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Microsoft

US set to raise $8.5bn from four tech companies following global tax deal

7th October 2021 by Alex Dunnagan

New analysis from TaxWatch reveals how the US Government is set to be the big winner from increases in taxes on big tech arising from the global tax negotiations currently underway under the auspices of the G20/OECD.

In our latest research, we have analysed the gains that the US Government can expect from imposing a global minimum tax of 21% on Facebook, Google, Apple, and Microsoft. This would result in an extra $5.4bn in taxes from just these four companies, whereas we estimate the total additional tax these companies would pay in all other countries under Pillar One would be $2.5bn under the terms of the G7 agreement set out earlier this year.

The figure of 21% is used because the stated intention of the US Government is to impose a global minimum of 21% on companies headquartered in the US, regardless of the minimum level set through the OECD led process.

Furthermore, we find that the US Government would also benefit from the removal of tax incentives on royalties received by US parents from overseas operating companies (the Foreign Derived Intangible Income incentive, or FDII).

The removal of the FDII incentive is facilitated by the increase in global minimum taxation and therefore should be seen as a benefit of it.

We estimate that just four tech companies will see taxes increase in the US by $3bn per year as a result of the removal of the FDII.

Taken together, this means that the package of reforms will mean a yearly increase in US Tax of $8.4bn from just four companies, as against a benefit of $2.5bn shared between all other countries.

What is significant is that both the global minimum tax and the FDII only impact profits that arise from revenues made overseas, in countries like the United Kingdom where sales are made. The analysis therefore demonstrates that the G7 / OECD deal resolves the question of who gets to tax the offshore billions of tech companies decidedly in favour of the United States, with relatively little being distributed to the countries where these companies operate. This was not necessarily the outcome expected from the OECD led BEPS process, which had a stated goal of making tech companies pay a fair share in the countries where they operate.

The full report, ‘A Fair Distribution’, is available as a web page here, and as a PDF here. This research was featured in The Guardian as an op-ed by our Executive Director George Turner, available here.

A fair distribution?

7th October 2021 by Alex Dunnagan

7th October 2021

US Government set to raise 3x more than rest of the world combined in tax payments from four tech companies after Global Tax Deal

Raising Global Minimum Tax to 21% would see US Government raise an extra $2.5bn in tax from Apple alone

Summary and introduction

In June 2021 finance ministers of the G7 group of nations agreed on proposals to reform the way in which multinational enterprises are taxed. The agreement was the product of over 10 years of negotiations hosted by the OECD under the auspices of the Base Erosion and Profit Shifting (BEPS) programme.

When the deal was announced, the UK Government, which hosted this year’s G7, trumpeted it as a “seismic agreement on global tax reform that will mean the largest multinational tech giants will pay their fair share of tax in the countries in which they operate.”1

This paper presents an analysis of the deal, looking at the accounts of individual tech companies to demonstrate that the United States, where almost all major tech companies are headquartered, stands to gain billions of extra tax dollars from global tech giants as a result of the deal, whilst “the countries in which [tech companies] operate” stand to gain relatively little.

To do this we look at the gains that the US government can expect from imposing a global minimum tax of 21% on Facebook, Google, Apple and Microsoft. This would result in an extra $5.4bn in taxes from just these four companies, whereas we estimate the total additional tax these companies would pay in all other countries in the world under the terms of the G7 deal would be $2.5bn.

The figure of 21% is used because the stated intention of the US Government is to impose a global minimum of 21% on companies headquartered in the US, regardless of the minimum level set through the OECD led process.

Furthermore, we find that the US Government would further benefit from the removal of tax incentives on royalties received by US parents from overseas operating companies (the Foreign Derived Intangible Income incentive, or FDII). The introduction of the FDII in 2017 had already led to tech giants substantially restructuring their tax affairs. US companies have moved vast amounts of profits arising from sales outside of the US out of tax havens and back to the United States. This had expanded the US tax base at the expense of market jurisdictions in advance of the G7 deal. The removal of the FDII incentive is facilitated by the increase in global minimum taxation and therefore should be seen as a benefit of it.

We estimate that just four tech companies will see taxes increase in the US by $3bn per year as a result of the removal of the FDII.

Taken together, this means that the package of reforms will mean a yearly increase in US Tax of $8.4bn, as against a benefit of $2.5bn shared between all other countries arising from just four companies. What is significant is that both the global minimum tax and the FDII only impact profits that arise from revenues made overseas, in countries like the United Kingdom where sales are made. The analysis therefore demonstrates that the G7 / OECD deal resolves the question of who gets to tax the offshore billions of tech companies decidedly in favour of the United States.

This was not necessarily the outcome expected from the OECD led BEPS process.

Tax avoidance and the multinational

The problem that the BEPS programme set out to resolve was clear. Large multinational enterprises had accumulated trillions of dollars offshore by shifting profits out of “market jurisdictions” – the countries in which their customers or users were based, and into tax havens.

These tax haven entities were often an accounting fiction, generating billions in profits every year but with no staff, no offices and no discernable economic activity.

Although companies in all sectors have engaged in profit shifting, perhaps due to the particularly high profile of these companies, and the particularly aggressive stance they took towards the tax system, the behaviour of the tech industry has been a particular concern. In fact, the activities of tech giants warranted their own action point within the BEPS action plan.

The structure of the US tax system, where almost most global tech giants are headquartered, provided huge incentives for US based multinational corporations to move cash out of their international (non-US) markets and hoard it offshore, avoiding taxes on profits made in foreign jurisdictions and a US corporation tax charge that would accrue if they brought the cash home to the US.

A classic tax avoidance structure used by a US company would see intellectual property (i.e. trademarks, patents or software aka IP) developed in the United States sold to an offshore company in Bermuda, which would then licence the use of the IP to companies in Europe and other non-US markets. Companies in these international markets would pay the offshore company high fees for the use of the IP leading to an accumulation of wealth offshore and the elimination of profit elsewhere.

According to the US research institute ITEP, fortune 500 companies alone had accumulated $2.6 trillion in profits offshore by 2017, when the Trump administration enacted far-reaching tax reform.2

The tax proxy wars

A key question facing tax policy makers was therefore whether or not the tax haven profits of US based multinationals and tech companies in particular should have been properly accounted for and taxed in the US, where the IP was developed, or in the “market jurisdictions” where services were sold to (predominantly European and other developed countries). All governments appeared to agree at least that shell companies with no staff and no physical operations should not have been considered to have “earned” any profits themselves.

The OECD’s report which kicked off the Base Erosion and Profit Shifting programme that sought to reform the global tax system raised the question of whether more profit needed to be allocated to countries where sales are made. Under the heading “Jurisdiction to tax” the report contained the following passage:

“In an era where non-resident taxpayers can derive substantial profits from transactions with customers located in another country, questions are being raised as to whether the current rules ensure a fair allocation of taxing rights on business profits, especially where the profits from such transactions go untaxed anywhere.”3

However, perhaps unsurprisingly given the amounts of money at stake, neither the US nor Europe saw eye to eye on how profits accumulated offshore should be divided.

In the US, the IRS has attacked the way in which costs are divided between US entities and offshore entities. It has argued that the subsidiaries of US corporations based offshore, which typically have no staff and no costs, should contribute a greater amount to the costs incurred by their US based parents. In effect, bringing profits onshore to compensate the US entities for their role in developing IP.

In 2020, a US federal appeals court resolved a dispute that had been going on for years between the IRS and Altera, a US based chip maker. The court upheld an IRS regulation from 2003 that offshore companies owned by US multinationals should contribute to the cost of share options granted to employees in the US. As a result of this case, Google and Facebook alone set aside $2bn to comply with the ruling.4

In Europe, the European Commission launched a number of cases against governments, claiming that the favourable tax treatment which allowed multinationals to move money to low-tax jurisdictions breached state aid rules, and compelled European tax havens to levy taxes on profits either accumulated or passing through their jurisdiction.

Although from a European perspective, this has been seen as an albeit imperfect mechanism to claw back some tax which should have been due in Europe, US politicians have viewed EC action against tax avoidance as a raid on US profits.

When Apple was fined €13bn Euros by the European Commission for unpaid taxes arising from a scheme which saw profits transferred out of profitable European markets to a headquarters company that “only existed on paper”,5 Charles Schumer, one of the highest-ranking Democratic senators, said:

“This is a cheap money grab by the European Commission, targeting US businesses and the US tax base.

