Finance ministers are plotting a raid on Amazon’s lucrative cloud-computing business to ensure it pays more corporate tax under the new G7 agreement on a global rate.
Despite Amazon appearing to fall outside the profit margin threshold set by the G7, the $1.6tn tech group will have to pay more corporate tax in some of its largest markets if the new G7 agreement on a global rate is ratified, according to people close to the negotiations.
Amazon did not start to generate significant profits until 2017 and they have consistently been below the 10 per cent margin threshold set by the G7.
However, the OECD in Paris, which is convening the international negotiations on the global rate, is exploring a special measure to treat Amazon’s cloud-computing division as a separate entity, said a person briefed on the discussions. The measure would ensure that Amazon pays more tax in large European countries such as France, Germany, the UK and Italy.
Amazon Web Services’ operating income jumped by 47 per cent to $13.5bn last year, generating a healthy operating margin of 30 per cent in 2020, compared with 3 per cent for its retail business.
The OECD proposal on applying the rules to large and profitable divisions of companies would ensure that all the US tech giants are caught by the G7 global tax agreement.
In the G7’s communiqué at the weekend the details of the moves to make companies pay more tax in the jurisdictions where they operate were left vague. The group said that countries where sales were made would be “awarded taxing rights of 20 per cent profit exceeding a 10 per cent margin for the largest and most profitable multinational enterprises”.
Amazon Web Services was founded in 2006 but Amazon did not break out the unit’s financial performance until 2015. Revenues last year grew by 30 per cent to $45.4bn. Amazon’s shares have risen by more than 700 per cent since it began to disclose AWS performance.
Janet Yellen, US Treasury secretary, signalled at the weekend that all the US tech giants would be covered. Asked specifically about Facebook and Amazon, she said the G7 agreement would “include large profitable firms, and those firms, I believe, will qualify by almost any definition”.
Amazon declined to comment but has described the weekend’s G7 agreement as a “welcome step forward”.
“We believe an OECD-led process that creates a multilateral solution will help bring stability to the international tax system,” the company said.
Seamus Coffey, an economist at University College Cork and former adviser to the Irish government on tax reform, challenged the idea that finance ministers might manufacture a way to include Amazon in the proposals.
“If you’re designing rules to target specific or individual companies, I’m not sure that’s a good basis to proceed,” said Coffey. “Retailing is a low-margin business — just because you’re doing it online doesn’t change that.”
The proposed new system of allocating some of the global profits of the largest multinationals to the countries where they made their sales was unlikely to raise large sums, tax experts said.
Several multibillion-dollar Silicon Valley companies would probably be excluded from the “Pillar 1” proposals, including Uber, Tesla, Twitter and Snap, as they remain lossmaking, or their pre-tax profit margin was below the 10 per cent threshold last year.
More money will be raised by the proposed global minimum corporate tax rate at an effective rate of “at least 15 per cent” if it is applied on a country-by-country basis. In this instance, the lion’s share of additional revenue will go to the US.
The US stands to gain heavily because its multinationals have shifted profits around the world to avoid US corporate taxes, leaving it with one of the lowest tax takes from these levies of advanced nations. The US currently raises 1 per cent of national income from taxes on corporate profits, compared with a 3 per cent average across the OECD.