There is a growing and widely held belief that multinational companies, particularly US tech companies, are not paying their fair share of tax.

Amazon, for example, pays little or no tax in the UK despite selling lots of goods to UK persons. How can this be right? The answer is because Amazon has no taxable base in the UK and the tax treaties signed by the UK mean Amazon doesn't have to pay tax in the UK.

Amazon relies upon the internationally-agreed principle that when goods are sold over the Internet, the point of sale is the place where the server is located. In the case of Amazon that happens to be in Luxembourg.

Both the UK/Luxembourg and the UK/USA tax treaty contain the same standard OECD 'Permanent Establishment' (PE) article. This states that a company can maintain stocks of goods for storage, display or delivery in the UK, without creating a PE in the UK. If there is no PE, there is no taxation.

Here is the relevant extract that can be found in Article 5 of both treaties:

" ... the term 'permanent establishment' shall be deemed not to include:

A) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise;

B) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery; ... "

Amazon relies on this article to avoid creating a PE in the UK. The Amazon warehouses in the UK are not PEs. They do not create a taxable base.

It may seem strange that Amazon can do all those things in the UK without paying UK tax but that is precisely what the UK has agreed to. The UK used that very provision to encourage Amazon and others to invest in the UK and create jobs here. It is a little rich to suggest that, now they are making lots of money, this is in some way unfair.

Ultimately, if the UK imposes tax on Amazon it is the US that will lose out because, somewhere down the line, the US will be obliged to offset any tax paid in the UK against Amazon's US tax liability. That is why the US is understandably resistant to imposing tax on its companies that is both contrary to the tax agreements it has signed and contrary to established international practices.

Of course, neither the US nor the UK is currently getting much tax because Amazon is booking its profits in Luxembourg. However, if the Luxembourg structure did not exist and the US company traded directly with the UK, the tax result for the UK would be exactly the same.

The US could, if it wished, broaden the scope of its Controlled Foreign Corporation (CFC) legislation and tax undistributed profits that are currently being rolled up abroad. Most countries have and apply these sort of 'attribution' rules. If the US applied them, there would be no point in booking profit in Luxembourg because those profits would still be taxed in the US. The US has decided that it doesn't want to do that. If it doesn't want the tax, it is hard to see why other countries should force it to charge tax it doesn't want. It doesn't help those other countries. They get no more tax and it is unlikely that the US will allow other countries to dictate tax policy to it or interfere with its tax regulations.

The US has presumably decided that it wishes to allow its companies to invest gross of tax rather than net. After all these offshore arrangements only defer tax. Eventually those dividends will come back to the US and will be taxed then. The US is giving up tax now to receive more tax later. Undoubtedly Amazon is getting a cash flow advantage by being allowed to do this and the US has decided to allow it. It could be argued that this is some form of artificial 'state aid' that gives US companies a competitive advantage. This would be a reasonable point.

The OECD has recently announced a project that seeks to get all its members to impose a minimum rate of tax. This is going back to the idea that any country that has lower rates of tax is competing unfairly with OECD member states that have higher rates. The idea is that all OECD countries would introduce this minimum rate and also impose it on all the countries or territories under their control.

In this scenario, the UK would impose a minimum rate of tax on all the International Financial Centres(IFCs) that it can influence. That includes most of the Caribbean jurisdictions, the Channel Islands, the Isle of Man etc. Many of the other IFCs are under the control of the Netherlands, so would presumably be brought into line by the Dutch government. And then all OECD members would impose severe sanctions on any independent jurisdictions such as Panama, Bahamas, Hong Kong (China), Singapore and other lower tax jurisdictions that failed to comply.

The suggested tax rate of 21% is higher than some OECD member countries such as Ireland currently impose (and, indeed, the UK for now) but seems to be perceived as a good average. If this can be introduced, it would indeed stop Amazon booking profit in low tax jurisdictions because they wouldn't exist anymore or would be subject to such punitive measures that it would be unfeasible to use them.

But it still wouldn't result in any more tax on Amazon outside the US for the reasons explained above. The likely effect is just that the US would trade directly with all other countries, making the US much richer but not assisting any other countries where Amazon trades. If the OECD member states agree, it could mean that Luxembourg would be forced to tax Amazon's profits in Luxembourg at 21% minimum. While this might result in Amazon closing its Luxembourg subsidiary, the UK will still get no tax.

It is interesting to note that in 1996 the OECD called for a report on "harmful tax competition". This was delivered in 1998 and one of its main foci was to try and harmonise tax rates throughout the world. Quite quickly The US government swiftly said that it would not support this recommendation and stated that it viewed tax competition as a good thing because it created efficiencies and obliged counties, like companies, to compete. Instead of trying to harmonise tax rates, the US suggested that the OECD should focus on transparency, so that high tax countries could obtain the information they needed to tax their citizens effectively and according to their rules. This report marked the beginning of the end for banking secrecy and culminated in the later introduction of the Common Reporting Standard (CRS).

Perhaps the US has now changed its attitude and no longer believes that tax competition is a good thing. Or perhaps it is just paying lip service to this idea because it would seem that it has by far the most to lose here – and the least to gain.

One of the major problems with a uniform tax rate is that the 'headline rate' of tax is only one element in a tax system. , The OECD knows very well that a high headline rate of tax will not result in the level playing field that it desires unless it is applied in in a uniform manner across all countries. Any and all exemptions or incentives will have to be removed or applied equally by all countries. To get all countries to apply common tax rules and practices would not only be a vast undertaking, it would completely undermine the principles of fiscal sovereignty.

