George Turner, Author at TaxWatch – Page 3 of 5

Tech companies and the response to Covid-19

9th April 2020 by George Turner

As governments around the world struggle to deal with the outbreak of Covid-19 our tech companies are keen to show that they are playing their part too. Over the last two weeks there have been a number of announcements from the world’s largest tech companies setting out what they intend to do to help people through the current crisis. In total, as of 8th April, we have counted that eight companies have donated a total of $1.2bn in cash and in kind to counter the impact of the coronavirus. They range from an $800m package announced by Google (over 50% of the total), to free use of software for coronavirus researchers from Nvidia.

But how generous are these donations? Firstly, it should be stressed that many tech giants are not experiencing the same dread economic consequences other industries are suffering. With many shops forced to close, the retailers that can are moving online which will benefit online advertising providers such as Google and Facebook. A massive shift to homeworking will surely benefit companies like Microsoft, and online marketplaces have seen large increases in traffic. Amazon announced last month it will hire 100,000 extra staff in the United States to handle the surge in demand caused by coronavirus.¹

More importantly, these donations are peanuts compared to the amount of money these companies have squirrelled away in tax havens over the years, depriving governments of tax revenues.

Until late 2017, when the US instituted wide ranging tax reform, US headquartered companies accumulated vast amounts of cash in tax havens.

In the tax world, there is some debate about whether this cash represented profits made outside the US, in market jurisdictions such as the UK, or US profits. Our research, which has looked at detailed US corporate filings, shows that as far as the companies themselves are concerned, the profits accumulated in tax havens are non-US profits.²

These stockpiles of cash came from profits made by US companies on sales of their products around the world. Using a complex series of transactions, often involving royalty payments or internal financing structures, profits were eliminated in the countries where these sales were actually made and transferred offshore to countries like Bermuda with a 0% corporate tax rate. The cash could not be transferred onto the United States, because untaxed foreign profits returned to the US would need to be taxed at the US federal tax rate, which at the time was 35%.

All of this changed at the end of 2017 when the Trump administration slashed the US corporate tax rate and introduced a new tax on the offshore cash holdings, which encouraged companies to bring their cash back into the US.

Up until 2017, US stock market listed companies regularly reported the amount of cash they held offshore. We can use these figures to understand how the total amount of profit these companies shifted out of non-US market jurisdictions over time. The amounts are truly staggering.

By 2017, Apple had accumulated $246bn in cash offshore, which is equivalent to the GDP of many small countries. Microsoft had accumulated $142bn.

A study from the Institute on Taxation and Economic Policy found that between Microsoft, Apple, Alphabet, Facebook, Cisco Systems, Adobe, Intel and Nvidia, these companies held $571bn in offshore tax havens by 2017.³

Companies still continue to move profits offshore from their non-US markets, however, reporting has slightly changed. Rather than report the increases in cash held offshore, companies now report the US tax charge they incur on profits declared in tax havens under new US anti-avoidance rules. We recently found that Netflix was subject to a tax charge of $43m in 2018 due to the US Minimum Tax on Foreign Entities. We believe that this is likely to be the Global Intangible Low Tax Income (GILTI) provision of the 2017 Trump Tax Reform. As we reported at the time, the disclosure that $43m is subject to the minimum tax rate suggests that between $327.8m and $430 of non-US profit was shifted into tax havens by Netflix in 2018.⁴

All of this puts the recent generosity of the tech giants into some context.

Overall, we calculate that the amount of cash donated by these tech giants accounts for just 0.22% of the total amount of profits accumulated in tax havens by the end of 2017. If we exclude Google, which makes up more than 50% of the total covid donations figure, the amount given comprises just 0.09% of tax haven cash accumulated.

Perhaps health services around the world would be better served if tech companies simply paid their taxes in normal times, rather than relying on handouts in a crisis?

We contacted Microsoft⁵, Apple, Alphabet, Facebook, Cisco Systems, Adobe, Intel and Nvidia, however, the above organisations either did not respond or declined to comment.

Company	ITEP Amount Held offshore (2017)	Financial Donations	Material Donations	Explanation
Microsoft	$142,000,000,000	$1,000,000		On 09 March, Microsoft announced they would donate $1 million to Puget Sound’s (region in Seattle) covid Response Fund.
Apple	$246,000,000,000	$15,000,000	20,000,000 masks	On 13 March, Apple announced that they had donated $15m to covid response efforts, and that they would match employee donations two-to-one. On 05 April, Apple announced that they had sourced 20m masks to donate for medical workers.
Alphabet	$60,700,000,000	$800,000,000		On 27 March, Google announced an $800m donation towards covid response. This included, but is not limited to, $250m in ad grants to the World Health Organization and other government agencies, a $400m investment fund to support NGOs and financial institutions, $340m in Google Ads credits to Small Business Banking, and $20m in Google Cloud credits for academic institutions.
Facebook	$2,870,000,000	$135,000,000	720,000 masks,	Facebook has made several announcements, as recently as 30 March, of $100m to aid journalists, $25m towards developing a treatment for covid, $10m to the Centre for Disease Control, and 720,000 masks, with millions more to come.
Cisco	$65,600,000,000	$225,000,000		On 22 March, Cisco announced $225m in donations, this includes $8m in cash, $210m in product, and $5m in grants to non-profits.
Adobe	$4,200,000,000	$3,000,000		On 24 March, Adobe announced a $3m donation, including $1m to the Red Cross and Red Crescent Societies, $1m to the Silicon Valley Community Foundation, and a commitment of $1m to match and double employee donations.
Intel	$46,400,000,000	$60,000,000		On 07 April, Intel announced $50m in a ‘pandemic response technology initiative’. Intel had previously announced $10m in donations towards supporting local communities.
Nvidia	$3,130,000,000	$0	Free access to software for covid researchers.	On 19 March, Nvidia announced covid researchers would be given a 90-day license to Parabricks, software that allows for analysis of genomes.

