Profit Shifting

TaxWatch give evidence at Treasury Select Committee

28th December 2022 by Alex Dunnagan

TaxWatch Acting Director Alex Dunnagan gave evidence to the Treasury Select Committee (TSC) on Monday 19th December highlighting the abuse of tax reliefs.

Written evidence

In November we submitted written evidence to the TSC for their inquiry on tax reliefs, focussing on both Creative Sector reliefs and the R&D reliefs.

TaxWatch’s evidence pointed out that Creative Sector reliefs are costing far more than anticipated, with the vast majority of these reliefs going to large multinational corporations. These multinationals are developing entertainment products that would likely have been produced regardless of whether or not the relief was available.

We also highlighted that companies claiming hundreds of millions of pounds in reliefs are engaging in profit shifting. These multinationals are producing games and films in the UK while claiming relief, then selling the taxpayer subsidised intellectual product at effectively cost price to overseas parent companies. It is these overseas companies, usually US based, which then distribute the product, generating significant profits, and with that, significant Corporation Tax bills outside the UK.

As for R&D reliefs, we pointed out that HMRC’s estimate of fraud and error with R&D relief (£469m in 2021-22) is likely a significant underestimate. While the true scale of abuse with R&D reliefs is not known, it could well costs billions of pounds every year. Without adequate compliance checks, we will simply never know the true scale of fraud and error.

Our evidence also pointed out that there are tax advisers boasting of 100% success rates in applying for R&D relief. There are companies that offer software which auto-generates relief claims, and accountants stating that it is the government intent to provide R&D relief for things such as cocktails and menu updates. This clearly is not the intent of Parliament.

Treasury Select Committee session

In addition to the facts presented in the written evidence, during the oral evidence session, Alex was able to highlight the lack of scrutiny these reliefs receive. There are close to 1,200 reliefs, the majority of which receive little to no government scrutiny. Even the smaller reliefs can have expenditures larger than government departments. Video Games Tax Relief, originally forecast to cost £35m a year, cost £197m in the year ending March 2022. The Serious Fraud Office by comparison had a budget of £74m last year.

The session was attended by Harriett Baldwin (Chair); Rushanara Ali; Anthony Browne; Dame Angela Eagle; Danny Kruger and Siobhain McDonagh. The panel consisted of Alex Dunnagan, Acting Director, TaxWatch; Dr Hosam Al Kaddour, Head of Teaching and Learning, Accounting Department, University of Southampton; Anita Monteith, Head of Taxation Policy, Institute of Chartered Accountants in England and Wales; and Dr Jo Twist OBE, CEO at UK Interactive Entertainment.

TaxWatch welcomes any opportunity to present further evidence on tax reliefs.

The full transcript for the evidence session is available here.

Etsy – Another US tech company with questions to answer

20th June 2022 by George Turner

20th June 2022

Etsy says that it is a company “committed to using the power of business and technology to strengthen communities and empower people around the world”. ^[1]Prioritizing the people at the center of commerce, Etsy, https://advocacy.etsy.com/about/ But looking at their tax filings, it seems that Etsy’s definition of community stops short of public services.

Etsy is a marketplace and marketplaces have existed since the dawn of time. Like many formal marketplaces, Etsy makes money by charging market sellers fees to set up their stall. The difference of course, is that Etsy’s marketplace is online, and not at a physical location (although the company does have an office in London and in many other countries where it operates).

According to Etsy’s 10-K, the UK is the most important market outside of the US, accounting for over 10% of the company’s takings. Growth in UK earnings has been extraordinary, rising from $51m (£40.1m) in 2018 to $329m (£243m)^[2]Dollar/ Pound exchange rate 31 December 2018 0.788 31 December 2021 0.739 in 2021, an increase of more than 600%.

	2021	2020	2019	2018
UK revenues	$329,203,000	$195,827,000	$72,471,000	$51,385,000

Etsy has attributed the explosion of their business to the global pandemic, and their growth in the UK is part of a global trend. Overall, sales on their marketplace grew 107% in the year ending 2020. Etsy’s latest accounts attributed this in part to “the shift from offline to online shopping, specific competitive dynamics, retail business closures, new buyer cohorts, pent-up demand, emerging categories such as face masks, gifting trends, and government stimulus.”^[3]Etsy Ireland Unlimited Company, Annual Accounts 2020, p.3

Like many e-commerce multinationals, Etsy structures its business to ensure that the profit it makes will not appear in the accounts of their local, UK-based businesses. Etsy operates a standard distance selling structure where clients (in this case market sellers) are billed from outside the UK. Other companies which use this model include Google and Amazon.

Etsy’s, main international company is an Irish Unlimited Company. Etsy Ireland Unlimited Company.

Until relatively recently, Irish Unlimited Companies did not have to publish corporate accounts. The use of secretive offshore companies led Americans for Tax Fairness to write to the B Lab, asking for Etsy’s B Corp status to be reconsidered in 2015.^[4]Etsy facing renewed pressure over Irish tax strategy, Irish Times, Sep 1 2015 – https://www.irishtimes.com/business/technology/etsy-facing-renewed-pressure-over-irish-tax-strategy-1.2335992 B corporations are companies certified to “meet high standards of social and environmental performance, accountability, and transparency.” Since then, no one appears to have looked at Etsy’s tax position.

The accounts of Etsy Ireland Unlimited are now available. They show that in 2020 the company earned revenues of €418,158,000 ($510m)^[5]Euro-Dollar exchange rate for 31 December 2020 was 1.22, source: https://www.exchangerates.org.uk/historical/EUR/31_12_2020 which accounts for 89% of the company’s revenues outside of the United States. It is, therefore, reasonable to assume that all of the company’s revenues in the UK are recognised in Ireland.

The company made a profit before tax of €129,013,000, with a tax liability in of €4,362,000 – a rate of 3%.

In the UK, Etsy UK Limited had a turnover of £12.5m for the year ending December 2020 (the latest figures available), and a profit of £7.5m, leading to a tax bill of just £128,000 a rate of 1.7%. All of Etsy UK’s turnover is derived from providing services to Etsy Ireland Unlimited.

