commercial entity.
All this, not to mention the fact that Luxembourg is one of the financial centers that guarantee banking secrecy, this is also one of the elements that make this country very attractive for multinationals. Amazon first arrived in Luxembourg in 2003 and within a few months obtained a confidential agreement with the country’s tax authorities.
Amazon tax planning
Amazon’s tax strategy in Europe has always been based on putting Luxembourg at the center of the group’s European operations. Although the group’s tax planning system is extremely complicated, this essentially involves the following interaction between the entities present in Luxembourg and those residing in the United States:
- Amazon Europe Holding Technologies SCS (AEHT) is a Luxembourg company that has the legal right to use Amazon’s intellectual property or IP outside the United States. As this is a special type of entity called a “non-resident partnership”, any monies received from other Amazon group companies in exchange for the right to use such IP are exempt from tax in Luxembourg;
- Amazon EU Sarl, entity that manages Amazon’s European businesses. This company pays AEHT hundreds of millions of euros in “copyrights” for the intellectual property of intangibles exploited by the operating companies. The cost of the royalties is deductible from the income and goes to lower the taxable income of this company (and therefore its effective taxation);
- The third point of the strategy involves the transfer of fees from AEHT to the US company of Amazon. This is for fees related to the right to license such IP in Europe.
Over time, European governments have argued that the rents between the two Luxembourg companies were too high, and tax-free. At the same time, the US government argued that the royalties returned to the US parent company were too low. Basically, the goal of Amazon’s tax planning has always been to reduce the group’s overall tax burden. However, this strategy, which has lasted until now, is likely to change in the near future. Let’s try to reason together on the reasons.
Monopoly increases, taxes decrease
Amazon has a market capitalization of $ 800 billion, making it the second most valuable company in the world, right behind Apple, with $ 805 billion.
Like most of the largest multinationals, it operates under a monopoly (or rather oligopoly) regime. It is useless to go around it:
Amazon is, the largest monopolist in the world.
It controls much of the infrastructure on which its competitors sell their products or use cloud computing services.
Acquisition of amazon market shares and strong investments
This position of power allows it to kill or injure its competitors on market power that has nothing to do with real economic productivity, innovation or entrepreneurship.
Many players in the digital economy have to pay a private “Amazon tax” to stay in business. Furthermore, Amazon could use its existing enormous market power to force consumers and others to pay higher prices.
However, anyone who has ordered cheap things on Amazon will feel that they obviously didn’t. This is because over the years Amazon has historically preferred to build higher market shares by keeping its prices relatively low.
Theoretically, this low-cost sales strategy may have reduced his profits. However, low profits and high investments have had the advantage (for Amazon) of cutting its taxes.
The other advantage, along with the tax benefit, is that its low prices have helped to kill its competitors and suppliers, allowing it to build not just market share, but market power.
Amazon was once tasked with getting close and buying competitors. It is no coincidence that nearly all of the richest people in the world are monopolists who got rich by exercising power over the markets.
Analysts have long argued that Amazon’s strategy was to build market power for a while, then afterwards, once it accumulated enough to have to start worrying about a democratic response, to start flexing its muscles and collect profits.
But perhaps his search for loopholes and lobbying will continue to contain tax revenues. We will see it in the next few years. What do you think about it? Share your opinion in the comments if you want. Otherwise, contact me for advice!