Tax Loopholes: How Did The Big Companies Avoid Paying Tax

The media has been abuzz with businesses using convenient tax dodge loopholes, with Amazon, Google and Starbucks to be the most recent companies to be reported on.
If you’re anything like me though, understanding exactly how they avoided millions of pounds in tax is a bit beyond you. However, sorting through the ins and outs of the big tax avoidance scandal isn’t actually as difficult as it seems.
 

It all begins with the figures: 

How Did The Big Companies Avoid Paying Tax

Starbucks
2011 UK sales: £398m
Corporation tax: £8m over 14 years
Employs: 8,500 UK staff

Also: Starbucks informed PAC (Public Accounts Committee) that it had only made a profit for one of the 15 years its stores have been open within the UK.

Amazon
2011 UK sales: £3.35bn
Corporation tax: £1.8m paid
Employs: 15,000 UK staff
Profit: £74m

Google
2011 UK turnover: £396m
Corporation tax: £6m paid
Employs: 1,500 UK staff

The glaring issue with these figures is that these three companies all managed to earn millions of pounds in one year, yet have paid hardly any corporation tax.

Tax loopholes

Tax loopholes

Okay, so just what is corporation tax?

Corporation tax works in much the same way as tax on your own income works. If a corporation earns more that £1,500,000 in one year it is taxed at a rate of 24% for 2012. This will decrease to 23% in 2013.

£8m, £1.8m and £6m in corporation tax might sound like a lot, but Starbucks, Amazon and Google have actually managed to get away with incredibly low tax bills.

In order to understand just how much they’re managing to sweep under the carpet, take a look at McDonald’s’ figures:

2011 UK sales: £3.6bn

Corporation tax: £80m paid

Employs: 85,000 UK staff

You can probably understand why everyone’s so annoyed about their tax avoidance now.

But didn’t Starbucks, Amazon and Google earn enough to be taxed?

Yes, they did, but they made it look like they didn’t. Starbucks used a tax avoidance scheme known as a ‘Dutch sandwich’, while Amazon and Google used a ‘Double Irish arrangement’.

Here’s how it works:

A multinational corporation charges its UK operation a royalty for using the intellectual property of the parent company, such as the brand and business model. This is set at a percentage of the total sales, and the money is transferred to a sister company in another country (in Starbucks, Amazon and Google’s cases this was Ireland and Amsterdam). This then makes it look like the UK company has a failing profit, thus excluding it from corporation tax payments.

What happens now? 

The furore that the multinational tax avoidance issue has caused has even brought the prime minister into the row. He’s recently promised the nation that these three companies, as well as the many others named and shamed during the media frenzy, will be forced to pay backdated corporation tax. They will also need to get their taxes straight for 2013, as they’ll be paying the proper amount of tax from now on.

Tax avoidance may hurt the involved companies’ sales figures more than they probably would have expected though, as more and more people pledge to boycott the companies involved.

The HMRC has also estimated that the corporation tax not paid by companies could have earned the UK £5bn a year, which certainly would have helped to ease the pressure of the recession.

What do you think of multinational companies avoiding tax?

Image courtesy of Shutterstock.

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