By forcing their member states to retroactively impose taxes on US companies, the EU is unfairly undermining our ability to compete economically in Europe while grabbing tax revenues that should go toward investment here in the United States”

This fundamental disagreement on who should have the right to tax held up progress on the digital economy workstream of the BEPS programme for years and in the interim, governments sought to enact unilateral reforms.

A number of countries sought to impose digital services taxes on the revenues of some tech companies. The UK’s diverted profits tax sought to impose a higher tax rate on profits diverted using artificial structures.

Eventually an agreement was reached at the 2021 G7 Summit in Cornwall to co-ordinate tax policy. As we will explore later in this paper, this essentially resolves the question of who gets to tax big tech profits in favour of the US.

Tax Cuts and Jobs Act 2017

The most significant unilateral policy change enacted before the G7 agreement was introduced by the US government. The Trump administration’s Tax Cuts and Jobs Act of 2017 (TCJA) fundamentally altered the incentives in place for US corporations to keep their cash offshore and paved the way for the G7 agreement.

These reforms came in several parts. A one off tax on accumulated offshore holdings, a new tax on profits allocated to intangible assets in tax havens (global intangible low-taxed income, or GILTI) and a tax incentive on revenues from overseas accruing to intangible assets in the United States (foreign-derived intangible income, or FDII). By targeting foreign derived income, the United States was laying claim to the offshore profits accumulated by its multinationals.

Profits from outside the US accruing to intellectual property based in tax havens would be taxed for the first time under the GILTI regime, whereas, if that IP was brought back to the US, the FDII provided a discount on the tax paid on the profits accruing from revenues earned by that IP. The GILTI and the FDII are both set at a rate of 13.125% (assuming a 21% corporate rate) ensuring that there was no longer an incentive to keep IP offshore. Being set at the same rate means they also work together. If the FDII incentive was removed without also increasing the GILTI rate, then US corporations would simply move their IP offshore, as they had under the previous incentive structure.

As will be explored in more detail later in this paper, in the years following the introduction of the TCJA, US companies responded to the new incentive structure by repatriating intellectual property from offshore jurisdictions to the US.

This clearly shows up in macroeconomic data. A study published on behalf of the Irish Finance Ministry showed royalty payments from Irish companies to the US jumping from €8bn a year on average between 2014-2019 to €52bn in 2020.6 Ireland is a key conduit used by US tech companies to move profits out of Europe.

The G7 deal

The current proposals endorsed by the G7 come in two parts. A new Global Minimum Tax, Pillar Two acts as an expanded GILTI charge, with jurisdictions that host the headquarters of multinational corporations placing a charge on the profits they accrue in tax havens.

The G7 has agreed that this should be set at a minimum 15%, however, as we have seen with the GILTI, countries can go it alone and tax the offshore profits of their corporations without international agreement. The US has said it will adopt a 21% rate and has encouraged others to do the same.

If raising taxes on profits accumulated offshore encourages companies to shift profits onshore, then jurisdictions also have more freedom to tax onshore profits.

As part of the Made in America tax plan President Biden has said that the US will scrap the FDII incentive which had already been declared a “harmful tax practice” by the OECD,7 replacing it with a new, as yet unspecified, R&D subsidy.

The removal of the FDII will mean large increases in US taxation on royalties paid from market economies to the US.

On the other side of the coin, the limited actions by market jurisdictions to claw back some income from digital services companies through digital services taxes are replaced by a limited redistribution of income from large multinational enterprises (MNEs) via the second part of the G7 deal, the so called Pillar I proposals.

Under Pillar One, the world’s largest companies see a portion of their global profits re-allocated to countries where they have a market which are then charged at the local corporate tax rate. Pillar One is limited to roughly the 100 largest corporations in the world.8

Under analysis undertaken by the OECD around the time of the publication of their blueprint for reform, the gains of the new system are weighted massively in favour of Pillar Two, with total gains from both pillars comprising between 2.3%-4% of global corporate income tax revenues and Pillar One accounting for between 0.2-0.5%.9

This is confirmed by our analysis in this paper, which shows that the real effect on four tech companies from the US plan to raise the GILTI rate to 21% and remove FDII is more than three times the additional tax those companies will see from Pillar One.

For companies subject to digital services taxes, the replacement of DSTs by Pillar One represents an effective tax cut.10 11

The impact on US based multinationals of the TJCA the G7 deal and the Made in America tax plan

Now that several years have passed since the Tax Cuts and Jobs Act, the impact of the new incentive structure on US based corporations can be seen very clearly in corporate accounts. In this part of the paper, we look at several companies and see how they have responded to the changing incentive structures they face after TCJA. The analysis shows that although some companies have chosen to repatriate the majority or all of their IP to the US, causing large and dramatic changes in their profitability overseas, some appear to have hedged, keeping some intellectual property offshore.

These companies will be impacted differently by the removal of the FDII and the increase in Global Minimum Taxation.

Shifting profits onshore

Google

In 2019 Google announced that it would no longer be licencing its IP from a Bermuda registered company, Google Ireland Holdings Unlimited Company, and instead would move its IP back to the United States.

The impact of this change on Google accounts was dramatic and immediate. The amount of profit Google declared in the United States (their US tax base) moved from $16.4bn to $37.6bn whereas the amount of profit Google declared outside of the US more than halved, from $23.2bn to $10.5bn.12

Figure 1: Alphabet (Google) 2020 10K, showing US and non-US profits.

Google explains this saying “as of December 31 2019, we have simplified our corporate legal entity structure and now license intellectual property from the U.S. that was previously licensed from Bermuda resulting in an increase in the portion of our income earned in the U.S.”

As a result of this shifting of profit to the United States, the amount of taxes paid to the United States Federal Government doubled, whereas the taxes paid to non-US governments saw a significant decline.

Figure 2: Alphabet (Google) 2020 10K, showing effective tax rates

The tradeoff that Google has made between a discount on its tax bill through the use of offshore companies, with the discount on the FDII shows up in Google’s tax reconciliation. In 2019, Google saw a 5% decrease in its effective tax rate through declaring income outside the US. In 2020, this almost disappeared, and instead the company saw a 3% reduction in its effective tax rate as a result of the FDII. This 3% is worth over $1.4bn.

In comparison, we calculate that under Pillar One, Google is likely to face an additional tax charge of just $307m.

Facebook

Turning our attention to Facebook, we see the same story again, with US profits increasing almost five fold from 2019 to 2020, while non-US profits more than halve.

Figure 3: Facebook 2020 10K, showing US and non-US profits.

In 2020 Facebook saw a 1.9% reduction in its effective tax rate resulting from “foreign-derived intangible income”, a tax break worth some $630m, whilst at the same time the effect of “non-US operations” fell from 5.8% to 2.4%.

Figure 4: Facebook 2020 10K, showing effective tax rates

It is also remarkable that the dramatic changes in where these companies locate their profits, is almost tax neutral, with Facebook’s effective tax rate being 12.8% in 2018, before their IP was repatriated, falling to 12.2% in 2020. The larger payment in 2019 can largely be attributed to a one-off increase in costs associated with “share based compensation” likely to be the impact of the Altera ruling.

Nike

For completeness, we can see that the impacts of the TCJA extend beyond the tech industry by looking at sports brand Nike, where US profits increased by almost 400%, from $593m in 2019 to almost $3bn in 2020. As this is happening, Nike’s previously profitable non-US business goes from a profit of $4.2bn in 2019 to a loss $67m in 2020.13

Figure 5: Nike 2020 10K, showing US and non-US profits

While US profits increase, we see an 8.1% reduction in the effective income tax rate as a result of “Foreign-derived intangible income benefit related to the Tax Act”. Nike state in their accounts that “This benefit became available to the Company as a result of a restructuring of its intellectual property interests”. What this means is that as a result of Nike bringing its IP back to the US, rather than sitting offshore. This 8.1% reduction is worth some $234m to Nike.14

Figure 6: Nike 2020 10K, showing effective tax rates

Remaining offshore

Although it is clear that there has been a very significant shift of profits from offshore back to the US, it appears that some US companies are hedging their bets and either only repatriating a portion of their IP, or continuing to keep all of their IP overseas.