The low tax rate in the UK is due to share-based compensation and differences affecting the valuations of those shares between options being granted and exercised.^[6]Etsy UK Limited, Strategic Report, Annual Report and Financial Statements for 2020 page 2

If we look at UK revenues for 2020 and apply a 25% profit margin (which is in line with their non-US profit margin), profits in the UK should have been £35.8m ($49m) with a tax liability of £6.8m. For 2021, the figures would be profits of £60.95m leading to a tax liability of £11.5m.

UK based comparators

The underpayment of tax in the UK is clear when we look at companies providing similar services. Notonthehighstreet.com is an e-commerce marketplace specialising in gifts and hand-crafted goods – a similar market to Etsy.

Notonthehighstreet Enterprises Limited (NOHL) operates notonthehighstreet.com and is a UK-headquartered company.

The latest figures published by NOHL for the year ending March 2021 show revenues of £57.9m and a profit of £10.1m, a profit margin of 17%. The company paid taxes of £659,410 a tax rate of 6.5%.

The 2021 financial year appears to be the first year that NOHL has had any corporate tax liability due to losses in previous years. Previous losses also account for the low tax rates seen by NOHL. As the company is now making a profit and paying taxes we would expect the tax rate to increase over the next few years. However, even adjusting for previous losses, NOHL’s UK tax liability was more than five times Etsy’s UK liability, despite the fact that NOHL has a lower profit margin than Etsy and that NOHL’s UK turnover is a fraction of Etsy’s turnover.

The difference arises because Etsy’s profit from UK-based customers arises overseas, whereas all of NOHL’s profit is in the UK.

Etsy and the new global tax deal

The misallocation of profit due to profit shifting by digital companies is an issue that is supposed to be addressed by OECD proposals for a new global tax deal.

However, applying the current deal to Etsy, we see that the company would actually see a substantial tax cut as a result of the new global tax deal if implemented.

Digital Services Taxes

The recent growth of Etsy would put the company within the scope of the Digital Services Tax (DST). The DST was a measure brought in to counter avoidance by some tech companies. The tax puts a charge on UK-based revenues of companies operating search engines, digital marketplaces, and social media platforms.

The tax applies to companies with a worldwide group income of more than £500m that generate at least £25m from UK customers. The first £25m of revenue is exempt from tax.

On the basis of Etsy’s 2021 figures, the company will have a Digital Services Tax liability of £4.4m ^[7]£243m in revenues, minus the first £25m which is exempt, multiplied by 0.02 gives us £4.4m. For 2020, the figure would have been £2.4m ^[8]£143m in revenues, minus the first £25m which is exempt, multiplied by 0.02 gives us £2.4m.

If the global tax deal proposed by the OECD is agreed upon, countries including the UK have agreed to ditch their digital services taxes. Instead, Pillar 1 of the OECD agreement will seek to redistribute profits to market countries. However, this part of the agreement only applies to companies with a global turnover of €20bn. In 2021 Etsy’s global turnover was $2.3bn – nowhere close to the threshold to come under the pillar 1 agreement.

As a result, it is clear that the global tax deal will represent a substantial tax cut for Etsy in the UK.

An Etsy spokesperson told the Guardian newspaper that the company:

“paid or accrued for any known and material tax obligations in compliance with current cross-border tax laws. Cross-border corporate tax law is extremely complex and Etsy is committed to paying our fair share.

“Ireland is the location of our international headquarters, where we employ dozens of people who support our international community across many critical business functions, like software and product engineers, payments operations, technical project managers, and member support.”

“We are very supportive of a global consensus on how to tax the digital economy even if our tax bill increases.” ^[9]Sarah Butler, Etsy paid just £128,000 in corporation tax in 2020 despite £160m in sales, Guardian, June 19th 2020, … Continue reading

References[+]

References
↑1	Prioritizing the people at the center of commerce, Etsy, https://advocacy.etsy.com/about/
↑2	Dollar/ Pound exchange rate 31 December 2018 0.788 31 December 2021 0.739
↑3	Etsy Ireland Unlimited Company, Annual Accounts 2020, p.3
↑4	Etsy facing renewed pressure over Irish tax strategy, Irish Times, Sep 1 2015 – https://www.irishtimes.com/business/technology/etsy-facing-renewed-pressure-over-irish-tax-strategy-1.2335992
↑5	Euro-Dollar exchange rate for 31 December 2020 was 1.22, source: https://www.exchangerates.org.uk/historical/EUR/31_12_2020
↑6	Etsy UK Limited, Strategic Report, Annual Report and Financial Statements for 2020 page 2
↑7	£243m in revenues, minus the first £25m which is exempt, multiplied by 0.02 gives us £4.4m
↑8	£143m in revenues, minus the first £25m which is exempt, multiplied by 0.02 gives us £2.4m
↑9	Sarah Butler, Etsy paid just £128,000 in corporation tax in 2020 despite £160m in sales, Guardian, June 19th 2020, https://www.theguardian.com/business/2022/jun/19/etsy-corporation-tax-uk-sales-taxwatch-us

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.

Amazon’s ballooning revenues demonstrate the need for transparency in tax affairs

4th February 2021 by Alex Dunnagan

The news that Amazon’s sales in the UK have ballooned over the last year have sparked the traditional headlines about Amazon’s tax bill (or lack of it).

This article looks to tease out some of the complex issues that arise from Amazon’s tax structure in the UK.

There is no doubt that Amazon has engaged in tax avoidance in Europe and the UK. Its structure, with a European hub in Luxembourg and satellite companies in the UK and other markets, was originally designed to exploit Luxembourg’s low VAT rate on books and other tax benefits.¹ The way that the company divided profits between the UK and Luxembourg (with very little profit being declared in the UK) was based on the fiction that Amazon’s European companies were separate entities operating independently of each other.²

Much of this changed in 2015. Ahead of the UK’s introduction of a “diverted profits tax” which was designed to attack structures such this, Amazon established a UK “branch” of its main European HQ in Luxembourg.³

Its UK company, Amazon UK Services, which delivers goods on behalf of its Luxembourg parent, continues to operate, making a small amount of profit and paying a little corporation tax each year. However, the branch structure means that the company would also start reporting the sales made to UK customers from Luxembourg to HMRC and pay corporation tax on those profits.

So was that the end of the story with regards to Amazon’s corporation tax in the UK? No.