All donations correct as at 1700hrs BST 08 April 2020.

This research has been featured in Law360 and The Independent among others.

Photo by Mika Baumeister on Unsplash

1Amazon ramps hiring, opening 100,000 new roles to support people relying on Amazon’s service in this stressful time, The Amazon Blog, 16 March 2020, https://blog.aboutamazon.com/operations/amazon-opening-100000-new-roles?utm_source=social&utm_medium=tw&utm_term=amznnews&utm_content=COVID-19_hiring&linkId=84444004

2US effective tax rate over 4 times higher for tech companies, TaxWatch, 08 April 2020, http://13.40.187.124/us_tech_companies_worldwide_profits/

3Offshore Shell Games 2017, Institute on Taxation and Economic Policy, 17 October 2017, https://itep.org/wp-content/uploads/offshoreshellgames2017.pdf

4No Tax and Chill: Netflix’s Offshore Network, TaxWatch, 14 January 2020, http://13.40.187.124/reports/netflix_tax_avoidance/

5It is important to note that the Bill & Melinda Gates Foundation announced in February 2020 that they would spend up to $100m to improve the detection and treatment of Covid-19. To date, Bill Gates has donated $35.8bn worth of Microsoft stock to the foundation.

US effective tax rate over four times higher for tech companies

8th April 2020 by George Turner

A new study has shown that large technology companies have historically paid more than four times in tax on their US profits than on profits made in the rest of the world.

In our latest study, we looked at pre-tax profits reported by major multinational companies in the technology sector. Our study looked at Microsoft, Apple, Alphabet, Facebook, Cisco Systems, Adobe, Intel and Nvidia.

Under US stock market rules companies have to report the amount of their pre-tax profits that are made overseas and the taxes paid to foreign governments.

The study found that over the last five years technology companies have faced a tax rate of just 9.6% on profits generated outside of the US. By contrast, the same companies have seen a tax liability of 45% on profits generated in the United States.

Part of this significant gap is explained by the large, one-off tax bills faced by companies in the US to deal with historic tax abuse following tax reform in 2017. For example, in 2017 Apple faced a tax bill of 71% on its US profits. Google had an effective tax rate of 120% on its US profits. For some companies, these large charges also appear in 2018 and 2019 as new rules were issued by the IRS on how to account for the tax reforms brought in in 2017.

Average ETR 2015-2019	Microsoft	Apple	Alphabet	Facebook	Cisco	Adobe	Intel	Nvidia	Total
Foreign total tax rate	14.57%	8.21%	8.54%	5.21%	13.29%	6.94%	10.17%	3.12%	9.60%
Foreign income as % total	72.22%	67.31%	56.59%	66.06%	68.37%	67.14%	41.63%	57.74%	63.51%
US current tax rate	76.27%	68.44%	37.89%	52.42%	76.10%	32.22%	30.03%	10.06%	54.88%
US total tax rate	52.13%	48.08%	39.71%	48.36%	80.94%	20.81%	31.27%	3.75%	45.32%

However, pre-tax reform there were still very significant gaps between the rates these companies paid on US profits and on non-US profits.

In 2016, Google had a tax bill of just 7.6% outside the US and a rate of 28.7% on its US profits. In the same year, Facebook paid just 2.6% of non-US profits in tax, whereas in the US it faced a tax bill of 30.9% on US profits.

Recently, the gap appears to have closed, following significant tax cuts in the United States, which saw the headline rate of federal corporation tax fall from 35% to 21% in 2017. At the same time action by tax officials around the world has increased the focus on tax avoidance by multinational companies.

In 2019, the US based technology companies in our study had a total foreign tax bill of 13.6% on profits generated outside of the United States. The total US tax bill was 15.6% of US profits, or 25.4% on a current tax basis.

The worldwide average tax rate was 26% in 2019 when weighted by GDP.

The figures call into question the claims made by companies on why they pay so little tax outside of the United States. Frequently when challenged companies claim that the reason that non-US governments see relatively small tax payments in their jurisdiction is due to the fact that profits should be allocated to the United States – where the value of the product is created.

However, TaxWatch’s study shows that the majority of US tech companies state in their annual accounts that most of their profits are made outside of the United States. On average the companies in our study reported that 63.5% of their profits were generated outside of the United States.

In 2019, Facebook states that 79% of its pre-tax profit was made outside of the US. Adobe claimed that it made 86% of its profits outside of the United States, on which it paid a tax rate of just 7.2%. Nvidia, the maker of high end graphics cards made 50% of its profits outside of the US, on which it paid just 3.7% tax.

The study also showed significant differences between the corporation tax liabilities of different companies on their non-US profits.

Between 2015 and 2019 Microsoft paid 14.6% of its non-US profits in tax, whereas over the same period Nvidia paid just 3.12% of its foreign earnings in tax. Most companies achieved figures in the single digits.

To download a copy of this briefing in PDF – click here.

Photo by Allie Smith on Unsplash

Supermarkets to receive billions from government coronavirus package

27th March 2020 by George Turner

The coronavirus outbreak will not be easy for anyone – but there is no doubt that some industries and businesses are set to do well from the widespread social changes that the crisis demands.

One of those industries is our supermarkets. No one can deny that supermarkets are doing an exceptional, difficult and vital job keeping the country supplied during the crisis.

However, the empty shelves seen across the country are not a sign that people have stopped buying food. Quite the opposite. UK supermarkets are currently seeing levels of demand usually experienced around Christmas as households face the prospect of two weeks’ isolation if anyone in the home gets a cough. This is not just a case of Christmas come early. Christmas is coming again and again and again. High volumes have been paired with higher prices as companies remove multi-buy deals to discourage panic-buying.