Microsoft

Microsoft’s latest 10-K form contains the following statement:

“In the fourth quarter of fiscal year 2019, in response to the TCJA and recently issued regulations, we transferred certain intangible properties held by our foreign subsidiaries to the U.S. and Ireland. The transfers of intangible properties resulted in a $2.6 billion net income tax benefit recorded in the fourth quarter of fiscal year 2019, as the value of future tax deductions exceeded the current tax liability from foreign jurisdictions and U.S. GILTI tax.”

The reference to the one off tax benefit show that Microsoft expect that moving their IP to Ireland and the US will result in a lower tax bill in the future.

As a result of this, whereas Micrsoft’s non-US profits made up 68% of their total profits in 2018, by 2020, this had fallen to 55%.

The Microsoft tax reconciliation shows that in 2021, the company still had a substantial tax benefit arising from earnings taxed offshore of 2.7%, whilst also claiming a 1.3% deduction on their effective tax rate due to the FDII.

Figure 7: Microsoft 2020 10K, showing effective tax rates

This reconciliation table suggests that if the global minimum rate is raised to 21%, then Microsoft will have to pay an additional $1.9bn in taxation. The removal of the FDII would mean an additional $900m to pay.

Apple

Apple is another company that has seen some shift in profits to the US, but appears to be continuing to keep a substantial amount of IP offshore. In 2018, the company earned $48bn in pre-tax profit overseas (66% of total profit), this fell to $38.1bn in 2020 (57% of total profit).

The current tax rate on Apple’s non-US profits was just 8.3% in 2020.

The company stated that as a result of declaring earnings overseas, it saw a reduction in its tax bill of $2.5bn against the standard US corporation tax rate. This fell from $5.6bn in 2018 (which included a period US corporation tax rates were higher). The company does not appear to claim anything under the FDII.

Figure 8: Apple 2020 10K, showing effective tax rates

Where now?

For years multinational companies accumulated trillions of dollars in tax havens at minimal or zero tax rates. Although multinationals from all jurisdictions and in all sectors have been to some extent guilty of these practices, it was always the digital disruptors, almost all of which are headquartered in the United States, that attracted the most attention. This is recognised in the fact that the current proposals put forward by the OECD have been framed as dealing with the challenges of the digital economy, when in reality the proposals will impact a wide range of multinationals regardless of the sector they are in.

In 2017, the US government laid claim to the offshore dollars of US headquartered multinationals, directly taxing the profits they had accumulated overseas and changing their policy framework to encourage them to bring their IP onshore. This has already raised billions from the offshore cash piles of US based multinationals and seen tens of billions of dollars of profit shifted to the US from overseas, substantially increasing the US tax base.

The G7 deal reached on global tax reform largely accepts this position. Countries that host multinationals get to tax the tax haven profits of companies in their jurisdiction, with a small amount of profit from larger companies redistributed to “market” jurisdictions.

For global tech giants, almost all of which are headquartered in the US, this will mean billions of extra tax dollars for the US government – all of which arises from profits on the sales of goods and services overseas.

We calculate that an increase in the global tax rate to 21% would mean that Microsoft would pay an additional $1.9bn in taxation to the US Federal Government, Apple an additional $2.5bn, Google an extra $144m and Facebook an additional $796m based on their latest annual accounts.

The removal of the FDII, which would also see the profits arising from royalties paid from overseas taxed at the current US tax rate of 21%, would mean an additional $1.4bn in tax paid by Google to the US Federal Government, an additional $630m in taxes from Facebook and $924m from Microsoft.

In total, this means that the US will see an increase in tax on profits derived from overseas sales of $8.4bn from just these four companies. By comparison, we would expect all other jurisdictions in the world receive an additional $2.7bn combined from these companies under the Pillar One agreement.

Given the history of the debate around tax avoidance over the last 10 years, which has focused on tech companies in particular removing profits from market jurisdictions, it is remarkable that the response from Finance Ministries in other developed economies to this obvious inequality has been muted. The US appears to have won the argument that the profits arising from from the customers of US companies overseas should largely be taxed in the US.

It is the case that G7 countries will also be able to raise more from multinationals based in their home countries. For example, in the UK, the new proposals would prevent the kinds of controversial profit shifting arrangements that have been used by British companies like Vodafone to keep non-UK profits offshore, and this may well be why developed nations have accepted the Biden proposals.

However, they have done so at the expense of other market jurisdictions. Developing countries, which host very few multinationals, will see relatively little benefit from the deal. As Nigeria’s ambassador to the OECD has said “What I understand, with the . . . rules as currently being developed, is that developing countries may get next to nothing.”15

Data for Facebook, Google, Apple, and Microsoft based on 2020/21 10-K filings

Notes

  1. ‘Income’ refers to what is in US 10-K filings as ‘income before provision for income taxes’. In UK company accounts this often referred to as something along the lines of ‘profit on ordinary activities before taxation’. This is simply taxable profit.

This report is also available as a PDF here. This research was featured in The Guardian as an op-ed by our Executive Director George Turner, available here.

Photo by NASA on Unsplash

1G7 Finance Ministers Agree Historic Global Tax Agreement, G7, 05 June 2021, https://www.g7uk.org/g7-finance-ministers-agree-historic-global-tax-agreement/

2Fortune 500 Companies Hold a Record $2.6 Trillion Offshore, ITEP, 28 March 2017, https://itep.org/fortune-500-companies-hold-a-record-26-trillion-offshore/

3OECD, Key tax principles and opportunities for base erosion and profit shifting, February 2013, p.36

4An obscure court ruling could play havoc with tech companies’ earnings, Marketwatch, 18 July 2020, https://www.marketwatch.com/story/an-obscure-court-ruling-could-play-havoc-with-tech-companies-earnings-2020-07-16

5Comment: ECJ decision should not let Apple off the hook, TaxWatch, 15 July 2020, http://13.40.187.124/apple_ecj_ruling/

6Seamus Coffey, The changing nature of outbound royalties from Ireland and their impact on the taxation of the profits of US multinationals, Irish Department of Finance, https://www.gov.ie/en/publication/fbe28-the-changing-nature-of-outbound-royalties-from-ireland-and-their-impact-on-the-taxation-of-the-profits-of-us-multinationals-may-2021/

7Harmful Tax Practices, OECD, August 2021, https://www.oecd.org/tax/beps/harmful-tax-practices-peer-review-results-on-preferential-regimes.pdf

8The OECD state that “In-scope companies are the multinational enterprises (MNEs) with global turnover above 20 billion euros and profitability above 10%”. A full explanation of which companies Pillar One applies to is available in the Statement on a Two-Pillar Solution to Address the Tax Challenges Arising From the Digitalisation of the Economy, OECD, 01 July 2021, https://www.oecd.org/tax/beps/statement-on-a-two-pillar-solution-to-address-the-tax-challenges-arising-from-the-digitalisation-of-the-economy-july-2021.pdf

9OECD, Tax Challenges Arising from Digitalisation – Economic Impact Assessment, (Paris, 2020) see table 1.1 available from: https://www.oecd-ilibrary.org/docserver/0e3cc2d4-en.pdf?expires=1633339704&id=id&accname=guest&checksum=BB2899422231BC934DA03A1778EE8C89

10This is also likely the case for other countries with their own respective digital services taxes. We have not however carried out an analysis on the effect for countries other than the UK.

11Will the OECD’s global tax deal raise more from tech companies in the UK?, TaxWatch, 27 September 2021, http://13.40.187.124/oecd_pillar1_analysis/

12Alphabet Inc. 10-K 2020, SEC.gov, https://www.sec.gov/ix?doc=/Archives/edgar/data/1652044/000165204421000010/goog-20201231.htm

13Nike 10-K 2020, SEC.gov, https://s1.q4cdn.com/806093406/files/doc_financials/2020/ar/NKE-FY20-10K.pdf

14 The increase of 43.3% to the effective tax rate in 2018 is a result of the one-time mandatory transition tax on deemed repatriation of undistributed foreign earnings, part of the Tax Cuts and Jobs Act 2017.

15Biden’s global tax plan could leave developing nations ‘next to nothing’, Financial Times, 10 May 2021, https://www.ft.com/content/9f8304c5-5aad-4064-9218-54070981fb4d

Tech giants undermine African countries by failing to collect VAT

12th July 2021 by Alex Dunnagan

African countries are missing out on significant tax revenues because multinational tech giants are failing to collect and pay VAT on services, according to new research.