Already we are seeing some support for this initiative. Smaller companies that trade only on a domestic basis, do not have the same opportunities for planning out taxes and expenses. They would like to see the multinationals curbed and "the playing field levelled". Of course, they would. It is hard for them to compete, so anything that penalises the competition is good But it may be bad for business as a whole. Taken to its logical conclusion, it will be hard for any company to grow internationally.

It seems disingenuous to complain that Amazon is making lots of money and that the UK is not getting its 'fair share'. It may well be that if Amazon was not allowed to do all those activities in the UK without paying UK tax, Amazon would not have warehouses and employees in the UK. It may have decided to do everything in Ireland and they would get the jobs, the PAYE, and all that money entering the economy. Tax treaties were designed and agreed to try and encourage investment and give certainty to taxpayers on how they would be treated. It seems that certainty now exists only until the investor makes a lot of money – and then all bets are off.

This concept of 'fair' as it applied to taxation is a new one. It is arbitrary. Companies should pay the correct amount of tax – according to the regulations in place – not the 'fair' amount.


Starbucks is another US giant that doesn't pay much tax in the UK – but for a different reason. The US coffee giant charges a royalty to its own outlets for the use of the Starbucks name, its know-how, its purchasing economies and its systems. Again, this practice is specifically permitted in the various tax treaties that the UK has signed. A royalty payment can be made pre-tax. Typically, the royalty is around 15% of turnover and there is not much profit left after this has been paid.

But why should a Starbucks' shop in the UK have the benefit of the Starbucks name, knowledge and branding without paying for it? The value of the Starbucks name has been created by spending billions of dollars on marketing. It seems only right, proper, 'fair' and correct that anybody who wants to use those things should pay for the privilege.

Starbucks is not allowed to charge its own shops any more than it would charge a third party franchisee, so the royalty amounts are negotiated and not artificial.

Reforming the tax system

The existing tax system allows apparent anomalies like Amazon to happen and is arguably in need of reform. It was developed in a world of physical goods and in-person services, before the arrival of the Internet and before it was appreciated that businesses could be totally mobile.

It might now seem fairer that taxes should be levied where the money is made. That could be wherever the customer takes delivery rather than simply where the server that books the sale is located. A straightforward tax on turnover would be problematical, however, because many businesses would be unable to pay unless (and until) they were profitable. Such a law would kill many businesses before they had really started. And there remains the issue of what level of tax would be payable and where?

Perhaps a fairer system would be to calculate the worldwide profits of multinationals and then assume that the percentage of profit made in each country would be the same as the percentage of revenue generated in each country. If Amazon's worldwide profits were US$1 million and 10% of its sales came from the UK, for example, this system would allow the UK to tax US$100,000 of Amazon's profits in the UK at the prevailing UK rate of tax. Does that sound fair?

This would of course require all countries to agree to completely rewrite their tax regulations and their international tax treaties, unless a particular country decided to go it alone. That would be unlikely to endear it to its trading partners. More tax paid in one country inevitably means less tax for another. The US, in particular, is unlikely to agree to this without major concessions being granted to it in some other area.

Why should it? Any such change would cost the US a disproportionately high amount. It just so happens that most of the largest companies that would be affected are US companies, so this reform would enrich other countries at the expense of the US. It is unlikely that the US would object to a reform of this nature if the most successful international companies were non-US companies and those companies were trading with, but not paying tax in, the US. It is far more likely therefore, that the US will suggest that its trading partners stick to the international agreements that they have signed and stop whining.

Substance 'abuse'

No, I am not referring to the illicit use of recreational pharmaceuticals. Rather this refers to the pressure being brought to bear by the OECD and now the European Union on IFCs to introduce a requirement for 'economic substance'. The idea is that any company incorporated in these jurisdictions should also have the necessary offices, bank accounts, employees etc. to support them in that jurisdiction.

This is an unusual requirement. None of the major onshore nations requires a company to have substance in its place of incorporation. It is possible to go online and incorporate a UK company for £49. There is no need to adhere to any of the requirements that the UK is trying to impose on others.

FATCA, CRS, registers of beneficial ownership and other transparency initiatives

There has been a plethora of international initiatives that are designed to force any and all financial institutions to automatically report details of the owners of any sort of structure set up within their jurisdiction to the tax authorities in the jurisdiction where the owner resides. FATCA (Foreign Account Tax Compliance Act) was the US unilateral precursor, while CRS was the OECD's multilateral version. As a result of both these initiatives, secrecy in the IFCs is well and truly dead – and has been for a long time.

Most right-minded people do not have any issue with the principle that tax departments around the world should be able to obtain the information that they need to calculate the liabilities of their taxpayers correctly and prevent them from under-reporting their taxable income. Many commentators argue that there is a big difference between secrecy and confidentiality. The tax authorities may need all this information, but the taxpayer's nosy neighbour does not.

Other countries don't agree. In Norway, for instance, every taxpayer is required to file a tax return on a public platform. Any member of the public can see exactly how much someone earns, what taxes they have paid and, to a certain extent, what assets they own.

Perhaps everybody should be posting their payslips, bank statements and tax returns on a public register? I don't believe so. Many people still think that everybody has a right to keep their affairs confidential and can see no reason why the general public should have the right to look into other people's private finances. Nor would they like CCTV in their homes. The argument that a person won't mind taking their pants down in public if they have nothing to hide seems facile in the extreme. Most hope that Orwell's '1984' does not become reality and that being allowed to keep one's finances private from the general public remains a fundamental right.

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