This is unlikely to be just a coronavirus blip. Social distancing measures may need to be maintained for some time after the outbreak is tamed, meaning that people are likely to be spending more time at home. The shift to home working for millions of people is also likely to persist for some time, as many companies that have been forced to build an infrastructure to allow home working will be more relaxed about their employees doing so in the future.

All of this will mean that in the long term, supermarkets are likely to make significant gains from the coronavirus outbreak. This is probably the last industry right now that needs a bailout – however, they are about to receive a cash bonanza from the government.

One of the big items of spending the government has announced in response to the pandemic been the business rates holiday for all retailers. The holiday applies to all retailers, whether or not they have been forced to close during the outbreak.

According to The Grocer, superstores and hypermarkets pay a total of £2.68bn in business rates a year. Add to this an extra few hundred million paid by smaller stores and the total bill hits £3bn.

The industry is concentrated, with a few companies making up a large percentage of shop space. The largest, Tesco, claims to pay around £700m in business rates a year. A week ago, Sainsbury’s put out a stock market announcement welcoming the Chancellor’s announcement on business rates, pointing out that the company paid £500m in business rates on its shops. Shares in the company were up over 10% on the news. The stock-market announcement said that the company was awaiting details of the scheme, however, it seems certain that they will qualify with the Chancellor stating in his first coronavirus update:

“We’re abolishing business rates altogether this year if you are in hospitality, retail and leisure.”

The amount of money this represents is mind boggling. To put it into context, Tesco made pre-tax profits of £1.6bn last year. A business rates holiday of £700m represents 50% of their total profit. For Sainsbury’s their business rates bill is more than double last year’s pre-tax profit of £239m.

Until now, the response of the government to the immediate crisis has been to throw money at entire sectors of the economy. Given the speed at which the government has to react to events, that is to some extent understandable.

However, there are risks to this approach and some significant questions which will need to be worked through. Does such broad intervention by the government, by rewarding both winners and losers, lead to economic inequalities being exacerbated?

Providing such broad interventions is easier and quicker to administer, but it is expensive. As the bill for the coronavirus continues to mount, will the public continue to support the government if they feel that their tax money is being spent on companies that are set to do very well out of this?

Should the government be asking for more in return for businesses that receive support? In the supermarket sector, should there be an obligation to use at least some of the support they receive to help stock foodbanks for example?

The business rates holiday was announced at a time when the government probably thought that the limit of their intervention on social distancing would be to tell people to wash their hands and avoid the crowds.

Now that the entire county has been put in lockdown, with all but “essential” retailers being told to close their doors, it may be a better idea for the government to take a more targeted approach, with support being directed towards businesses forced to close, whilst those that remain open and thrive continue to pay business rates in the normal way.

This research featured in The Times. Our Director has had an op-ed on the issue published in The Guardian.

Photo by John Cameron on Unsplash

Budget 2020 – Tax avoidance and evasion issues to look out for

10th March 2020 by George Turner

The new chancellor, Rishi Sunak, has had a busy month. Thrust into the hot seat as the government prepared to present its first budget since October 2018, one of the first items to hit his desk, a global pandemic.

Although the world’s attention is rightly focused on the Coronavirus, tackling tax avoidance remains a hugely important priority for the public. For a number of years polling has consistently shown that tax avoidance is viewed as morally wrong and the public have demanded that the government do more to tackle the problem.

At TaxWatch we believe that tax avoidance is a complex issue that takes many forms. It is not something which can be solved with one simple policy or tax change. If that was the case the issue would have been dealt with many years ago!

In this article, we set out two issues facing the Chancellor on tax avoidance and tax fraud as he puts the final touches on his first budget.

The Digital Services Tax

Over the last ten years, the most high profile tax avoidance story has been the behaviour of the new digital giants, and the corporate structures they employ to shift billions of dollars of profits to tax havens every year.

Financial journalists have been publishing stories about Google’s extraordinarily low corporate tax rate since at least 2010. In that time digital companies have managed to get out of paying tens of billions of dollars in tax payments to governments around the world. In doing so, they have faced growing anger from both the public and regulatory authorities.

In 2013 the G8 mandated the OECD to come up with proposals to deal with the issue. However, when the Base Erosion and Profit Shifting plan was published in 2016, the digital economy was left on the too difficult shelf. Talks continue to this day, with the OECD aiming to agree on a plan to restructure the global tax system by the end of this year.

In the meantime, treasuries have continued to leak huge sums of money. Inaction at a multilateral level has led to unilateral action, with governments around the world seeking to introduce Digital Services Taxes.

The UK Digital Services Tax was always designed as a stop-gap measure to be put in place until an international agreement was reached on a new system of taxing digital companies. The introduction of it was delayed for two years in order to give the OECD process an opportunity to succeed. Now this time has expired, the tax is scheduled to apply from April. It is a blunt instrument, taxing the UK derived revenues of large social media platforms, search engines and online market places. It is a significant departure from the usual method of taxing companies, which focuses on profits and not turnover. As such it is controversial.

Some stopgap is clearly needed. Research by TaxWatch found that just five digital companies were avoiding almost £1bn in taxes a year in the UK. The Digital Services Tax, imperfect as it may be, ensures that at least some (and by no means all) of that money is recouped by the UK government.

A number of digital businesses will not be impacted, such as video streaming services and video games producers, despite these companies operating very similar tax avoidance strategies. In a recent adjournment debate, Dame Margaret Hodge MP called for the tax to be extended to such companies. We do not expect to see this happen in the budget, as the government response at the time was that to change the Digital Services Tax now would be too difficult.

Digital Services Taxes have become a major diplomatic issue, with huge pressure being put on countries to stop or delay their introduction by the United States Government, who have threatened trade sanctions for countries going ahead with the measure. Most companies impacted by digital services taxes are headquartered in the United States.