A new report published by TaxWatch finds that Microsoft, Google and Facebook are not collecting VAT on sales made to customers in most African countries, even in some countries where they have a local office.

The companies say that they will only collect VAT and sales taxes in countries that have levied specific taxes on digital products, claiming that it is up to the customer to pay any taxes due.

However, analysis from TaxWatch shows that these companies should be required to register for VAT under existing VAT rules in many African countries if they make significant sales.

VAT, a tax on the final consumption of goods and services, is an important source of revenue for tax authorities. An analysis from the OECD shows that on average VAT accounts for 30% of tax revenues in Africa, as opposed to taxes on individuals, which make up just 15.4%. Taxes on corporations account for 18.6% of tax revenues on average.

Since 2013 a number of African countries have changed their laws so VAT is collected on products, such as advertising, sold to customers.

The report does not make any estimate of the amount of money that could be raised if digital companies registered for VAT, as this would require detailed knowledge of the amount of sales made in each country. However, evidence from countries that have enacted a digital sales tax shows that the gains could be significant.

In 2014 South Africa became one of the first countries in the world to introduce specific legislation on VAT and digital services. The South African Revenue Service has said that it has collected an additional R600m a year since the introduction of the rules.

TaxWatch Executive Director, George Turner, said: “Big tech has for years traded on the myth that because they invoice their clients from offshore, they somehow have no obligation to pay any taxes. Our research demonstrates that this simply is not the case. If these companies have made significant sales in any country that levies VAT, then they should register to pay VAT locally.

“Google, Facebook and Microsoft wouldn’t get away with such an approach in Europe or North America anymore.

“I would encourage tax authorities across the continent to cast a close eye on the activities of these companies in their jurisdiction, and pursue them for any VAT payments that should have been made. This is likely to be a far more significant issue than any corporate tax avoidance engaged in by tech companies, as VAT makes up a far higher proportion of tax revenues than corporate profits.”

When questioned on the findings of this report, a Microsoft spokesperson stated: “Microsoft is fully compliant with all local laws and regulations in every country in which we operate. We serve customers in countries all over the world and our tax structure reflects that global footprint.”

Google did not respond to our requests for comment.

The report is available on our website here and in PDF here.

This research was featured in Law360 and PQ Magazine.

Digital Giants and VAT in Africa

12th July 2021 by Alex Dunnagan

12th July 2021

This report is available as a PDF here.

Summary

Multi-national tech giants such as Facebook, Google, and Microsoft (operating out of their Irish subsidiaries) are failing to collect VAT on sales they make in Africa – even in countries where they have local offices. This appears to be in contravention of local VAT laws requiring non-resident companies to register for VAT, and could be leading to large sums of tax going uncollected.

VAT and Digital Services

Value Added Tax (VAT), known as a goods and services tax (GST) in many jurisdictions, is designed to be a broad based tax on the final consumption of goods and services.1 As such it is a major source of revenues for governments around the world. In Africa VAT accounts for on average around 30% of government revenues.2

VAT is a destination based tax, where the tax rate is based on the location of the consumer. The tax is usually collected by the seller, and is often applied to the sales price. Businesses can claim back the VAT that has been added to goods and services they have bought if they are used in the making of other supplies that are subject to VAT.

For example, a business selling cars adds VAT to the price of the cars it sells. It also buys advertising from a third party to encourage people to buy its cars. While the supply of advertising services to the car seller would be subject to VAT, the advertising firm would be able to offset that “output VAT” against its own “input VAT” costs, such as billboard hire.

When the car seller calculates the VAT they need to send to the tax authority, it is able to deduct the VAT it has paid on the purchase of the adverts. The effect of this is that VAT is assessed on the value added on each part of the production process but ultimately borne by the final consumer and collected by the final seller of the goods.

For similar reasons VAT is not charged on exports by a country exporting goods and services, but is charged on imports of goods.

VAT and the digital economy

VAT has been a particular problem for tax administrations when applied to digital services.

Goods imported into a country cross physical borders where checks can be carried out and taxes levied. Digital services provided remotely are not subject to border checks. This can make it very difficult for tax authorities to enforce VAT charges on digital services provided from abroad.

This is an issue that tax authorities and the OECD have been aware about for some time. In 2013 South Africa announced it would be one of the first countries in the world to introduce specific rules on VAT on digital companies.

The National Treasury stated at the time:

“The current application of VAT on imports does not lend itself to the effective enforcement on imported services or e-commerce where no border posts (or parcel delivery agents like the Post Office) can perform the function as collecting agents, as is the case with physical goods”.3

After initial regulations were introduced in 2014, which only applied to a limited amount of electronic services, further legislation came into effect on 01 April 2019, widening the definition of electronic services to include any “electronic services” supplied by an electronic agent, electronic communication or the Internet.45 This widening of the net encompasses anything from software to advertising services.

In 2012 the OECD set up the Global Forum on VAT. This resulted in the publication of a set of guidelines for VAT in 2016.6 Following the BEPS process, the OECD recommended that countries adopt the guidelines to assist with combating tax avoidance in the digital sector in September 2016. These guidelines included the destination principle, which obliges non-resident sellers to pay VAT in the country that they sell their goods. This often requires sellers from overseas to register for VAT or to appoint a local agent to be responsible for their VAT payments.

In 2019 it was reported that there were over half a billion monthly internet users in Africa, more than in Latin America, North America, or the Middle East.7 As internet penetration in Africa grows, so to will the scale of the problem.

Do laws need updating?

The position of some companies is that without new legislation, there is no obligation to collect or pay VAT.8 Our research shows that the issue is with compliance and enforcement, not with the law itself. Legislation doesn’t need to be updated in order to require foreign digital advertisers to collect tax.

We found that the major suppliers of digital advertising services are not applying the law with regard to VAT in Africa, irrespective of whether or not legislation has been updated.

Looking at VAT legislation in many African countries, it is clear that non-resident companies are required to either register as a VAT vendor in the host country, or, to appoint a registered local representative.

Below we have highlighted a select few African countries where the standard message from digital advertising companies is that it is for the customer to self-assess, whether they should be paying VAT.

Algeria

Algeria introduced new VAT rules on foreign suppliers in January 2020,9 which confirms that operations carried out over the internet are subject to VAT, and that there is no VAT liability threshold.10

Angola

Angola introduced new VAT rules in October 2019, with a January 2020 Administrative Ruling stating that digital service suppliers are required to register with the Angolan Tax Authority, appoint a representative in country, to collect and pay VAT in Angola.11

Cameroon

Cameroon changed its VAT rules for foreign suppliers of e-commerce in December 2019, with suppliers now having to register with the country’s tax authority in order to meet their obligations.12

Since October 2020, Facebook has begun adding VAT to Cameroonian invoices. Microsoft and Google have not followed suit.

Ghana

With a threshold of GH¢200,000 (approximately £25,000), VAT applies to the supply of telecom, broadcast, data and electronic services to consumers.13

Kenya

The Kenyan Revenue Authority has announced its intention to crack down on VAT dodging by tech companies, saying that it would work with the Communications Authority of Kenya to get information on which companies are selling into the country.

The KRA deputy commissioner for corporate policy, Maurice Oray, said:

“If you are a resident here, you are supposed to pay the taxes the normal way. If you are not a resident but you have an app that’s being used here, your tax representative (a requirement under Section 16 of Tax Procedures Act) must pay your VAT and income tax.”14

Since April 2021, Facebook has begun adding VAT to Kenyan invoices. Microsoft and Google have not followed suit.

Malawi

Though it wasn’t always the case, Malawi reintroduced VAT on internet service from July 2013.15 Malawi has a VAT threshold of MWK 10m (approximately £9,500).

Namibia

With a VAT threshold of NAD 500,000 (approximately £24,5000), there are no special rules for the taxation of the digital economy in Namibia.16

Nigeria

Section 10 of Nigeria’s Value Added Tax Act 1993 No.102, states:

“(1) For the purpose of this Act, a non-resident company that carries on business in Nigeria shall register for the tax with the Board, using the address of the person with whom it has a subsisting contract, as its address for purposes of correspondence relating to the tax.

(2) A non-resident company shall include the tax in its invoice and the person to whom the goods or services are supplied in Nigeria shall remit the tax in the currency of the transaction.”17

It appears companies such as Google, Facebook, and Microsoft are required to include VAT in their invoices so that the customer to whom the supply is made in Nigeria can remit the VAT to the tax authority. There is a similar situation in many other African countries.

