Politics 5 April 2012 Amazon pays no UK corporation tax The company attributes nearly all its income to its Luxembourg branch. Sign up for our weekly email * Print HTML The Guardian has a major story today on the tax affairs of Amazon UK. The online retailer, Britain's biggest, pays no corporation tax in the UK, despite having between £2bn and £3bn sales here in 2010. The company avoids paying anything by registering the vast majority of its turnover in its Luxembourg office, which reported income of €7.5bn in 2010, despite having just 134 employees. The British office, which employed 2,265 people, reported a turnover of £147m. The paper explains: The UK operation avoids tax as the ownership of the main Amazon.co.uk 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. This arrangement saves them millions in tax: At first glance, the corporation tax rates in Luxembourg and the UK are similar, but the Luxembourg authorities have a different view of costs that can be offset against income, which reduces taxable profit. So Amazon EU Sarl's €7.5bn of income in 2010 was almost entirely offset by €7.4bn of charges, enabling it to disclose a tax charge of just €5.5m. The charges are defined by the company as the "cost of product sales and other ongoing costs related to the operations of the company"… This is in stark contrast to the performance of the UK fulfilment business which filed its 2011 accounts last month. For the first time since 2006, Amazon.co.uk Limited posted an after-tax profit of £1.2m, much better than the £3m after-tax loss reported a year earlier. The accounts show its turnover was £208m, a big improvement on the £147m recorded in 2010 but dwarfed by the £3.3bn of UK sales passed to Luxembourg. The company still pays a fair amount of UK tax, because VAT is charged based on the location of the recipient, not the business. But a significant proportion of Amazon's sales are books, which are zero-rated for VAT; they also don't have to pay British sales tax on downloads, instead paying Luxembourgish rates. For ebooks, this is 3 per cent, rather than the 20 per cent they would be paying in the UK. Until last Sunday, the company also managed to not pay VAT on almost every sale under £18. It used a loophole, originally designed to protect flower sales, which allowed low-cost goods to be imported from the Channel Islands VAT-free. Richard Murphy, the tax campaigning accountant, suggested how a revised tax code could more accurately assess the company's holdings: First split the profit in three. One third is then allocated between the UK and Luxembourg based on where the sales really are. Well, all these sales are to UK customers so that ratio is 100% to the UK and 0% to Luxembourg. So that £125 divided by three = £41.66 million of profit allocated to the UK. Then we split the next third on the basis of where the people are. That’s 2,265 here and 10 in Luxembourg. £41.66 million x 2,265/2,275 = £41.5 million to the UK and £166,000 to Luxembourg. And then let’s do assets – admittedly the one I have had to guess. The guess is £100 million here and £5 million in Luxembourg so that is £41.66 million x 100/105 = £39.7 million of profit here and £1.96 million to Luxembourg. Add it up and near enough £122.8 million of profit would be in the UK and £2.2 in Luxembourg. Instinctively that feels right of course - because that is exactly how the economics really are. Glaringly obviously, as Amazon’s accounts admit, the market is here in the UK, not in Luxembourg. But the game of abuse that is being played means that almost all the profit goes to Luxembourg on this one – and almost none to us. Implementing such a change would be a massive undertaking, though, as well as being difficult to get through EU law. For now, the news is likely to remain just bad PR for Amazon. › Sweet like chocolate? The Amazon warehouse in Swansea, in the run-up to Christmas. Credit: Getty Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter. Subscribe from just £1 per issue More Related articles Jeremy Corbyn has found a vulnerable spot on Theresa May and trade Politicians are worried that their pensions are destroying the planet. Is yours? Nap Store: Where did all these new mattress start-ups come from?