The branch structure means that Amazon does not publish any public accounts that detail the sales and profits it makes from UK customers or the taxes paid on them. All that is there is the company’s Luxembourg accounts, which show that as a whole, the company had no net tax liability and instead receives tax credits.⁴ It is possible that there was some corporation tax paid in the UK, which was offset elsewhere, but we just don’t know.

Amazon’s global accounts state that the Luxembourg entity did make a profit in 2020 as a whole, but that this was was offset by deferred tax assets.

Deferred tax assets are often the result of losses a company has made in previous years that it can offset against profits made today or in the future. Interestingly, the company also said that it still believes that its earnings in Luxembourg are uncertain, and as such, has written off some of their deferred tax assets on the basis that it will be unlikely to generate enough profit to offset previous losses against future profits.⁵

So whilst business across the world is booming (and has been booming for years), and the company is recording its highest ever profits, the accountants appear to believe that its European operations may continue to be loss making (or at least not make much profit) for a significant time to come.

For a company that was built partly on tax avoidance all of this is hardly reassuring, and Amazon’s attempts to obfuscate the issue raises even more concern.

Specifically, Amazon publish what they call their annual economic impact in the UK.⁶ This attempt at assuaging criticism of the company’s historic tax dodging seeks to set out the company’s total contribution to the UK economy, including the total amount of taxes it pays. This includes direct taxes the company pays, like corporation tax, as well as taxes it pays on behalf of consumers, such as VAT. The company states that in 2019 it paid £293m in direct taxes.

The problem with this is that the figure for direct taxes includes Employer’s National Insurance, which is a large bill for a significant employer like Amazon and will dwarf any corporation tax liability they have. The comparisons of this figure that some media outlets have made with other UK retailers’ corporation tax bills are grossly misleading.

Looking at Amazon’s global accounts, it must be said that the company does state that it pays taxes overseas. The latest annual report for 2020 published on February 3rd shows that the company had a current tax liability of close to $1bn outside the United States on profits of $4bn.⁷ However, although this tax rate of around 25% is more than the UK’s statutory tax rate, there is no indication whatsoever as to where this is paid, it might all be paid on Amazon’s operations in Asia or anywhere else. We just don’t know.

The UK government could easily rectify this lacuna. Every major multinational needs to report their economic activity, including their profits and taxes on a country by country basis. This report is then given to tax authorities on a confidential basis.

In 2016 MPs voted to give the power to ministers to compel the publication of these reports (for all major companies, not to single out any individual one). However, the government has yet to take up the offer.⁸

If the government were to do this, or Amazon were to publish their country-by-country report themselves, this would go a long way to establishing the reality of Amazon’s tax position in the UK and other jurisdictions around the world.

Two final things worth noting. Amazon’s published figures for how much profit it makes outside of the United States may well be significantly deflated by royalty payments paid by its overseas operations to the US.

Amazon’s latest corporate accounts show an adjustment in their tax liability against the US headline corporation tax rate of $372 for Foreign income deduction.⁹ This is the Foreign-Derived Intangible Income (FDII) provisions of the US tax code which gives US based corporations a discount of 7.75 per cent on royalty income on intellectual property they bring in from overseas. This suggests that Amazon’s international operations sent back almost $5bn in royalties from overseas, vastly more than the total profit they made outside the US.

Secondly, Amazon’s global accounts also show that the company received $639m in tax credits.¹⁰ These appear to be primarily related to US government subsidies on research and development. The use of tax credits to help subsidise things like research and development has become increasingly popular with governments around the world in recent years. As we have previously pointed out in our work on the creative industry tax credits in the UK, by design, much of these credits end up subsidising very large profitable corporations. It seems that the US is no different in this regard.

Our Director discussed some of the issues raised in this blog on Times Radio on 04 February 2021.

Photo by Christian Wiediger on Unsplash

1 David Pegg, From Seattle to Luxembourg: how tax schemes shaped Amazon, The Guardian, 25 April 2018, https://www.theguardian.com/technology/2018/apr/25/from-seattle-to-luxembourg-how-tax-schemes-shaped-amazon

2 Clair Quentin, Risk-Mining the Public Exchequer, Journal of Tax Administration Vo. 3, No 2 (2017), http://jota.website/article/view/142

3 Simon Bowers, Amazon to begin paying corporation tax on UK retail sales, The Guardian, 23 May 2015 https://www.theguardian.com/technology/2015/may/23/amazon-to-begin-paying-corporation-tax-on-uk-retail-sales

4 Mark Sweney, Amazon given €294m in tax credits as European revenues jump to €32bn, The Guardian, 21 April 2020, https://www.theguardian.com/technology/2020/apr/21/amazon-given-294m-in-tax-credits-as-european-revenues-jump-to-32bn

5 Amazon 10-K 2020, p.63 available from: https://d18rn0p25nwr6d.cloudfront.net/CIK-0001018724/336d8745-ea82-40a5-9acc-1a89df23d0f3.pdf

6 Dayone Blog, 2019:Amazon’s Economic Impact in the UK, https://blog.aboutamazon.co.uk/jobs-and-investment/2019-amazons-economic-impact-in-the-uk

7 Amazon Inc 2020 10-K p.62

8 Out-Law News, UK MPs back power to make multinationals’ country-by-country tax reporting public, https://www.pinsentmasons.com/out-law/news/uk-mps-back-power-to-make-multinationals-country-by-country-tax-reporting-public

9 Amazon Inc 2020 10-K p.62

10 Amazon Inc 2020 10-K p.63

No Time To Pay Tax?

18th October 2020 by Alex Dunnagan

The UK companies behind the James Bond films have minimised tax for decades whilst receiving tens of millions of pounds in subsidy from the UK taxpayer.

TaxWatch’s latest report – No Time to Pay Tax? – delves into the accounts of EON Productions Limited and its associated companies (EON). We found that despite Skyfall and SPECTRE grossing just shy of $2bn at the box office, EON generated small profits and smaller tax bills in most years whilst profits in the hundreds of millions are declared overseas.

In recent years, the UK group of companies headed by EON Productions Limited has declared a pre-tax loss, while simultaneously receiving tens of millions of pounds in tax credits via the UK’s creative industry tax relief scheme.