Tanzania

The Tanzanian VAT Act was updated in 2015, clarifying that digital and electronic services provided to consumers are subject to VAT.18

Uganda

Uganda has clarified the requirements for foreign providers of digital services to levy 18% VAT on sales to local consumers, and that non-resident providers must register with the Ugandan Revenue Authority.19

Despite several of these countries updating their legislation, and many saying explicitly that VAT should be charged on the supply of digital services by foreign suppliers, it appears that the online advertising companies didn’t get the memo.

Digital advertisers in Africa

Google, Microsoft and Facebook all run their Europe, Middle East, and Africa (EMEA) operations out of Ireland. Despite being classed as one region for administrative purposes, the continent of Africa is treated very differently to that of Europe.

We made a test purchase of Google advertising in the UK, advertising TaxWatch, and received an invoice which did include VAT. However, according to Google’s own website it does not charge VAT on purchases made in most parts of Africa.

Any output VAT Google collects in relation to supplies to UK customers could be offset against Google UK’s input VAT expenses. By contrast, there is no such incentive to collect output VAT in those African countries where Google does not have input VAT costs. Absent the opportunity to offset input VAT, the incentive flips: VAT-free sales are preferred because the lower cost to the consumer is likely to boost sales volumes.

Outside of the European Union, and South Africa, customers seeking information on VAT on the Google website are told “Google can’t charge VAT if your billing address is in a country that’s not part of the European Union”.20 The use of the word ‘can’t’ is clearly incorrect, because the company does charge VAT on South African accounts.

Instead, potential customers are told that they should self assess as to whether they should pay the VAT themselves. It is likely that many people do not self-assess, and any VAT that is required to be paid is lost. If those that are required to self-assess do not, then they themselves are committing tax evasion.

Google did not respond to our requests for comment.

Facebook appears to have a similar policy. Setting out the following on their website:

“If your country isn’t listed, that means we don’t have tax information for that country. Please contact your local tax authority for this information.”21

The site then sets out the position in a number of countries where VAT is added to the bill. The countries listed by Facebook include South Africa, Zimbabwe, and Cameroon where it is stated that VAT will be added to invoices where the customer is located in those countries. For Zimbabwe and Cameroon, this is a relatively recent addition with the site stating that it started to add VAT in those countries from late 2020. A Ghanaian Facebook advertising invoice seen by TaxWatch showed only the cost and an Irish VAT registration number – no VAT had been added to the bill.

When asked why Facebook doesn’t charge VAT on advertising sales made outside of the EU, the response we were given was:

“Facebook is registered, charging and remitting VAT in countries outside of the EU where applicable legislation has been implemented requiring foreign providers to tax the supply of electronic services (e-services). Tax regulations vary country by country. In general the e-services regimes apply to the supply of services to consumers. Advertising is, in general, supplied for business purposes. For example, in South Africa, the e-service VAT regime developed over the years and it is now applicable to the supply of e-services to both businesses and consumers. FB is registered, charges and remits applicable VAT. “22

Facebook’s statement does not appear to be accurate. Ghana’s VAT Act specifically says that non-residents who provide “telecommunication services or electronic commerce” must register if they are likely to make sales exceeding 120,000 Ghana Cedis ($20,900) per year.23 However, Facebook’s pages on VAT do not mention Ghana.

With a population of 30 million, we suspect that Google Ads likely exceeds this low threshold.24 We questioned Google as to the value of their advertising sales in Ghana, but the company refused to comment. Microsoft’s website states explicitly that it does not charge VAT on advertising in African countries (outside of South Africa) – stating that it is not required to do so.25



When questioned on the findings of this report, a Microsoft spokesperson stated “Microsoft is fully compliant with all Local laws and regulations in every country in which we operate. We serve customers in countries all over the world and our tax structure reflects that global footprint.”

Even without a physical presence, Microsoft operates in every country in which it does business. As a global seller of software and advertising, that includes African countries in which it is required to collect VAT.

All of these approaches appear to run counter to the law in many African countries, which states that non-resident companies should register for VAT if they are selling into those countries.

Legislation in many African countries is clear that non-resident companies are required to either register as a “VAT vendor” in the host country or to appoint a registered local representative. This is also stated in tax briefings prepared by large accountancy firms for the region.

Impacts

It is beyond the scope of this study to determine the impact of non-compliance on the continent as a whole. This would require substantial work to calculate and necessitate detailed knowledge of advertising sales in each country. It would also be complicated by the fact that many businesses that purchase advertising would largely be able to reclaim the VAT paid on advertising sales.

However, there are important consumers of advertising who do not provide services which are subject to VAT and therefore would be subject to VAT on their purchases of advertising. This includes political parties and NGOs.

In addition, commissions earned on online marketplaces (for example the Google Play Store) would be subject to VAT.

In South Africa, Prenesh Ramphal of the South African Revenue Service (SARS) has stated that between 2014 and 2019, the new regulations implemented there collected in excess of R600 million ($43 million) a year – around R3 billion ($215 million) in its first five years.26 With the 2019 addition to the regulation casting the net further to include all electronic services, SARS can expect to collect even larger amounts of VAT in future years.

VAT legislation is clear that non-resident sellers should be collecting VAT on behalf of the local tax authorities. We believe that tax authorities on the continent should take a close look at whether the digital giants have incurred substantial VAT liabilities in their jurisdictions which have yet to be paid.

 

1VAT is collected fractionally, via a system of partial payments whereby taxable persons deduct from the VAT they have collected the amount of tax they have paid to other taxable persons on purchases for their business activities. It is a consumption tax because it is borne ultimately by the final consumer.

2OECD, Revenue Statistics in Africa 2020, https://www.oecd.org/tax/tax-policy/brochure-revenue-statistics-africa.pdf

3Electronic Services Regulations, Parliamentary Monitoring Group, 04 February 2014, https://pmg.org.za/call-for-comment/162/

4Regulators widen definition of ‘electronic services’, IT Web, 07 June 2019, https://www.itweb.co.za/content/mQwkoq6KbYmv3r9A

5Prepare for tax in digital economy, Mail & Guardian, 24 May 2019, https://mg.co.za/article/2019-05-24-00-prepare-for-tax-in-digital-economy

6International VAT/GST Guidelines, OECD, 12 April 2017, https://www.oecd.org/ctp/international-vat-gst-guidelines-9789264271401-en.htm

7Last Month, Over Half-a-Billion Africans Accessed the Internet, Council on Foreign Relations, 25 July 2019, https://www.cfr.org/blog/last-month-over-half-billion-africans-accessed-internet

8Email from Facebook sent to TaxWatch 19 August 2020

9Algeria will levy VAT on Digital Services, Global VAT Compliance, 20 March 2020, https://www.globalvatcompliance.com/algeria-will-levy-vat-on-digital-services/

10Algeria enacts 2020 Finance Act, EY, https://taxnews.ey.com/news/2020-0159-algeria-enacts-2020-finance-act

11Angola VAT system introduced, replacing old consumption tax, Taxamo, 20 January 2020, https://blog.taxamo.com/insights/angola-vat-system-introduction

12Section 149c of the 2020 Finance Law, it states “The VAT due on commissions received on sales in Cameroon through e-commerce platforms shall be declared and paid into the Treasury by the operators of these platforms”, https://www.prc.cm/en/multimedia/documents/8033-law-2019-023-of-24-dec-2019-of-2020-financial-year

13Ghana VAT on foreign B2C digital service providers, Avara, 22 November 2015, https://www.avalara.com/vatlive/en/vat-news/ghana-vat-on-foreign-b2c-digital-service-providers.html

14Kenyan Revenue Authority to commence taxing income-generating apps, Techpoint Africa, 15 August 2019, https://techpoint.africa/2019/08/15/kenyan-revenue-authority-taxing-apps/

15Malawi re-imposes internet services VAT, Avalara, 29 July 2013, https://www.avalara.com/vatlive/en/vat-news/malawi-re-imposes-internet-services-vat.html

16Namibia – Indirect Tax Guide, KPMG, https://home.kpmg/xx/en/home/insights/2019/02/namibia-indirect-tax-guide.html

17Nigeria Value Added Tax Act 1993, https://www.firs.gov.ng/sites/Authoring/contentLibrary/035860b3-9ecf-400f-8d03-4335e4be5d19Value%20Added%20Tax%20(VAT).pdf

18Tanzania VAT changes, Avalara, 02 July 2015, https://www.avalara.com/vatlive/en/vat-news/tanzania-vat-changes.html

19Uganda VAT on foreign e-services, Avalara, 27 October 2019, https://www.avalara.com/vatlive/en/vat-news/uganda-vat-on-foreign-e-services.html#:~:text=Uganda%20has%20clarified%20the%20requirements,online%20clubs%3B%20and%20dating%20websites.

