Paying tax on profits

Amazon has just filed 2017 accounts for two UK businesses:  Amazon UK Services, which runs its distribution centres and delivery business in the UK, and Amazon Web Services, which provides consultancy and marketing services in relation to cloud computing.  The major part of Amazon’s global business is in selling goods and services; its cloud computing arm, AWS, accounts for about 10% of global sales.

Amazon Inc filed its 2017 financial statements in April – and they showed a 2% net profit before tax on the group’s $177 billion sales.  The group has always made low profits – in the range 0-3% over the last decade.  Interestingly, the group’s CEO, Jeff Bezos focused not on profits but on customers in his annual report to shareholders. He noted that Amazon UK has ranked No 1 in the UK’s Customer Satisfaction Index from the Institute of Customer Service for the last five years (and 8 years in the equivalent US index).  The letter never refers to profit – and makes only passing reference to sales in one unit. 

The group’s financial statements reflect a 20% tax charge, which has halved due to US tax reform and is also substantially reduced by tax deductions for employee share payments.  They also note that $11.3 billion of its sales are attributed to the UK – about 6% of total group sales. 

The Amazon UK Services accounts do not include UK sales, as its role is to provide services only to the main UK retailer, Amazon EU Sarl.  This Luxembourg company has a sales branch in the UK, as Amazon buyers may have noticed on their invoices.  However, it doesn’t publish accounts solely for the branch.  UK company law requires that the accounts of the whole company be published. 

The UK distribution company makes a net profit of 4% on its sales – twice the group profit.  Its tax charge is just 2%, though, well below the statutory rate of 19%.  The accounts explain the difference – which is mainly due to corporation tax deductions for paying employees in shares, partly offset by non-allowable costs.  The expected tax charge would be nearly £14 million, but it’s reduced by £17.5 million due to tax relief for employee shares (and increased by £5.8 million for non-allowable costs).

Many companies offer employees part of their income in shares or share options.  The difference with many technology-based groups is the scale and value of the awards.  As technology company share prices climb, employees do very well.  We must always remember, though, that employee tax charges are much higher than corporation tax.  Employees will pay income tax at 20%/40%/45%.  Most will also pay national insurance at 2%, alongside employer national insurance at 13.8%.  The effective rate of tax will be 32-61% – considerably more than 19% corporation tax.

Making higher profits – and thus paying more tax – would mean increasing margins and putting up prices to customers.