International tax rules state that profits should be allocated based on where value is created, with tech companies often using this argument to explain why they only pay taxes in the US. If this is the case, why isn’t a significant amount of tax paid on the profits of Bond films in the UK?

Find out more in our latest report here.

A PDF version of our report is available here (printer-friendly version here)

This research was featured in The Observer and the Mail on Sunday among others.

Image by Glen Ratcliffe

No Time To Pay Tax?

18th October 2020 by Alex Dunnagan

18th October 2020

How EON Productions, the studio behind the James Bond films, has minimised UK tax for decades whilst receiving tens of millions of pounds in subsidy from the UK tax payer

Introduction

The British production company behind the hugely successful James Bond series is part of a structure which minimises UK corporation tax, despite generating substantial profits for its US owners and receiving over £100m in subsidy from the UK government. After two delays due to the ongoing pandemic, Bond, a fictional series about a British civil servant, is set to return to the big screen next Spring in the 25th instalment of what is the fourth highest grossing franchise of all time.¹

However, despite the franchise bringing in billions at the cinema and raking in hundreds of millions of dollars in profit, under a tax structure set up more than 50 years ago, the Bond franchise has managed to minimise corporation tax in the UK for decades.

This report looks in detail at the financial accounts of EON Productions Ltd and associated companies (together referred to as EON) over the past decade, a period which saw the production of Skyfall (2012), SPECTRE (2015), and No Time To Die (2021).

We make no allegation that the company is behaving illegally, now or in the past. However, our research raises questions about whether government subsidy to the film industry is well targeted, and at a time of constrained public finances, the use of tax minimisation strategies by such high profile British franchises must be a matter of public concern.

We found that despite Skyfall and SPECTRE grossing just shy of $2bn at the box office, EON generated small profits and smaller tax bills in most years whilst profits in the hundreds of millions are declared overseas.

In fact, in recent years, EON has declared a pre-tax loss, while simultaneously receiving tens of millions of pounds in tax credits via the UK’s creative industry tax relief scheme. Publicly available accounts reveal that SPECTRE received £30m in tax credits, with a further £47m for No Time To Die, taking the total subsidy for the last two films to a hefty £77m. The total amount of UK tax credits received since their introduction in 2007 is likely closer to the £120m mark, with leaked emails showing that Skyfall received £24m in tax credits,² and our calculations putting the amount Quantum of Solace received at around £21m.³

Dr No Tax – a history of tax avoidance at EON productions

The James Bond films are one of the longest running film series in history with the franchise grossing over $16bn to date.⁴ From the outset the Bond franchise was produced using a structure designed to minimise tax. The finance and distribution of the films is dealt with by an American company (be it United Artists, MGM, Sony, or now Universal) while the production is done by a British company. The rights to exploit the film are however owned by a non UK company.

In 1961 Harry Saltzman and Albert R. ‘Cubby’ Broccoli acquired the rights to Ian Fleming’s Bond novels and established EON Productions in the UK to make the films. At first, United Artists (UA), was contracted to provide 100 per cent of the finance and distribute the films.

Saltzman and Broccoli’s wives, Dana and Jacqueline then created a company in 1962 called Danjaq S.A. (a contraction of their names), incorporated in Lausanne, a picturesque town on the banks of Lake Geneva, Switzerland, the type of place that many of Commander Bond’s adversaries may have used to stash their ill gotten gains over the years.⁵ In an interview, Harry’s son Steven stated that Danjaq “was set up with shares that were actually bought privately by Dana and Jacqueline separately with cash they could demonstrate was not linked to their husbands.”⁶

Under the structure set up by Saltzman and Broccoli, EON would make the films in the UK and then sell the film to Danjaq, ensuring that the producer’s profit would end up in Switzerland taxed at a very favourable rate.⁷ It appears that Danjaq had no real function other than to hold the copyright and trademarks of 007. At the time, Danjaq’s sole director was the Swiss attorney Mr Schlaeppi. As was set out in a 1991 court case between Danjaq and then distributor MGM, Mr Schlaeppi admitted to knowing little about the film industry and working only in an administrative function. He performed this function for fifteen other corporations. As described in graphic terms by the judge in that case, “If put in anatomical terms, Switzerland is Danjaq’s stomach reflexively churning the enterprise’s profits, but it is hardly a nerve center”. In fact, in that case Danjaq argued that its principal place of business, if not Switzerland, must be Great Britain, due to the “substantial and long-standing presence” of EON in the UK. The argument rested on the proposition that Danjaq and EON are in effect the same entity.⁸

The Broccolis were eventually able to assume complete control over Danjaq, and with it the rights to Bond, when in 1986 they purchased Saltzman’s original stake from UA. Cubby was free to operate as the sole owner and producer, and was later succeeded by step-son Michael Wilson (then a tax lawyer) and his daughter Barbara Broccoli, who together run the franchise to this day.

Danjaq became incorporated in the United States in the 1990s in Delaware. However, although Danjaq has changed jurisdiction, and the financier and distributor has also changed over the decades, the key arrangement that allows for EON to minimise UK tax remains intact today.

EON still makes the films (but makes little profit from them), Danjaq still owns the rights, and distribution and finance are still dealt with by an outside third party.

In fact, EON state in their 2015 accounts that once the production of a film has been completed, “the film is sold for a price equal to the total cost of production less the amount received in respect of UK Film Tax Credits.”⁹ This ensures that minimal taxable profits arise in the UK as valuable rights to exploit the film are sold for no more than the cost of production.

Structures like this are not unusual in the film industry, but they do raise questions about whether they result in a fair distribution of profit between countries.

EON have stated on the record that the profits are all properly declared in the UK or the US, and that no profits are sheltered in tax havens. This suggests that the vast majority of profits made by the Danjaq and EON, and any taxes due on them are declared in the US.

How much profit is Bond really making?

As Danjaq is a Delaware company we cannot see how much profit it makes from each film. It is also not possible to simply deduct the costs of producing a film from cinema receipts in order to look at the profitability of a film.

The production cost only comprises part of the total cost of a film. In addition, studios and distributors will spend substantial amounts on marketing and the physical printing of copies. For your average blockbuster with a budget of $100m plus, a film’s production budget only makes up 37% of the total cost.¹⁰ On top of this cinemas also take a chunky percentage of total ticket sales.