20Taxes in your country, Google Support, https://support.google.com/google-ads/answer/2375370?hl=en-GB

21Will I be charged tax on my purchases of Facebook ads?, Facebook, 16 July 2020, https://www.facebook.com/business/help/133076073434794

22Email sent to TaxWatch 19 August 2020

23Section 6 of Value Added Tax Act 2013, https://gra.gov.gh/wp-content/uploads/2018/11/vat_act_870.pdf

24Alphabet Inc. 10-k for fiscal year ended December 31 2018, reveals that the revenue for Google Ads in the Europe, Middle East and Africa (EMEA) region was $44.5bn in 2018. This means that Google would only have to generate 0.000047% of its EMEA revenue from Ghana in order to cross the threshold requiring the company to register for VAT.

25Tax or VAT information, Microsoft Ads, https://help.ads.microsoft.com/apex/index/3/en/52032

26New VAT rules lead global tax reform, Mail & Guardian, 26 April 2019,  https://mg.co.za/article/2019-04-26-00-new-vat-rules-lead-global-tax-reform

Eight tech companies in the UK avoided an estimated £1.5bn in 2019 – New Research

2nd June 2021 by Alex Dunnagan
  • £45.4bn in revenues
  • £9.6bn in profits
  • £296m in tax paid
  • £1.5bn in tax avoided

Eight large tech companies in the UK made an estimated £9.6bn in profit from sales to UK customers in 2019, a new analysis by TaxWatch shows.

​But by moving money out of the UK, these companies ended up declaring a fraction of these profits in the accounts of their UK subsidiaries, radically reducing their tax liabilities.

​Amazon, eBay, Adobe, Google, Cisco, Facebook, Microsoft, and Apple faced UK corporation tax liabilities of £297 million in 2019.

That puts the total amount of tax avoided by the companies in the UK at an estimated £1.5bn in 2019, the latest year where figures exist.

Large US-based technology companies have tens of millions of UK users and make billions in sales to UK customers. The UK is unarguably a significant source of corporate profits for these companies. But a glance at the accounts of their UK-based subsidiaries shows that little of this profit ends up in the UK.

As Finance Ministers seek to negotiate a new international settlement on how large multinational companies should be taxed, understanding the scale of tax avoidance by global digital giants is key to evaluating the outcomes of any deal.

​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. Last year we updated these figures taking 2018 into account. This year three companies were added to our analysis, eBay, Adobe, and Amazon.

The full report is available here, and as a PDF here.

This report featured on ITV News, Channel 4 News, and in several newspapers.

Eight tech companies in the UK avoided an estimated £1.5bn in 2019

2nd June 2021 by Alex Dunnagan

2nd June 2021

Introduction and Summary

The UK market is an extremely important market for US based technology companies. These well known companies realise substantial sales in the UK and as such are some of the most significant economic operators in our country.

For example, In 2020 Amazon made £19.4bn in sales to UK customers, a 50% rise on the previous year and more than 20 times the largest physical bookseller in the UK, Waterstones.1

It sold more goods to UK customers than Morrisons, the fourth largest supermarket chain in the country. The advertising revenues of Google and Facebook now surpass those made by ITV, or major publishers such as News UK, the owners of the Times Newspapers.

Given how profitable the digital economy has proved to be, the vast sales made by the global digital giants should result in these companies being some of the largest corporate tax payers in the UK. However, the accounts of the UK businesses of these major international companies show that very little profit is ever declared in the UK and as such, little corporation tax is paid on the profits these companies make from UK customers. These profits have instead re-appeared in tax havens where the company pays little or no tax at all.

TaxWatch has been tracking the tax payments, revenues and profits of the tech giants in the UK since we began in 2018. Each year we have sought to estimate the amount of revenues generated by UK customers of major tech companies, how much profit should be attributed to those sales, and how much tax has been avoided by these companies by moving their profits offshore.

This year our analysis takes on a special significance, as Finance Ministers seek to negotiate a new international settlement on how large multinational companies should be taxed. Understanding the scale of tax avoidance by global digital giants is key to evaluating the outcomes of any deal.

In 2018, we started by looking at the top five tech companies, Apple, Alphabet, Facebook, Microsoft and Cisco Systems. This year we have added Amazon, eBay and Adobe. The numbers we produce below are for the 2019 financial year, which is before the impact of the Covid-19 pandemic. The reason for this is that the UK accounts for the companies in our study are only available to 2019.

Our analysis has a simple methodology. We look at the global profit margin of a company, the percentage pre-tax profit the company make on every dollar of sales. This is the average profit the company makes across all operations in all jurisdictions. We then apply that average profit margin to the amount of sales made in the UK to calculate the amount of profit generated in the UK. The UK sales are either taken directly from the global accounts of the company where they are reported, or estimated using a variety of different methodologies. We then apply the UK headline tax rate to the amount of profit estimated for the UK, which gives us an estimate of the tax liability that each company should have in the UK. We then compare this to the actual taxes paid in the UK by their local subsidiaries.

It should be stressed that the figures we produce are estimates of the profits made by these companies in the UK. They are not definitive, however, in the absence of any accurate reporting on profits made from UK customers by major multinational companies, we believe our methodology gives a good understanding of the amount of profit made by each company in the UK.

We gave each company the opportunity to respond to our figures. Most declined. Amazon strongly disputed our figures. Facebook told us that they had long supported efforts to reform the international tax system and that currently the tax system does not allocate profits to where customers are located.

There are good economic reasons for taking this approach we have taken to attributing profit to the UK. As companies move into new markets, sales volumes increase and the marginal cost of production falls. As a result, the profit on each unit of sales increase. As most companies start in their home market and then move to new markets at a later stage of development then their profits will be higher in their foreign operations.

The accounts of the major tech giants appear to support this theory, with profit margins higher on non-US sales than on US sales. For example, in 2019, 79% of Facebook’s profits were made outside the US, even though non-US sales only accounted for 55% of revenues. Adobe reported that it made 86% of its profits outside the United States in 2019, despite the majority of its sales being to US customers.

By using the average profit margin across the group of companies, it means that the sales made in foreign jurisdictions share the costs of product development and other costs with the home jurisdiction. Our methodology therefore arguably underestimates the true scale of tax avoidance in some of the companies in our study.

Results

We find based on our estimates of profit arising from the UK market, that the eight global tech giants underpay their taxes by £1.5bn a year. The majority of this comes from just two companies. The largest tax avoider based on our methodology is Apple, which sees an underpayment of £518m, followed by Alphabet (Google), with £452m.

This is a significant finding. The current solution put forward by the OECD to redistribute profits made by large multinationals to countries like the UK (known as the Pillar One proposals) foresees a total tax benefit of between $5-$12bn across all jurisdictions (i.e. not just the UK) on an analysis which was based on a dataset of 27,000 multinational groups.2

In fact, the OECD proposal which would only seek to redistribute profits that exceeded “routine profits” set at a 10% margin may mean that a company like Amazon would not be impacted at all.

The impact of global minimum levels of taxation on the tech giants

Although US based global tech giants have traditionally paid very little in corporate taxation in markets such as the UK, companies do pay taxes in the US. Indeed, in defence of their position, Facebook told that they pay the majority of their taxes in the US.

This was clearly demonstrated in our research published in April 2020, which found that the effective tax rate of several large technology companies was four times higher in US than the rest of the world. In simple terms, this means that US corporations pay four times more tax on each dollar profit they make in the US than they do on each dollar of profit their make outside of the US.

It is important to be clear that the significant tax bills that these companies face in the US have historically not been the product of profits from Europe being moved back to the United States to be taxed there. Large US corporations with a significant presence both in the US and the rest of the world pay their taxes on profits arising from sales to US customers, but by moving profits out of foreign jurisdictions into tax havens, effectively eliminate taxes paid on taxes on profits declared in the rest of the world – which make up a significant amount of the total profits of these companies. The result of this is that the effective tax rates of these corporations have sat between the US headline rate and zero.