With the budget coming just weeks ahead of the UK tax coming into effect, any announcement on the Digital Services Tax, or even no announcement, will be highly significant.

Avoiding unintended consequences

Tax avoidance can be seen as an unintended consequence of government policy. By definition, tax avoidance is people using the tax system in a way that was never intended by the framers of tax policy.

A clear avoidance risk therefore emerges from the 1,190 tax reliefs and allowances which are part of the UK tax system. Tax reliefs reduce the amount of tax owed by a company or person based. In recent years, they have increasingly been used as a tool of economic policy, being granted to encourage a multitude of economic activities.

Tax reliefs have been introduced to encourage the production of films, video games, and spending on R&D to name a few. These schemes work by allowing companies to make additional deductions from their tax bills for spending money on the desired activities.

Although these types of tax reliefs are obviously popular with the people getting a benefit from them, they are also open to abuse. The history of tax reliefs shows that no sooner does the government come up with a scheme to promote one sector, a group of accountants and lawyers find inventive ways to claim it.

In recent years film tax relief has been the focus of a lot of media attention after a number of high profile celebrities were caught investing in a scheme which abused the film tax relief system.

A huge risk is posed by the research and development tax credit system, where there is very clear evidence of abuse. The government currently spends a little under £4.5bn on R&D tax credits, a figure which has quadrupled over the last decade.

These tax credits work by awarding companies credits based on the amount of money they spend on research and development activities. These credits can then be offset against their tax bills. If the company has no tax liability they can receive money back from the government.

In 2016-7, the last year where figures are complete, HMRC awarded credits to companies claiming that they spent a total of £32.3 billion in spending on R&D. However, the Office of National Statistics (ONS) recorded just £22.6bn of spending on UK R&D activities in 2017.¹

It is unheard of for any tax relief to get anywhere near 100% take up, never mind more than 100%! The ONS data and the HMRC data are different and not directly comparable. They cover slightly different time periods, with the ONS looking at a calendar year whilst HMRC looks at the financial year. The HMRC data also counts some non-UK spending, which can be claimed under the R&D tax credit scheme (for example if a company subcontracts some R&D work to a non-UK company). The ONS data looks at UK spend only. However, the difference is very large, with the ONS data suggesting that R&D expenditure for tax purposes is 143% of UK R&D spend. This can’t simply be explained by differences in methodology, even the inclusion of non-UK spending. In fact, HMRC has identified the practice of some companies opening up UK subsidiaries with the sole purpose of routing payments through the UK to collect tax credits as an abuse of the system. The data suggests a worrying level of abuse.

The government accepts there is a problem. The last budget brought measures to cap the amount small businesses could claim in cash under the R&D tax credit scheme based on their UK payroll. It did this after identifying “fraudulent attempts to claim the SME scheme payable tax credit… even though they had no R&D activity.”²

These measures are due to come into effect in April this year. However, as recently observed by the National Audit Office, even when the changes to R&D tax credits announced in the 2018 budget are made, companies will still have until 2022 to claim under the old rules. This means that tax will continue to be lost for years after serious fraud in the system was identified.

The cap on SME R&D relief only deals with part of the problem. A significant amount of tax loss occurs from what is charitably termed “poor quality” R&D tax relief claims. This is where companies and their agents make claims for expenditure which should not be allowed, and the claim is not picked up by HMRC compliance staff, leading to an incorrect payment being made. According to the NAO:

“Following the increased assessment of tax at risk in 2018, HMRC is also exploring opportunities to improve its systems and processes for risk-assessing claims and preventing incorrect payments, which is likely to require both legislative change and funding.”³

This highlights a serious problem with the tax relief system. Tax reliefs can be very difficult to change, even where there is clear evidence of fraud in the system. Given that it is likely that the Chancellor will seek to increase spending on R&D tax credits in line with the commitment made in the 2019 Conservative Party Manifesto, it is important that this comes alongside more resources dedicated to tackling the abuse of the system.

Photo by Steve Smith on Unsplash

1 Office for National Statistics, Research and Development Tax Credit Statistics, October 2019, see table on page 16 for comparison of HMRC data with ONS data. https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/837282/Research_and_Development_Tax_Credits_Statistics_October_2019.pdf

2 HM Treasury, Preventing abuse of the R&D tax relied for SMEs: consultation, see paragraph 1.3 https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/790243/preventing_abuse_of_the_R_D_tax_relief_for_SMEs_consultation_web.pdf

3 National Audit Office, The management of tax expenditures, p35, https://www.nao.org.uk/wp-content/uploads/2020/02/The-management-of-tax-expenditure.pdf

TaxWatch research features in UK Parliament debate on evasion and avoidance

2nd March 2020 by George Turner

On February 25th an opposition day motion gave MPs an opportunity to debate the issue of tax avoidance and evasion.

Our research into the work of digital tech companies featured prominently in the debate.

Opening the debate for the Opposition, Shadow Chancellor John McDonnell highlighted our report “Still Crazy after all these years” which estimated the top five tech companies alone had avoided £5 billion in UK tax over five years.

Our recent update to the report, which estimated that £1.3 billion had been avoided by the big five as recently as 2018, was cited by Dame Margaret Hodge MP. The MP for Barking also highlighted our recent investigation of Netflix’s profit shifting activity.

Dame Margaret said that whilst the government’s proposed digital services tax was “a tiny start” it would raise only around £400 million by 2023.

“It makes me so angry,” she said, “Because these companies are as dependent as anybody else on the services our tax provides. They need a well-educated workforce, which is provided from taxpayers’ money; they need a healthy workforce, which is provided from taxpayers’ money; and they need infrastructure—whether roads, the internet or whatever else—which is often also provided from taxpayers’ money.”

The fact that large multinational companies are not paying enough in corporation tax was a point of cross party agreement. Kevin Hollinrake, Conservative MP for Thirsk and Malton, agreed the UK was not getting its fair share of tax from the tech giants.