On the revenue side, cinema sales make up less than half of a blockbuster’s revenues, with successful films making money for years though TV deals, DVD sales and airline broadcast fees.

All of this makes it very difficult to see a film’s total profitability from the outside.

However, by taking a detailed look at the evidence available for the last three Bond films we are able to get a good idea of how much real money is being made.

Skyfall

Detailed financial figures for Skyfall are available with thanks to the North Korean secret service.

In November 2014, a hacker group leaked over 170,000 emails from Sony Pictures Entertainment, thought to be in response to Sony releasing the film ‘The Interview’ which poked fun at Supreme Leader of North Korea Kim Jong-un. These emails give an insight into the otherwise obscure of film finance.

According to the leaked emails, Skyfall, which grossed $1.1bn worldwide, made $232m in profit for the distributors MGM and Sony, of which Sony kept 25 per cent despite putting up 50 per cent of the movie’s costs. A leaked document from Sony revealed that Danjaq earned $109m on Skyfall.¹¹ With these profits sitting outside the UK, EON was able to post pre-tax profits of less than £2m in the UK for the 2012 and 2013 years in which Skyfall was at the cinema. Danjaq’s profits were almost guaranteed. With the distributors putting up all the money to produce the films, Danjaq is understood to earn money from each ticket sale, in what is known as a “first-dollar gross” deal.¹²

SPECTRE

According to the accounts of B24 limited (the specific EON production company responsible for SPECTRE) the production cost of the film was £182m. Within the Sony leaks emails we can also see discussion among studio executives about box office projections for SPECTRE of $500m international and $209m in the US.¹³ The executives deem this to be enough in order to green-light the film to begin production, and is therefore almost certainly enough to break even, but would likely allow for some profit. Considering SPECTRE grossed $880m worldwide,¹⁴ not to mention the revenues generated from DVD/VOD sales, it is safe to assume that the total profit for this film was over $100m, with Danjaq receiving a substantial amount.

However, despite the billions in revenues and hundreds of millions in profit generated by SPECTRE and Skyfall, practically no profits are realized by the UK based production company responsible for creating the films.

EON’s accounts show a small pre-tax profit for 2008-2014 on a group level, which then turns into substantial pre-tax losses following the release of SPECTRE. While Skyfall and SPECTRE are grossing almost $2bn between them, and hundreds of millions of dollars in profit are going to MGM, Sony, and Danjaq, EON in the UK made a net pre-tax loss of £33m for the decade to 2018.

Film	Budget	Box Office	Tax Relief
Quantum of Solace	£106,891,959	$589,580,482	£21,378,391
Skyfall	£138,197,058	$1,108,561,013	£24,000,000
SPECTRE	£182,431,933	$880,674,609	£30,005,367
No Time To Die	£199,472,744	Released Spring 2021	£46,791,492

You Only Pay Twice – UK Film Tax Relief

Even though the producers of James Bond have arranged their affairs to make sure that very little profit stays in the UK, that has not stopped them from seeking substantial hand-outs from the UK government.

The way in which film tax relief works is that it allows for film production companies to claim a tax credit of up to 25% of the money they spend making the film in the UK (up to a maximum of 80% of the film’s core expenditure). This credit is deducted from any corporation tax bill if the film company makes a profit. If the company makes a loss, the company can claim cash back from HMRC. Since 2015, EON’s accounts show that it has been receiving the cash credit from HMRC arising from the production of the Bond films. The British taxpayer is effectively subsidising a highly profitable franchise that has been operating since the early 1960’s.

Film Tax Relief (FTR) is part of the UK Creative Sector Reliefs. All creative sector tax reliefs are designed to promote British culture, with productions having to pass a “cultural test” administered by the British Film Institute before accessing subsidy.

That James Bond is a product of British culture is beyond any doubt, and as a result it is perfectly entitled to claim UK tax credits on UK production spend. The story was written by a former WW2 British intelligence officer, about a British operative working for the UK’s Secret Intelligence Service MI6. Despite the world travels of 007, London will forever be the home of Bond. Barbara Broccoli, who alongside Michael Wilson was awarded an OBE in 2008 for services to the film industry,¹⁵ has gone on record about how British Bond films are, saying in 2009 “The Bond films were made in Great Britain, they were started by my father Albert Broccoli, he moved to the United Kingdom in 1952 and felt England was home.”¹⁶

While a lot of filming is done internationally, the productions are centered around Pinewood Studios, situated just outside of London, which has its own 007 stage. Editing and post-production work on SPECTRE was split between Pinewood and a further office in Soho.¹⁷

Brits are proud of the James Bond franchise. Daniel Craig in his capacity as Bond was paraded before the world at the London 2012 Olympics, acting as a bodyguard to the Queen as she made her way to the opening ceremony. This stunt delighted executives at Sony Pictures, who noted how it raised the profile of Bond in the year that Skyfall was released. Wishing to replicate this level of exposure, the studio executives contemplated having Bond present at multiple events in 2015, from the Super Bowl to the UEFA Champions League Final.¹⁸

Politicians are keen to show off the cultural export, with George Osborne, the then Chancellor of the Exchequer, tweeting in 2015:¹⁹

All of this means that Bond films are eligible for large amounts of subsidy from the UK government.

British Film Tax Relief is far from the only way in which the Bond films can claw back production costs. SPECTRE received at least $14m (and potentially up to $20m) in tax incentives from the Mexican government for the opening sequence to be shot in Mexico City and to show the country in a positive light. The president of MGM Jonathan Glickman said in an email “By all accounts we can still get the extra $6M by continuing to showcase the modern aspects of the city…Let’s continue to pursue whatever avenues we have available to maximize this incentive”.²⁰ The production also received millions from product placement. Last year The Mirror reported that No Time To Die had netted a franchise record of £75m in endorsement deals for the likes of Heineken and Aston Martin.²¹

Film Tax Relief was introduced in 2007. One of the pre-requisites for receiving Film Tax Relief is being certified as ‘culturally British’ by the BFI. Quantum of Solace was awarded this certification in 2008, as was Skyfall in 2012, followed by SPECTRE in 2015.