To some extent this changed in 2017, when US tax reform introduced a form global minimum taxation, the GILTI, a charge placed on the profits of US corporations declared in tax havens. In addition, the 2017 reforms included a form of tax subsidy on profits moved back to the United States, the FDII. This provided a powerful incentive for companies to move their profits back to the United States where they would be taxed at a lower rate.

More research is needed to look at how firms responded to this change. However it is clear that Google responded by moving more profit back to the US. This is clearly shown in the latest Google 10-K which shows that between 2019 and 2020 the amount of profit the company allocated to its international operations (which previously almost all arose in Bermuda) declined by more than 50% from $23bn to $10.5bn. All of that profit re-appeared in the United States which saw its share of Google’s profits jump from $16bn to $37bn over the same period. The net result of this is that US federal tax payments more than doubled from $2.4bn in 2019 to $4.8bn in 2020, whilst taxes paid to non-US governments declined from $2.7bn to $1.7bn.

All of this highlights the fundamental importance of distribution in any agreement on global tax reform that ensures that more profit is allocated to the countries where real economic activity, users and customers are located. Countries should also reserve the right to take unilateral action to ensure that profits are properly taxed in their jurisdiction regardless of any deal on global minimum rates.

Could a global minimum tax rate benefit the UK?

There has been much confusion over the idea of global minimum tax rates, with even some Finance Ministers appearing to misunderstand what a global minimum means in practice. A global minimum tax rate is not an agreement between all countries of the world to increase their tax rates above a minimum level.

Instead a global minimum can be imposed by countries on companies headquartered in their jurisdiction on profits that arise overseas (the US already has a form of global minimum taxation).

When a company moves profits into tax havens, the tax administration in its home jurisdiction places an additional tax charge to top up the tax payments of the company. This severely limits the potential benefits of a tax haven.

This means that in practice, it simply does not matter if any jurisdiction refuses to sign up to a minimum tax rate as the finance ministers of Ireland, or Hungary have threatened. If a jurisdiction adopts a tax rate below the global minimum imposed on a foreign multinational corporation operating in country, all that will happen is that the country with the lower rate will be giving up tax revenues to the multinational’s home country.

The negotiations at an OECD level are for OECD members and other jurisdictions to co-ordinate economic policy so that each jurisdiction will impose a minimum tax on its corporations, resulting in a patchwork of rules that will create a system of global minimum taxation.

Although global minimum tax rates therefore primarily benefit the home jurisdictions of any multinational companies they apply to, there are benefits to the UK of adopting the policy and there are broader benefits that arise to all jurisdictions. Firstly, the UK is itself home to a great number of multinational corporations that themselves avoid taxes on their foreign profits. UK participation in a system of global minimum taxation would therefore ensure that substantial amounts of revenues could be raised from UK multinationals.

Secondly, the policy mitigates against the tendency for some jurisdictions to engage in a race to the bottom through cutting taxes to encourage foreign multinationals to establish subsidiaries in their countries. It places a floor on the race to the bottom where previously there was none.

Thirdly, the disincentive to use tax havens means that profit shifting is less likely. There are multiple costs to profit shifting through the potential for enforcement action, reputational damage, and the cost of paying tax advisors to create schemes. Reducing the incentive on companies to engage in profit shifting may therefore mean that fewer companies engage in the practice. Less profit shifitng will benefit the UK.

Finally, there are also some measures currently being negotiated as part of the OECD global minimum tax rate package that seek to protect the tax bases of non-home country jurisdictions. But it is not clear how effective these will be.

However, as long as there is a difference between the global minimum rate applied to any particular company, and the headline corporation tax rate of the country where they operate, there will be an incentive for companies to shift profits could remain. For example, if the global minimum rate applied to US corporations by the US Government was 21%, and the UK headline rate rises to 25% as planned, then there will still be an incentive to move profits out of the UK and into tax havens, or back to the US.

As such, it is in the UK’s interests to seek to negotiate a global minimum rate of taxation at least as high as 25%, the rate which the UK Government is currently seeking to legislate for.

Figures

eBay

The online marketplace eBay launched in the UK back in 1999. eBay’s 10-K shows a global pre-tax margin of 20%, and UK revenues of £997,172,883 for 2019, which gives us an estimated profit on UK revenues of £201,951,765.

With the UK’s 19% corporate tax rate, this means eBay had an estimated UK tax liability of £38.4m.

eBay UK had a UK current tax charge of £5,260,000 in 2019.

Based on the above, we estimate eBay avoided £33m in UK taxes in 2019.

eBay did not respond to our request for comment.

Adobe

Adobe’s 10-K shows a global margin of 33%, and UK revenues of £616,487,008 for 2019, which gives us an estimated profit on UK revenues of £205m. With the UK’s 19% corporate tax rate, this means Adobe had an estimated UK tax liability of £39m.

Adobe Systems Europe Limited, a UK company, had a £2,040,000 tax charge in 2019.

Based on the above, we estimate Adobe avoided £37m in UK taxes in 2019.

Adobe did not respond to our request for comment.

Amazon

Amazon’s 10-K shows a global pre-tax margin of 5%, and Amazon have confirmed to us that their UK revenues for 2019 were £13,730,000,000,3 which gives us an estimated profit on UK revenues of £684m.

With the UK’s 19% corporate tax rate, this means Amazon had an estimated UK tax liability of £130m

Amazon Services UK Limited and Amazon Web Services UK Limited had a £14,582,000 current tax charge in 2019 between them.

It is the case that Amazon’s Luxembourg operation, which is the entity that charges UK customers, reports its profits and revenues directly to HMRC (although it does not provide figures for the UK publicly). We assume that this entity did not have a significant UK tax liability because its accounts show that it is loss making.

Based on the above, we estimate Amazon avoided £115m in UK taxes in 2019.

Amazon responded to our request for comment, with an Amazon spokesperson saying:

“These calculations are wildly inaccurate, and do not include the majority of taxes we pay in the UK. Our total tax contribution in the UK was £1.1 billion during 2019 – £293m in direct taxes and £854m in indirect taxes. During 2019, our international consumer business was loss-making as we continued to invest heavily.”

Alphabet (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 2019 global revenues to estimate the revenues generated from the UK in 2019.

Alphabet’s US 10-K shows a profit margin of 24%. Using this margin, we estimate the profits on UK revenues to be £2,689bn.

At a 19% UK corporation tax rate, that would amount to a tax liability of £511m.

Google UK Limited’s accounts show a current UK tax charge for 2019 of £58,987,000.

Based on the above, we estimate Alphabet avoided £452m in UK taxes in 2019.

Alphabet did not respond to our request for comment.

Cisco

The accounts of Cisco Systems International report separately on the revenues the company makes from UK sales, which were £1,699,691,993 in 2019.

Cisco’s US 10-K shows a pre-tax margin of 28%. Using this margin, we estimate the profits on UK revenues to be £616m.

At a 19% UK corporation tax rate, that would amount to a tax liability of £117m.

In 2019, Cisco International Limited and another UK subsidiary, Cisco Systems Limited, were charged £48,919,131 in tax between them.

Based on the above, we estimate Cisco avoided £68m in UK taxes in 2019.

Cisco did not provide us with a comment on our findings.

Facebook

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. Using the online tool Napoleon Cat, we calculated an average of 42,000,000 Facebook users in the UK for 2019.

On the basis of these numbers we estimate Facebook’s revenues from the UK to be £2.9bn in 2019.

Facebook’s US 10-K shows a pre-tax margin of 35%. Using this margin, we estimate the profits on UK revenues to be just over £1bn. At a 19% UK corporation tax rate, that would amount to a tax liability of £194m.

Facebook’s UK accounts show a current UK tax charge for 2019 of £40,049,000.

Based on the above, we estimate Facebook avoided £154m in UK taxes in 2019.

We spoke with Facebook, who informed us that they have changed their structures to be more transparent about where they generate revenue, including in the UK. Facebook have stated that they have long supported the OECD process which is looking at new international tax rules for the digital company.4 They also said that currently the tax system does not allocate profits to jurisdictions where customers are located and pay the majority of their taxes in the United States.

Microsoft

Microsoft’s UK accounts do not disclose any information about how much the company earns from UK customers. All of the revenue earned by Microsoft’s main UK subsidiary, Microsoft Limited, is income earned from other Microsoft subsidiaries.