“We know that Google turns over about 10 billion quid in the UK, we know that its international profit margin is about 22% and that 19% corporation tax on that should be £418 million, and we know that it pays about £67 million,” he said.

Conservative MP for South Cambridgeshire, Anthony Browne, highlighted how large multinationals arrange their finances to avoid declaring profits in the UK.

He said: “What any fair-minded person objects to is aggressive tax avoidance which results in companies or people paying less tax than is clearly their fair share…. The biggest examples are multinational corporations, who frequently arrange their internal transfer pricing, often of intellectual property, to ensure that most of their profits are booked in low-tax regimes.”

He added it was “an offence against any sense of fairness, and certainly against the public purse, that incredibly profitable global companies, such as Amazon, Facebook and Google, pay minimal tax in the UK because of the way they arrange their internal finances.”

Rounding up for Labour, Anneliese Dodds MP, noted TaxWatch’s recent work on Netflix and last year’s report detailing how Rockstar Games manages to avoid substantial amounts of tax, whilst claiming cash subsidies from the government.

TaxWatch recently reported that Rockstar took 37% of all the available subsidy for UK video games production in 2018/19 despite having paid no corporation tax for four years and the fact that Grand Theft Auto V, which is produced by the company in Scotland, is being widely cited as being the most profitable entertainment product in history.

Responding to the debate on behalf of the government, Financial Secretary to the Treasury, Jesse Norman MP, defended the operation of creative sector tax reliefs and argued that larger companies in receipt of the reliefs are subject to an “exceptional level of scrutiny” but that they should pay the “taxes due under UK law.”

Mr Norman also appeared to confirm that the government is pushing for international agreement to publish country by country reporting.

He said: “Private country-by-country registration is of course in place. The problem lies in securing the international agreement required to roll out the public registration. It demands a measure of international agreement, and that is something that we continue to focus on.”

A full transcript of the debate is available to read here.

Top five tech companies in the UK avoided an estimated £1.3bn in tax in 2018 – new analysis

10th February 2020 by George Turner

The top five tech companies operating in the UK managed to generate profits estimated at £8.1bn from UK customers in 2018, a new analysis by TaxWatch shows.

However, due to these companies implementing complex financial structures to take these profits offshore, these companies only paid a combined total of £237m in taxes on these profits in the UK, an effective tax rate of just 2.9%. That puts the total amount of tax avoided by the companies in the UK at an estimated £1.3bn in 2018, the latest year where figures exist.

	Google	Cisco	Facebook	Microsoft	Apple	Total
Current UK Tax Charge	£72,895,000	£40,101,583	£30,372,000	£24,729,000	£70,877,000	£238,974,583
UK Estimated Revenues	£9,358,419,600	£1,677,303,280	£2,289,953,250	£2,885,251,840	£12,270,489,000	£28,481,416,970
Estimated Profits on UK Revenues	£2,433,189,096	£443,311,257	£1,030,478,963	£952,133,107	£3,313,032,030	£8,172,144,453
UK Estimated Tax Liability	£462,305,928	£84,229,139	£195,791,003	£180,905,290	£629,476,086	£1,552,707,446
Estimated UK Tax Avoided	£389,410,928	£44,127,556	£165,419,003	£156,176,290	£558,599,086	£1,313,732,863

The latest figures are an update on TaxWatch’s 2018 study, Still Crazy After All These Years, which looked at the activities of Google, Cisco, Facebook, Microsoft and Apple, five of the largest technology companies in the world, over the period 2013-2017. The latest figures use the same methodology applied to the companies’ 2018 financial accounts.

Methodology

Corporation tax is a tax on corporate profits. Under international principles of taxation a country has the right to tax companies on the profits that arise in their jurisdiction, even if the company is headquartered overseas.

However, it has become common practice for many multinational companies to move profits from higher tax countries to lower tax countries via a series of complex financial transactions. For that reason, the accounting profit declared in the UK accounts of many multinational companies is not an accurate reflection of the real economic profit made by the company from its activities in the UK.

For example, up until 2019 Google booked sales from UK customers in Ireland. The Irish company which recorded sales of Google products then made large royalty payments for the use of Google intellectual property to a Dutch company, money which then eventually ended up in Bermuda. In 2018, the company moved $22.7bn from its worldwide operations to Bermuda in this way.

The result of this is that Google made a relatively small amount of profit in the UK, Ireland, and other countries, and an enormous profit in Bermuda, which has a zero % tax rate. However, given that Google’s Bermuda subsidiary appears to have no employees, whereas the company employs over 3600 people in the UK, are the vast profits made by its offshore shell company an accurate reflection of the real economic profit of the company? We think not.

In order to get a better understanding of the real profit that the companies in our study made in the UK, TaxWatch estimated the total revenue made by these companies in the UK, and applied the company’s global pre-tax profit margin to that revenue. The pre-tax profit margin is the proportion of revenues that is declared as profit before taxes.

From an economic point of view this assumes that the UK market has an average level of profitability vis-a-vis all of the other markets these companies operate in, including their domestic market, the US.

It also assumes that the costs of the company, from research and development to manufacturing and other functions are allocated equally between different markets.

There are some who argue that the approach we have taken overestimates the real profits that these companies make in markets such as the UK because, under international tax rules, profits should be allocated based on where value is created, which is not the same as the location of customers. The argument goes that as much of the research and development conducted by these companies happens outside of the UK, the UK market should receive less profit.

This is an argument also put forward by the companies themselves. Responding to the 2017 Paradise Papers leaks from the International Consortium of Investigative Journalists Apple made the following statement on their website:

Under the current international tax system, profits are taxed based on where the value is created. The taxes Apple pays to countries around the world are based on that principle. The vast majority of the value in our products is indisputably created in the United States — where we do our design, development, engineering work and much more — so the majority of our taxes are owed to the US.