Although we only see tax relief in the accounts for SPECTRE and No Time To Die, given the cultural British accreditation, it is almost certain that both Quantum of Solace and Skyfall also received UK Film Tax Relief, and that we are unable to see it due to changes in accounting practice.

With a budget of £107m, we estimate that Quantum of Solace will have received around £21m in tax relief. A leaked Sony email from 14 October 2014 makes reference to $38m (£24m in 2012) in tax credits for Skyfall,²² the vast majority of which will be UK Film Tax Relief. Accounts for B24, the company behind SPECTRE, show the company receiving £30m in tax film credits. Accounts up to 31 December 2019 for No Time To Die show it has become the most expensive Bond film to date, with a cost of £200m, and with £47m so far claimed in credits – listed as “tax credit recognised in work in progress” in the accounts. Corresponding 2019 accounts are not yet available for EON.

This takes the tax credit received for SPECTRE and No Time To Die to £77m, and the estimated total tax credit for the four films since the introduction of the scheme to £122m.

Again, we stress there is nothing contrary to law about the Bond franchise claiming tax credits. As a UK production of a culturally British product, the producers of Bond are perfectly entitled to claim tax credits.

However, we do believe that this example raises legitimate questions about how the tax credits system works in practice.

On Her Majesty’s Service?

Bond films are produced in the UK, by a British company, and receive production subsidies from the UK government on that basis. It would therefore be reasonable to expect that most of the profit generated by the films is declared in the UK. This is certainly the expectation from some MPs. Mark Spencer, the Conservative MP for Sherwood, stated in Parliament during a debate on tax avoidance and multinational companies on 03 February 2016:

“We are blessed with a global taxation system agreement whereby companies pay tax not on the profit they make in the country but where they add the value and create the IP…. I was fortunate enough to go to the cinema to see “Spectre”, the latest James Bond movie, which was created in Pinewood Studios in the UK. Tax on the profits from those movies should be paid in this country, not all over the world.”²³

However, as our research has demonstrated, despite Bond’s decades long association with Britain which has seen the franchise become a landmark of British identity, when it comes to profits, Bond is not really British at all.

From the very beginning, the Bond franchise was structured to minimise UK corporation tax. The films used Swiss banks and shell companies in Switzerland and then Delaware in order to channel profits out of the UK.

No Time To Die, the latest film in the Bond series, has seen Universal Pictures step in to replace Sony, with Universal now set to distribute the film internationally. Though an important function, distribution and finance could arguably be provided by companies anywhere in the world. What can’t be substituted in James Bond is the British story, cast, production, and 007 stage at Pinewood Studios. If HMRC is unable to tax the profits on the Bond franchise, how does the government intend to fund MI6?

TaxWatch first contacted EON Productions Limited for a comment on our research in February 2020, and again in October 2020. EON ignored several requests to engage with us on this report and did not respond to four separate deadlines to provide a comment.

Eventually, a comment was provided via the law firm Schillings on behalf of EON, at 2.30pm on a Saturday, the day before publication. It reads as follows:

“Since the 1960s Danjaq has chosen to make the James Bond films in the UK through Eon Productions, resulting in the investment of more than half a billion dollars in the UK film industry, the employment of tens of thousands of people, and showcasing the talents of British film to the world.

All the income from the James Bond films received by Eon and Danjaq is subject to tax in either the UK or USA. None of the income is sheltered in a tax haven. Eon has utilized the UK tax credits to help fund the making of Bond films in the manner intended by the government. This has enabled the Bond films to continue to be made in the UK to the benefit of the UK film industry and UK economy.”

It is certainly the case that the production of Bond films does lead to a substantial amount of money being spent in the UK film industry, and this provides a substantial benefit for people working in the industry. However, it is not clear why this means that profits made by the film should be declared outside the UK.

Background research for this report was aided greatly by the book “Some Kind of Hero: The remarkable story of the James Bond films” by Matthew Field and Ajay Chowdhury (The History Press, 2015).

A PDF version of our report is available here (printer-friendly version here)

Image by Glen Ratcliffe

1 Some box office rankings place the James Bond films third in lists of highest grossing franchises of all time. These lists often involve the non EON films Casino Royale (1967) and Never Say Never Again (1983).

2 Email from Sony Executive Andrew Gumpert, dated October 14 2014, from the Sony Leaks, available here: https://wikileaks.org/sony/emails/emailid/80455 The majority, if not all, of this £24m is likely from the UK. However, given that it does not show in any publicly available accounts, we cannot be certain that this is all UK Film Tax Relief.

3 Accounts for B22, the EON Special Purpose Vehicle company that produced Quantum of Solace, show that Quantum of Solace has production costs of £107m. Film Tax Relief allows for a payable cash rebate of up to 25% of UK qualifying expenditure, up to 80% of core expenditure. 25% of 80% of £107m is £21.4m

4 $16.3bn in ticket sales when adjusted for inflation, research conducted by Forbes in 2018, available here: https://www.forbes.com/sites/jeffewing/2018/09/26/studied-not-stirred-bond-in-numbers-analyzes-everything-james-bond/#2ad7df284e1a. Unadjusted, the series has grossed $7.1bn, researched conducted by The Numbers, available here: https://www.the-numbers.com/movies/franchise/James-Bond#tab=summary

5 Scaramanga from The Man With The Golden Gun kept his money in a Swiss bank, as did Ernst Blofeld in On Her Majesty’s Secret Service.

