Fresh Amazon claims highlight Europe’s tax trouble

Jeff Bezos with Kindle FireDespite being Britain’s biggest online retailer, with revenues of more than £3.3 billion last year alone — that’s over $5 billion — Amazon (s AMZN) paid zero tax in the U.K., according to new reports.

The claims are made in the Guardian (see disclosure below), which has made a great deal of exposing corporate tax loopholes over the past few years. They detail how the business was restructured in order to deliberately avoid handing over money in one of its biggest markets:

Regulatory filings by parent company with the US securities and exchange commission (SEC) show the tax inquiry into the UK operation, which sells nearly one in four books sold in Britain, focuses on a period when ownership of the British business was transferred to a Luxembourg company.

The UK operation avoids tax as the ownership of the main business was transferred to a Luxembourg company in 2006. The UK business is now owned by Amazon EU Sarl and the UK operation is classed only as an “order fulfilment” business. All payments for books, DVDs and other goods go directly to Luxembourg. The UK business is simply a delivery organisation.

The latest 2010 accounts for Amazon EU Sarl show the Luxembourg office employed just 134 people, but generated turnover of €7.5bn (£6.5bn). In the same year, the UK operation employed 2,265 people and reported a turnover of just £147m. According to the SEC filings, UK sales that year were between £2.3bn and £3.2bn.

A parallel story explains precisely how Amazon UK does it by operating as a delivery service, a little bit of legal trickery that has saved it untold millions in taxes.

This sort of corporate behavior is not entirely unusual: Even the Guardian‘s own parent company uses a few loopholes of its own. But it does highlight one of the big problems that European governments and businesses struggle with: How do you act as a single market if the varying tax structures of different countries can effectively be used against you?

Of course, Amazon is not the only company to feel the heat here.

Google (s GOOG), too, has come in for plenty of criticism over the years for taking advantage of international tax laws, shuffling money through Ireland and the Netherlands to cut its tax bill by billions of dollars each year. It’s a move known as the “Double Irish,” and it is commonplace among American corporates.

Google chairman Eric Schmidt
Google chairman Eric Schmidt

Eric Schmidt — himself an advisor to the U.K. government — previously argued that Google would pay more tax in Britain if the system wasn’t so weak.

“It is true we could pay more tax but we would have to do so voluntarily. It’s called paying the legally minimum amount of tax required,” he said last year. “We love Britain. If Britain changes its tax laws, we will pay taxes in accordance with those laws. I can’t be clearer than that,” he said.

It’s an attitude that can be a little offensive, but it’s unsurprising. There’s nothing illegal going on — just a way of interpreting the rules to gain maximum shareholder benefit. And after all, you have to imagine that any company built by hackers — who, by their nature, are constantly looking for loopholes and efficiencies — is going to exploit everything it can.

The problem is that when you look at the vast differentials among various countries — even inside the European community — something’s got to give.

Take Denmark. Over at the Nordic tech blog Arctic Startup, there is a great post on how the country’s “portfolio tax” is causing damage by taxing some entrepreneurs as much as 67 percent when their company exits.

Realizing its negative consequences, Minister Mikkelsen promised to remove the tax not long after it was passed but left office without making any changes . . . [but] the tax has only been re-structured to allow entrepreneurs to exit cleanly under specific circumstances. . . .

As a result the startup ecosystem in Denmark has stagnated. Early stage investors who were willing to invest in less than 10% of a company have taken their money elsewhere. And investors who may be willing to make larger investments still face large uncertainty from the fact that further investments may dilute their shares to less than 10 percent. A DVCA report found that 62 % of angel investors have declined to invest, and more than a third of Danish IT companies reported they have already been affected by the Entrepreneur Tax.

It’s a poorly implemented law that just ends up causing problems instead of solving them. It’s all a mess.

There’s no doubt that innovative businesses are one way out of the current economic turmoil — an idea that the U.K. government, among others, is keen to promote — but it is a tough sell to the public if it turns out all the money made by those innovative businesses simply gets funneled straight out.

Disclosure: Guardian News and Media Ltd., the parent company of the Guardian newspaper, is an investor in the parent company of this blog, Giga Omni Media.