This could be a reasonable argument for Apple to make if in fact the company allocated most of its profit to its operations in the United States (where it says that the vast majority of its value is created). The fact is that it does not.

Apple’s latest annual financial statements state clearly that the company’s pre-tax profits outside of the United States were $44.3bn in the year until November 2019 and $48bn in 2018. That accounted for 67% and 66% of the company’s entire pre-tax profit. As far as Apple’s financial accounts are concerned, the majority of the company’s profit is made outside of the US.

In fact, according to Apple’s accounts, the distribution of the company’s pre-tax profit is much more closely aligned with the distribution of its net sales. In 2019 the US market accounted for 39% of sales and 33% of the profits made by the company.

Other companies also report that their operations outside of the US are more profitable than their US operations, suggesting that our approach in fact underestimates the amount of profit that these companies really make in countries such as the UK.

For example, the latest Microsoft annual report shows that worldwide the company made revenues of $126bn in 2019. Of this, 51% was received from customers in the USA and 49% from customers in the rest of the world.

Microsoft also declares the pre-tax profit the company makes in its US domestic segment as against its non-domestic segment. This suggests that the pre-tax profit margin of Microsoft is 24.6% in the USA, but 45.2% in the rest of the world.

At no point do we pretend that the figures presented here are an exact answer to how much profit these companies make in the United Kingdom. That would be impossible to determine without access to detailed figures from inside these companies. However, we do argue that our approach gives a much more realistic estimate of the real profits made by these companies in the UK market as opposed to the profits declared in the accounts of their UK based subsidiaries.

Google

Until 2016 Google reported the revenues it made from the UK in its US 10-K filing. On average, around 9% of Google’s global revenues came from the UK between 2014 and 2016. We applied this average figure to Google’s 2018 global revenues to estimate the revenues generated from the UK in 2018.

Over the last five years Google has consistently made a profit margin of over 25% on all of its worldwide sales. In 2018, Alphabet, the parent company of Google reported profits of $34.9bn, on revenues of $136.8bn. The same profit margin applied to the UK revenues of Google would yield a profit of £2.4bn, and a tax bill of £462m.
Google UK had a current tax charge of £72.9m in 2018.

In January 2019 it was revealed that Google had changed its corporate structure, moving its intellectual property from Bermuda back to the United States. This does not impact our study (which only covers 2018) and is unlikely to impact profits declared in the UK in the future. This is because rather than paying royalties to Bermuda, the company will simply make the same payments to the US where under the new FDII rules these payments will be subject to a substantial tax break.

Cisco

Cisco Systems has a subsidiary based in the UK called Cisco International Limited. It is responsible for the majority of Cisco’s sales in the Europe, Middle East, and Africa region. The accounts of Cisco Systems International report separately on the revenues the company makes from UK sales, which were £1.7bn in 2018.

Cisco Systems made a profit margin of 26% in 2018 on all of its global sales. Applied to its UK sales this would yield a profit of £443m, and a tax bill of £84m. However, in 2017, Cisco International Limited and another UK subsidiary, Cisco Systems Limited, were charged £40m in tax between them.

Facebook

Facebook’s global accounts do not break down their revenues by geography at all, whilst the accounts of the company’s UK subsidiary do not reflect the real UK revenues.
Until 2016, Facebook booked all of its UK revenue in a subsidiary in Ireland. Following public pressure about the company’s tax affairs, it started booking revenue from its largest customers through Facebook UK rather than an Irish subsidiary. However, smaller customers would still receive invoices from Ireland, meaning that Facebook UK’s accounts are not a true reflection of the revenue the company makes from UK customers.

In order to estimate Facebook’s real revenues in the UK, we looked at Facebook’s average revenue per user (APRU), which is published in a chart, broken down by region, appended to the company’s US stock market filings. We then took the mid-point between the US APRU and European APRU basing this calculation on the assumption that the UK would be at the top end of the European APRU range, but less than the US. Recent market research puts Facebook’s userbase in the UK at 39 million users, an increase on previous estimates of 32 million. To get an estimate for UK revenue we then multiplied the APRU by 32 million.

In 2018, the company had a tax charge of £30.3m – substantially more than the £16m tax charge they recorded in 2017.

Our estimate based on how much Facebook makes per user puts revenues in the region of £2.29bn in 2018 from UK customers.

In 2018, Facebook globally had a profit margin of 45%. If we assume that the UK market is no less profitable than any other market the company operates in, then the company should have generated a profit of around £1bn in 2018.

A profit of £1.03bn would yield a tax charge of £195.8m.

Microsoft

Microsoft UK appears to have made a significant accounting change since 2017, with significantly more revenue from customers from the UK being recorded in its UK accounts. Between 2017 to 2018 Microsoft UK’s sales to 3rd parties increased by more than £1bn.

However, this increase in sales to 3rd parties does not seem to have been at the expense of Microsoft’s Irish subsidiary, Microsoft Ireland Operations Limited, which saw its revenues increase from $22.8bn in 2017 to $27.5bn in 2018. Microsoft Ireland Operations Limited makes sales to customers throughout the EMEA region.

Previous editions of Microsoft Ireland Operation’s accounts provided a figure for revenues earned from the UK. Between 2013 and 2015 the proportion of the company’s global revenues that came from the UK ranged between 3.12% and 3.6%.

To estimate revenues that Microsoft gained from the UK in 2018 we applied an average of 3.44% to the global revenue of Microsoft in that year.
Overall, Microsoft made a pre-tax profit of 33% on its revenues in 2018.

In total, we estimate that Microsoft generated revenues of £2.9bn in 2018 from UK customers. This would yield an estimated profit of £952m and a tax bill of £181m in 2018. Microsoft Limited in the UK had a tax bill of £24.7m in 2018.