Microsoft’s UK sales are booked by an Irish subsidiary, Microsoft Ireland Operations Limited. Its accounts provided a figure for revenues earned from the UK until 2015. 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 2019 we applied an average of 3.44% to the global revenue of Microsoft.

We estimate that Microsoft generated revenues of £3.4bn in 2019 from UK customers. This would yield an estimated profit of £1.2bn and a tax bill of £2225m in 2019. Microsoft Limited had a tax bill of £34,194,000 in 2019.

Based on the above, we estimate Microsoft avoided £191m in UK taxes in 2019.

Microsoft did not respond to our request for comment.

Apple

Our figures for how much revenue Apple makes from the UK market is derived from an estimate of 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 accounted for 6% of Apple’s global iPhone sales. If we assume that other Apple products have a similar market share in the UK, and that the amount UK is worth as a per cent of the global total remained the same, then in 2019 Apple would have made revenues of £12.7bn in the UK.

Applying Apple’s global pre-tax profit margin of 25% implies an estimated profit of £3,2bn and a tax bill (at the UK’s 19% corporation tax rate) of £610m.

Apple (UK) Ltd, Apple Europe Ltd, and Apple Retail UK had a £92,839,000 UK tax charge between them in 2019.

Based on the above, we estimate Apple avoided £517m in UK taxes in 2019.

Apple did not respond to our request for comment.

eBay

Adobe

Amazon

Google

Cisco

Facebook

Microsoft

Apple

Total

Current UK Tax Charge

£5,260,000

£2,040,000

£14,582,000

£58,987,000

£48,919,132

£40,049,000

£34,194,000

£92,839,000

£ 296,870,132

UK Estimated Revenues

£997,172,883

£616,487,008

£13,730,000,000

£10,979,551,791

£1,699,691,993

£2,904,305,592

£3,408,827,130

£12,699,873,462

£ 47,035,909,859

Estimated Profits on UK Revenues

£201,951,757

£205,090,395

£684,047,882

£2,687,957,516

£616,194,000

£1,019,302,521

£ 1,183,417,748

£3,208,820,181

£ 9,806,782,000

UK Estimated Tax Liability

£38,370,834

£38,967,175

£129,969,098

£510,711,928

£117,076,860

£193,667,479

£ 224,849,372

£609,675,834

£ 1,863,288,580

Estimated UK Tax Avoided

£33,110,834

£36,927,175

£115,387,098

£451,724,928

£68,157,728

£153,618,479

£ 190,655,372

£516,836,834

£1,566,418,448

This report is available as a PDF here.

 

1 Amazon reports UK sales rose by 51% in 2020, The Guardian, 03 February 2021, https://www.theguardian.com/technology/2021/feb/03/amazon-reports-uk-sales-rose-by-51-in-2020

2 Tax revenue effects of Pillar One, Tax Challenges Arising from Digitalisation – Economic Impact Assessment, OECD, 12 October 2020, https://www.oecd-ilibrary.org/sites/0e3cc2d4-en/1/3/2/index.html?itemId=/content/publication/0e3cc2d4-en&_csp_=60cbdb3f912de71310706737fc50a27f&itemIGO=oecd&itemContentType=book

3 Email from Amazon to TaxWatch, 31 May 2021

4 Facebook boss ‘happy to pay more tax in Europe’, BBC News, 14 February 2020, https://www.bbc.co.uk/news/business-51497961

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

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.

How much profit are Google, Apple, Facebook, Cisco and Microsoft making in the UK?

6th November 2018 by George Turner

How should profit be distributed within the modern multinational corporation? That is the key question at the heart of the debate on international tax avoidance, and one touched on by Taxwatch’s first report.

The aspiration of the OECD reforms to the international corporate tax system is to better align taxable profits to where value is created. However, what itself constitutes ‘value’ is a disputed concept, which is being discussed between international negotiators at this very moment. The UK government for example, feels that a significant amount of ‘value creation’ comes from the users of social media sites, which is the position they are currently taking in OECD negotiations.

Some argue that the “value” of products sold by large American technology companies is made in the United States, where the engineers and designers create the product. For that reason, under international tax rules profit is properly allocated to the US. The operations of these multinational companies in the UK are limited to less profitable activities such as sales and marketing. That is why so little profit shows up in the UK accounts of the subsidiaries of these companies and why so little tax is due. The scale of tax avoidance, they argue, is far lower than has been claimed, if it exists at all.

This is an argument which is shared by the corporate interests themselves.

Apple wrote to Taxwatch in advance of the publication of our first report to say that it is “indisputable” that the vast majority of the value of their products is created in the United States of America – and for that reason, most of the company’s tax bill arises in the United States of America.

This argument may appear logical – but does it correspond to the facts?

Current tax rules are not concerned with a measure of value, but with profits. Are US corporations allocating the profits of their business activities to the US, where all that design, product development and entrepreneurial innovation takes place?

No they are not. Indisputably.

As part of their US corporate filings, Apple, Google, Cisco and Facebook all declare how much of their pre-tax profit they say is made overseas, and how much is made in the US. These figures appear as part of their tax note in order to help investors better understand their tax bill.

If you analyse those figures, you find that these companies are telling investors that the majority of their pre-tax (and post tax for that matter) profit is made outside the US.

In Apple’s case their US filings show that 70% of their pre-tax profit is made outside the US. In 2017, Cisco reported that a staggering 81% of their pre-tax profit was made overseas.

Below are two tables showing how much profit Google, Cisco, Facebook and Apple declared in their accounts as being earned outside the United States, and the percentage that number represents of their global pre-tax profit.

Google, Apple, Facebook and Cisco non US profits

Why aren’t the profits in the US? It appears from the accounts that these companies are not recharging any of their group costs to their non-US subsidiaries, as they are entitled to do. The companies pay for all of their R&D costs, all of their product design, and all of their group administrative costs from their US revenues. This results in lower profit margins for the US business. Their overseas businesses, freed from any obligation to pay for the product design and innovation that are a significant part of the business, see their profits rocket (before zooming offshore).

Why are they set up like this? Probably because it is harder to avoid tax in the US, so why not get as much cost on the income statement as possible, and make all your profit overseas where those profits can be kept offshore and tax free.

Now all that is fine if the companies want to do that, but it then becomes very difficult to argue that these companies should face barely any tax charge in Europe.

After the publication of our first report, which sought to estimate how much profit was being made by 5 US tech companies from UK customers, and compared those estimates to the (very low) profits being declared in the accounts of their UK subsidiaries, there were some who criticised the report by arguing that the numbers we produced failed to recognise the reality of current tax rules, which rewarded the product designers and the innovators. The same argument of course made by Apple.

The irony of this argument is that the methodology in the Tax Watch report, which used the global average profit margins of companies, allocates more R&D and administrative costs to the European operations of Apple, Google, Microsoft, Cisco and Facebook than the companies themselves do!

The final question this raises is this. If these companies are not charging their European subsidiaries for R&D etc, and if they claim that the majority of their pre-tax profit is made outside the US, then how are they paying so little in Europe?

This confirms that most of the profit being made outside the US is being shifted towards tax havens. Indeed the companies themselves admit this. Microsoft’s 10-K contains the following statement:

Our foreign regional operating centres in Ireland, Singapore and Puerto Rico, which are taxed at rates lower than the U.S. rate, generated 87%, 76%, and 91% of our foreign income before tax in fiscal years 2018, 2017, and 2016, respectively.

Google say:

“Substantially all of the income from foreign operations was earned by an Irish subsidiary.”

Could it really be that he majority of the value of Google’s business is generated in Ireland? What on earth are all those people in California doing? Time for a restructuring perhaps?

What the accounts of these five tech companies confirm is what many of us of course already know. Companies arrange their affairs to move profit out of European countries and into tax havens, often though the use of royalties on intellectual property.

The perversity of this structure is that companies in our study are “paying” for the use of IP, but they are not paying it to the creators of the IP, but to another entity within the group – an entity which appears not to have incurred any significant costs for creating that IP in the first place. It is impossible to argue that this structure rewards the creators and the makers in any way (unless of course you count the creative lawyers and accountants who would have constructed such schemes).

How value creation is rewarded by the tax system is an important issue, and one which in the end will require a political rather than a technical answer. But when we have that debate, lets first start with an honest conversation about what is really going on.

Photo by Marvin Meyer on Unsplash


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