6 Interview with Steven Saltzman, 16.11.2011, as featured on page 52 of Some Kind Of Hero, by Matthew Field and Ajay Chowdhury

7 Ibid.

8 In 1991 the holding company Danjaq and distributor MGM had a disagreement regarding MGM selling the distribution rights of the Bond film. Further details can be find in the court records for Danjaq, SA v. MGM/UA COMMUNICATIONS, available here: https://law.justia.com/cases/federal/district-courts/FSupp/773/194/1608047/

9 2.11 Revenue, Eon Productions Limited annual report and financial statements for the year ended 31 December 2015

10 Analysis by film industry data researcher Stephen Follows. A more thorough explainer on how blockbusters make money is available at his website here: https://stephenfollows.com/how-movies-make-money-hollywood-blockbusters/

11 Pursuit of James Bond Film Rights Kicks Into High Gear, article for the Wall Street Journal by film business journalist Ben Fritz, Available here: https://www.wsj.com/articles/pursuit-of-james-bond-film-rights-kicks-into-high-gear-1446156132

12 Article on the financial performance of Bond films, in entertainment journal Deadline Hollywood from 21 March 2016, available here: https://deadline.com/2016/03/spectre-profit-box-office-2015-james-bond-1201723528/

13 Spreadsheet “BOND 24 forecast 7.17.13.xlsx”, available at https://search.wikileaks.org/?q=bond+24+forecast

14 Worldwide Box Offce for SPECTRE, at The Numbers, available here: https://www.the-numbers.com/movie/Spectre#tab=summary

15 Barbara Broccoli net worth, at ‘The Richest’, available here: https://www.therichest.com/celebnetworth/celeb/producer/barbara-broccoli-net-worth/

16 Interview with Barbara Broccoli, BBC Berkshire, 07 April 2009,available here: http://www.bbc.co.uk/berkshire/content/articles/2009/04/07/albert_broccoli_cloisters_wing_feature.shtml

17 Interview from 01 March 2016 in Pro Video Coalition with the editor of SPECTRE, Lee Smith ACE, available here: https://www.provideocoalition.com/art-of-the-cut-with-lee-smith-on-cutting-007-s-spectre/

18 Email between Sony Executives, 29 September 2014, available here: https://wikileaks.org/sony/emails/emailid/199504

19 Tweet from then Chancellor of the Exchequer, George Osborne, on 30 May 2015, https://twitter.com/george_osborne/status/604711170902241280

20 Email from Jonathan Glickman, President of MGM, to Michael Wilson and Barbara Broccoli, among others, dated November 13 2014, from the Sony Leaks, available here: https://wikileaks.org/sony/emails/emailid/79884

21 Bollinger and Aston Martin bring in the big bucks for the next James Bond film, The Mirror, 20 Aril 2019, available here: https://www.mirror.co.uk/film/bollinger-aston-martin-bring-big-14439798

22 Email from Sony Executive Andrew Gumpert, dated October 14 2014, from the Sony Leaks, available here: https://wikileaks.org/sony/emails/emailid/80455

23 Tax Avoidance and Multinational Companies, 03 February 2016, https://hansard.parliament.uk/Commons/2016-02-03/debates/16020363000001/TaxAvoidanceAndMultinationalCompanies

Parliament forces Netflix to respond to TaxWatch research

24th September 2020 by Alex Dunnagan

Netflix has agreed to respond to TaxWatch’s investigation into the company’s tax affairs after a request from the Digital, Culture, Media and Sport (DCMS) Committee. Our report revealed that the TV giant had streamed up to $430m of profits into offshore tax havens in 2018 (we have since published a follow up bl og post taking into account 2019 figures). This research into Netflix’s tax affairs has previously been the subject of an adjournment debate in the House of Commons.

The DCMS are currently holding an inquiry into ‘The future of public service broadcasting’, and on Tuesday 15 September held a formal meeting in which senior Netflix executives Benjamin King, Director of Public Policy UK and Ireland, and Anne Mensah, Vice President of Original series, participated.

During the oral evidence session the Labour MP for Cardiff West, Kevin Brennan, put our report to Mr King, in saying:

“the revenues from subscribers in the UK in 2018 for Netflix was £860 million, yet Netflix pays very little tax in the UK because that money is credited to a Dutch company….What is your response to that issue about the way in which Netflix is structured allegedly to avoid paying tax in the UK?”

Mr King responded:

“I would like to start by emphasising that we do pay all the tax that is required of us under UK law and every other jurisdiction that we operate in. Our accounts from 2018, which is our most recently published set, showed that the operating profit we made across our entities at that time was offset under HMRC’s group relief regime rules by the losses that we made on certain of our productions.”

Mr King went on to say that because Netflix’s European Headquarters is in the Netherlands, profits from the UK “are taxed in the Netherlands, which is completely in accordance with international norms”.

Mr Brennan asked if there was any truth to the allegation that Netflix is intending to take advantage of High End TV Tax Relief in the UK while not paying any profit here. Mr King responded that there were “a great many inaccuracies” and “false assertions in the TaxWatch report that we noted at the time of publication”, to which Mr Brennan questioned why Netflix did not respond to TaxWatch’s initial request for comment prior to publication.

Mr King stated that “we were not consulted on the detail of the calculations”.

As TaxWatch has now set out in a letter to Mr King, this is incorrect. TaxWatch contacted Netflix posing a number of questions that arose out of our investigation, while setting out in detail our calculations and research in advance of the publication of our first report in January 2020. We made it clear that we were contacting Netflix to allow for the opportunity to raise any factual issues and to provide a comment in advance of publication.

In a subsequent phone call with a representative of Netflix, TaxWatch’s Executive Director George Turner made it clear that we would be happy to correct any inaccuracies in advance of publication if Netflix provided us with the disputed details.

We were assured we would receive a full response to our request for comment, however, after several days of no further contact, Netflix told us that the company had decided not to respond.

For that reason we were surprised to see the claims made about our research at the committee hearing.

Mr Brennan pointed out that Netflix were given an opportunity to respond, and asked if Mr King wished to make a comment during the committee proceedings. Mr King stated that he did not have TaxWatch’s report in front of him, and repeated the claim that there are “certainly a great many inaccuracies in the report”. When pressed further he agreed that Netflix would provide a written response.

We have since re-sent our report and initial correspondence to King in order to assist with Netflix’s response to the DCMS.

A transcript of the session is available here, with video footage is available here. Reference to TaxWatch’s research begins at 1059hrs.

This story was reported in Deadline.

Photo by cottonbro from Pexels.

Comment: ECJ decision should not let Apple off the hook

15th July 2020 by George Turner

The decision of the European Court of Justice (ECJ) on the Apple case means that Ireland will have to pay back €13bn in taxes they were told to collect from the company by the European Commission. The Commission’s ruling, which was annulled by the court, found that Apple had managed to gain a substantial tax advantage through an agreement they came to with the Irish authorities over the tax treatment of certain subsidiaries the company operated in the country. The Commission argued that the tax benefit gave Apple an unfair advantage, and so should be returned to Ireland.