Apple

Apple is one of the most opaque of all of the companies we looked at, and so most difficult to analyse.

In order to estimate how much revenue Apple makes from the UK market, we looked at the amount of money spent by UK customers on iPhones in the UK which was constructed from data on smart-phone penetration and market research. This shows that £6.3bn was spent on iPhones in the UK in 2017. This accounts for 6% of Apple’s global iPhone sales. We were not able to obtain updated figures for 2018, and so to estimate Apple’s 2018 revenue in the UK, we applied the same figure, 6% to the company’s global revenues.

Assuming that Apple makes 6% of its revenues in the UK, it would have generated £12.3bn from UK customers in 2018.

Applying Apple’s global pre-tax profit margin of 27% to these revenues implies an estimated profit of £3.3bn and a tax bill of £629m in 2018. Apple’s three UK subsidiaries had a UK tax charge of £70.8m in 2018.

This research was featured in the Daily Mirror, The Telegraph, and the Mail on Sunday among others.

Netflix UK revenues hit an estimated £1bn, but will the company start paying any corporation tax?

3rd February 2020 by George Turner

Netflix’s latest earnings report, published on 21 January, showed that 2019 was another bumper year for the company. Revenue in the 4th quarter was up 31% on the previous year, with the company clocking up $20bn in revenues worldwide over the course of the year.

Operating profit rose an enormous 61% in 2019 and the company reached 100m subscribers outside of the US. Pre-tax profits jumped from $1.2bn in 2018 to $2bn in 2019.

But how much of that profit will end up taxed in the UK?

The answer is likely to be not much. In 2018 the company reported revenues of £43.3m and profits of just £2m at its main UK company, Netflix Services UK, and paid no tax. In fact it received a tax credit under the creative industry tax relief scheme. This is despite the fact that in the same year, Netflix will have generated an estimated £860m in revenues from its UK customers. As we set out in our recent report, No Tax and Chill, subscription fees from UK customers are billed by Netflix from a company in the Netherlands. This explains why so little revenue and profit end up in the UK.

Netfix has not yet published its UK accounts, but as far as we are aware, the company structure has not changed. Our latest analysis, based on Netflix’s recent earnings reports, suggests that Netflix revenues from UK customers increased sharply to an estimated £1.08bn in 2019 – all billed to its Dutch subsidiary. This should have generated an estimated £68.5m in profit, giving rise to a tax liability of £13m.

Our analysis is based on the following data:

The Broadcasters Audience Research Board shows that Netflix had 11.5m subscribers in the UK in Q1 2019, 11.62m in Q2, and 11.77m for Q3 2019. We have taken the midway point of 11.62m as the average number of Netflix subscribers for 2019.

The latest financial data published by Netflix in January 2020 shows that the company made an average revenue per user of $10.33 per month in the Europe, Middle East and Africa region in 2019. This would suggest that Netflix made $1.44bn from UK subscribers in 2019. This is 13.5% of all revenue that Netflix makes outside of the United States.

The latest Netflix financial data states that the company’s international streaming operations made “Contribution Profit” of $1.6bn in 2019. This would suggest that the UK contribution profit would be $217m.

Contribution profit is gross profit after the deduction of marketing costs. On top of that Netflix has financing costs and other shared operational costs. On a consolidated basis, profit before tax is 41% of contribution profit. This would suggest that UK pre-tax profits are in the region of $89m, or £68.5m. Applying a 19% tax rate this should have generated a tax liability of £13m.

Whether Netflix ends up paying anything close to that remains to be seen. However, it does appear that the structure employed by Netflix has come to the attention of the UK tax authorities, HMRC, as the latest Netflix 10-K report published in late January 2020 states that their 2018 tax return is currently under examination by the UK tax authorities.

Response from Netflix

We reached out to Netflix to share our analysis with the company ahead of publication. A spokesperson for the company provided the following response:

“We believe that international taxation needs reform and we support the OECD’s proposal for companies to pay more tax in the countries where their operations help generate value.

In the meantime, we comply with the rules in every country where we operate. The TaxWatch report has a number of inaccuracies, including that Netflix has a Caribbean-based entity. This is no longer the case as we significantly simplified our tax structure last year.

Netflix continues to invest heavily in the UK – spending more than £400 million on local productions in 2019, which helped to create over 25,000 jobs and training placements.”

This research was featured in The Times, the Daily Mail, and The Independent among others.

Photo by freestocks.org on Unsplash

The Sunday Times Tax List and the argument for corporation tax

28th January 2020 by George Turner

The Sunday Times published their second annual tax list over the weekend. The list, which uses publicly available data to showcase the “individuals and families who contribute most to the public purse” is pitched as a celebration of the contribution that the wealthy make to the Treasury.

Coming at the end of a week that saw the release of a letter from the Millionaires Against Pitch Forks, a call for higher taxes on the wealthy coming from a group of millionaires and billionaires, it is important to remember that there are many wealthy people who value the contribution they make to public services and do not just slip off to Monaco at the first whiff of fortune. The Sunday Times list contains a number of such people, such as Denise Coates, owner of Bet 365, who chooses to put her extraordinary £276.6m salary through the payroll, and J.K. Rowling, who The Sunday Times reports puts her £100m+ in royalties on her self-assessment form.

However, the list also contains people, such as Philip and Tina Green, and Stelios Haji-Ionnou, who have moved to Monaco, as well as the Perkins family (owners of Specsavers) of Guernsey. Although these individuals could have moved for reasons unconnected with tax – for example, Douglas and Dame Mary Perkins said they’d moved to Guernsey some 40 years ago to be closer to Dame Mary’s parents – it remains important to ask how people resident in such well known tax havens made it onto the list of top UK taxpayers? That is because The Sunday Times ranking probably tells us more about the effectiveness of wealth taxation in the UK rather than giving us an indication of the ethical conduct of taxpayers, and explains why corporation tax is such an important tax for capturing income arising from wealth.

