After Google, Amazon to be grilled on UK tax presence

LONDON - Reuters

A worker collects orders at Amazon's fulfilment centre in Rugeley, central England in this December 11, 2012 file photo. Reuters photo

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

Amazon will follow search giant Google, which attended another grilling by parliament's Public Affairs Committee (PAC) over its tax affairs on Thursday. 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 99 percent of the people who are responsible for merchandising, buying, the online activity, fulfillment, are based in Slough," said Roberts, an expert who advises many Amazon suppliers.

Amazon declined to answer any questions about its UK business.

On Thursday, 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 minimize 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 Organization 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.

FULFILMENT

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 fulfillment 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, localization 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 maximizing 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. Analyzing sales figures and reaching targets."

Teather did not respond to requests for comment.

PREPARATORY OR AUXILIARY

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. U.S. 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 fulfillment centers, 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."