Earlier this week, I appeared on Radio 5 to talk about tax avoidance. The news hook was a speech by Ed Miliband on the supposed problems of Google’s low corporation tax payments. Of course, before the interview, I ‘googled’ the issue.
Many of the top stories were about Amazon and Google from the BBC and the Guardian. The stories reported the corporation tax paid by these companies as a proportion of their UK turnover. For example, a BBC story read: ‘Amazon, which had sales in the UK of £3.35bn in 2011, only reported a "tax expense" of £1.8m. And Google's UK unit paid just £6m to the Treasury in 2011 on UK turnover of £395m.’
It should be said that one story by Alex Hern in the Guardian was excellent. As Hern wrote: ‘The thing is, companies don't pay tax on sales, but on profits. And Amazon is a company with a very strange attitude to profit: it doesn't seem to like it. In the year 2012, it made a worldwide loss of $39m, even as it had sales totalling $61bn...Amazon's strategy is to aggressively cut margins everywhere it can, in an attempt to grow into the biggest retailer the world has ever seen. That means that, even as its sales rise and rise (because where else is cheaper to shop than Amazon?) its profit stagnates…Amazon pays barely any taxes because it makes barely any profit.’
This is, indeed, true. Amazon’s profit margin in a normal year (2012 involved exceptional writedowns) is around one per cent as it provides exceptional value to customers. Tax is paid on profit and not turnover. The BBC and most Guardian stories about Amazon get the tax base wrong by a factor of 100. This would be more or less analogous to the BBC reporting UK unemployment rates as a proportion of the world’s working age population.
Turning to Ed Miliband, specifically, he said in his speech: ‘I can’t be the only person here who feels disappointed that such a great company as Google, with such great founding principles, will be reduced to arguing that when it employs thousands of people in Britain, makes billions of pounds of revenue in Britain, it’s fair that it should pay just a fraction of one per cent of that in tax.’ As it happens, according to the BBC story above, it pays tax of nearly two per cent of turnover but that is beside the point. Ed Miliband made no mention of Google’s profits in the speech whatsoever. Companies pay national insurance contributions in respect of their employees – as well as income tax and employees’ national insurance which raises the cost of employment - and they pay VAT on the value added in turnover. They pay corporation tax only on profits.
In the Radio 5 interview, I mentioned that the BBC – the source of much of this confusion on the basis of a profits tax – had a turnover of £5bn and paid no corporation tax (its turnover is much more if you include the value of the free spectrum). In fact, that turns out to be not quite true. The BBC paid corporation tax of £22m (0.4% of its turnover) last year. Even if you express tax as a proportion only of commercial turnover (which is debatable – after all a pound of turnover is a pound of turnover), the BBC paid tax of about 1.2% of turnover. In other words Google pays more tax on its turnover than the BBC by a factor of nearly two.
But, these figures are irrelevant – even in respect of the BBC.
Legitimate points can be made about whether Google should pay more tax on its profits. Members of Parliament have passed the laws and HMRC administers them. If MPs wish to change the laws, or feel that the government agency charged with administering them is not enforcing them properly, the power to change the laws lies with the politicians.
Amongst all this talk of corporation tax expressed as a proportion of turnover, it should be mentioned that there is a head of steam building up behind a reform to corporation tax that would lead it to being charged on profit but apportioned according to turnover in different countries. This would be a disaster. It would lead to huge corporate complexity as internet-based firms shifted their activities to ensure that turnover was registered in low tax countries. It would also lead to disintermediation of the retail chain in high corporation tax countries such as the USA. It would completely distort economic activity in a way that was very damaging. Much more sensibly, as suggested by Milton Friedman, shareholders – that is company owners – could be taxed on the attributed profits per share owned. They would be taxed in whichever tax jurisdiction they happen to live. Avoidance would become more difficult but evasion would become easier – because individuals are harder to track down than companies. This is the way debt interest is taxed and, arguably, it should form the basis for corporation tax. This is unlikely to lead to more UK tax being paid by US-owned companies, though company owners might end up paying more tax overall.
But, whatever the outcome of this debate (better enforcement of existing rules or the development of new rules), it is extraordinary that our public service broadcaster is the source of such misinformation on this subject. It is not surprising, of course, but nonetheless regrettable. And the BBC, as can be seen, is casting stones when guilty of the same ‘sin’ of which it accuses others.