Calculating the Tax List

Unlike some Scandinavian countries, where individuals’ tax payments are a matter of public record, the tax affairs of individuals in the UK are subject to strict secrecy laws. As a result, rather than looking at the tax paid by people, in most cases the Sunday Times has looked at taxes paid by the the businesses they own where records are available via Companies House. Primarily the ranking looks at Employers National Insurance Contributions and Corporation Tax apportioning these taxes to individuals based on their stake in the company. The list also looks at dividends paid by these companies and then assumes that UK resident individuals will pay income tax on these payments at the higher rate. As a result, the list favours people who own large UK businesses employing staff in the UK.

Who pays corporation tax?

There is a large, lively and important debate as to who really ends up paying corporation tax, a tax on the profits of companies. A number of people, particularly those who argue for cutting corporate taxes, assert that corporation tax is in the end paid for by the workers of a company. They argue that lower corporation tax will lead to higher wages for employees.

The Sunday Times entirely rejects that view, explicitly, and assumes that 100% of corporation tax is borne by the shareholders. The paper argues that this is because shareholders could choose to move operations overseas if they wanted to, but instead choose to locate their business in the UK and therefore make it liable to UK corporation tax.

Another argument of course is that if corporation tax is reduced, this leaves more profit in the company available for distribution to shareholders. Some empirical analysis has shown that any excess distributable profits overwhelmingly goes to shareholders.

Corporation tax – A withholding tax on wealth?

This debate is important for how, why, and how much we tax profits arising from business activity. If a shareholder is a UK resident, then the money they receive from corporate profits goes though two tax gateways. Corporate profits are first taxed at the corporate level through the corporation tax, and then again as income once the profits have been paid out as a dividend and are in the hands of the shareholder.

The income tax rate that individuals pay on dividends is lower than the amount paid on income from work, partly to account for the fact that corporation tax has already been paid on the distribution. If a UK resident were to move offshore to a place like Monaco, which does not charge income tax, then that corporate profit would only be subject to corporation tax, and not income tax.

Now consider what would happen if corporation tax were to be cut, as some argue it should be. If we are to accept the argument of The Sunday Times, then 100% of that benefit would accrue to the shareholder. If that shareholder was a UK resident then the impact on government revenue would be limited because the government would recoup some additional tax from the shareholder via increases in income taxes on the dividends they receive. If the shareholder was offshore, or tax exempt (e.g. a pension fund), then the UK government would lose all of the amount of the cut.

If we assume that the corporation tax primarily falls on shareholders, then The Sunday Times Tax List demonstrates its importance in ensuring that when companies generate profits in the UK at least some of that profit is taxed in the UK even if the shareholders live in Monaco, Guernsey, Bermuda or anywhere else. Following the same argument, cuts to corporation tax would disproportionately benefit those who choose to move to tax havens, as it allows them to move more profit generated from UK activities offshore and outside of the UK tax net.

A letter from our Director to the Editor of The Sunday Times was published on the issue.

Photo by Colin Watts on Unsplash

No tax and chill: Netflix’s offshore millions

14th January 2020 by George Turner

Online video streaming company Netflix streamed up to $430m of profit from their international operations into tax havens in 2018.

“No Tax and Chill”, an analysis of the company’s accounts in the US, the Netherlands and UK shows the company is the latest in a growing list of digital giants that use a web of offshore companies to shift profit offshore and avoid tax.

In 2018, despite making $1.2 billion in worldwide profits and booking an estimated £860 million in revenue from its 10 million strong UK subscribers, the company paid no tax in the UK. On the contrary, the company received £924,000 back from the UK taxpayer in 2017/18 in tax credits.

Although where the profit from Netflix’s international operations end up remains a mystery, the company’s US accounts suggest that large amounts end up in tax havens.

The full report can be found here
A PDF version can be downloaded here

This research featured extensively in the UK and international press. In the UK, this research was featured in The Times, BBC News, and The Guardian among others.

TaxWatch calls on Facebook to come clean over tax affairs

21st November 2019 by George Turner

Facebook say that their low profits in the UK are down to the workings of the international tax system which require them to pay their taxes in their home country. But an analysis of Facebook’s accounts demonstrates that doesn’t appear to be happening, with the evidence strongly suggesting that most of Facebook’s profits are being shifted into tax havens. This resulted in Facebook paying an average tax rate of just 12% in 2018, when the US Federal rate is 21%.

TaxWatch is now calling on the company to come clean on its tax affairs and tell the world where it is putting its profits.

In 2018 Facebook’s worldwide profit margin was 44.6%. On every $1 they sold in advertising, they made 45 cents in pre-tax profit.

In the UK, according to their published accounts, Facebook is much less profitable, making only 8.5% pre-tax profit.

On Tuesday 19 November, in an interview on the BBC, Amol Rajan, the BBC’s media editor put it to Facebook’s Director of UK and Ireland, Steve Hatch, that the low levels of profit seen in the UK were artificially deflated to avoid a tax liability in the UK.

Mr Hatch responded that the current tax rules meant that most of Facebook’s profits were taxed where things were created and made. In Facebook’s case this would be in the United States.

An analysis of Facebook’s accounts by TaxWatch demonstrates that this does not appear to be true. Facebook themselves state in their financial accounts that the majority of their profit is made outside of the USA, where it is taxed at an average rate of just 6%. This evidence strongly suggests that the company is moving profits made in the UK and other places where it makes sales into tax havens.

TaxWatch has written to Facebook’s Vice President of Tax calling on him to set the record straight on Facebook’s tax affairs, and to tell us in which tax jurisdiction Facebook declares most of its profit.

The full text of the letter to Facebook’s Ted Price can be seen here: Facebook-Letter_GT_20191121

Photo by Joshua Hoehne on Unsplash