Today’s ruling from the ECJ is therefore not about whether or not Apple has engaged in tax avoidance, but whether the European Commission was right to find that the government of Ireland had enabled Apple’s tax avoidance scheme by granting the company a tax ruling which should not have normally been available to companies operating in Ireland.

The fact that Apple has been engaging in tax avoidance is beyond doubt. According to the company’s own corporate filings, Apple paid just five per cent on its profits generated outside of the US between 2008 and 2015.

The company argues that the low tax bills it faces in countries like the UK are due to the fact that its products are designed in the United States, where most of its taxes are paid.

However, this argument is simply not borne out by the facts. According to our research, Apple’s own corporate filings from the last five years disclose that the company declared close to 70% of its profits outside of the United States.

It is true that the company has faced a much higher tax bill on the minority of profit it declares in the US. That is because most of its non-US profits have historically been shifted into companies which are not tax resident anywhere in the world.

This structure is very well documented by various investigations that have been carried out by government agencies and legislatures.

Three of the companies that are the focus of today’s ruling by the ECJ, Apple Operations International, Apple Sales International, and Apple Operations Europe were examined by the US Senate Permanent Subcommittee on Investigations in 2013, which concluded that they were part of a “complex web of offshore entities” designed to “avoid billions of dollars in U.S. income taxes”.

In the context of the vast nature of Apple’s tax avoidance scheme, the European Commissions focus on tax rulings made by Ireland was always a relatively narrow point, but this narrowness reflects the fact that the EU does not have many tools to deal with these kinds of issues. Tax policy has always been closely guarded by member states.

The high stakes involved in this dispute came about because Apple was using Ireland as a conduit to remove profits from countries around the world. Whatever the outcome of today’s ruling, no-country outside of Ireland would have been impacted by it.

For that reason, the judgement should serve as a reminder that governments need to urgently press ahead with reforming the international tax system and to implement domestic reforms to ensure that profits are taxed appropriately in their jurisdiction and make sure that the kind of corporate trickery deployed by companies like Apple is a thing of the past.

Apple’s scheme presents a particularly pressing issue because there is no backstop to Apple’s tax avoidance scheme such as the Digital Services Tax. Whereas other digital companies, such as Google and Facebook, will soon be faced with additional charges to make up for their profit shifting.

Photo by Marcin Nowak on Unsplash

The coronavirus is not an excuse for tech giants to cash in on taxpayer generosity

14th April 2020 by George Turner

Throughout the coronavirus crisis, technology companies have played an important role in efforts to combat the disease. Google has been using its data to monitor movements amongst the population and test the effectiveness of lockdown measures. Amazon has partnered with the government to deliver Covid-19 testing kits.

But will all of this work come at a price?

In the UK, TechUK, the industry group that represents Facebook and Google as well as many others has asked for the government to delay the start of the Digital Services Tax. The Times reports today that the argument being deployed by TechUK is that recent changes to the tax have widened the scope of the tax, causing an unexpected compliance burden that companies can not meet during the crisis. Tax experts consulted by the paper, as well as our own research, have found no such changes to the UK legislation.

The Digital Services Tax is a new tax that has been imposed on the revenues of social media companies, search engines and online market places – Facebook, Google, and Amazon. The tax, which came into effect just a few days ago, places a 2% charge on revenues generated by these companies from UK customers. Although it is a new tax, it is in effect an anti-avoidance measure designed to counter some of the aggressive tax avoidance schemes used by these companies. It only applies to companies with global revenues of more than £750m, meaning that only the very largest companies are caught by it. There is a generous £25m tax free allowance built into the scheme.

The UK is not the only country to implement such a tax. According to the US Tax Foundation, 14 countries in Europe have either implemented or proposed a Digital Services Tax at rates ranging from 2%-7.5%.

The proliferation of Digital Services Taxes is a direct result of the failure of the OECD to agree on a comprehensive solution to the problem of tax avoidance by large multinational tech companies. A failure that has resulted in governments losing billions of pounds a year in tax revenues. In the UK we estimate that just five companies manage to avoid taxes of £1bn a year by shifting profits offshore.

Looked at in this context, the UK’s Digital Services Tax is a relatively modest measure, with the government estimating that it will collect around £400m a year from around 30 companies. Staggeringly, this estimate includes a 30% allowance for companies putting in place measures to avoid paying the tax. These figures are speculative, and the Office for Budget Responsibility say they come with a high degree of uncertainty.

At TaxWatch, using information published by the Treasury setting out how the tax operates, combined with our research estimating the revenues that large tech companies derive from UK customers, we estimate that a delay to the Digital Services Tax would benefit Google to the tune of £187m and Facebook £39m.

If implementation was delayed it would offset a significant chunk of the total amount companies are giving to governments to fight the coronavirus. The bill for Google is almost as much as the total amount of free ad credits Google has offered to the World Health Organisation and over 100 government agencies around the world ($250m (£203m)) as part of their response to the Coronavirus. A survey of what some tech companies have offered as part of the effort to fight coronavirus is set out here – http://13.40.187.124/tech_company_covid_donations/

Unfortunately, TechUK’s lobbying efforts appear not to be just the actions of one overzealous industry group in the UK. There appears to be a concerted effort by tech companies to use the coronavirus as an excuse to loosen regulations in a number of countries.

Reuters recently reported that in India, industry lobbyists representing the same companies are co-ordinating a similar campaign to defer the Indian version of the digital services tax.

Back in the United States, the New York Times reports how a number of tech companies have used the coronavirus to lobby against a range of government policies from labour laws to privacy protections.

Lobbyists may have thought the coronavirus outbreak an opportunity to realise long standing campaign aims, but they may have underestimated the reputational damage their clients could suffer if they are seen to be exploiting the crisis. The Times of London today ran a lead article heavily critical of the move from TechUK.

Government support mechanisms are supposed to be in place to help businesses in distress. Given that large tech companies are set to do relatively well out of the crisis, perhaps now is not the time for them to be looking for a hand-out. It is certainly not the time for governments to get rid of policies designed to combat tax avoidance by the tech industry.

We asked TechUK for a comment, they did not respond.

This research has been featured in The Times and The Telegraph.

Photo by Markus Spiske on Unsplash

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