Duncan Hamilton: The UK tolerates tax loopholes, so don’t be shocked if Amazon exploits one

Published on 08/04/2012 00:00

THE reports that Amazon has been avoiding corporation tax in the UK have understandably caused anger. Less explicable is the silly attempt to point the finger of blame at the SNP.

One Lib Dem businessman rushed to print to proclaim that “Scottish businesses have been given a kick in the teeth” by the Scottish Government decision to invest £10 million of public money to establish an Amazon distribution centre in Dunfermline. Labour joined the chorus, demanding an end to such payments.

But perhaps we might just “haud the bus” for a moment, and consider the facts.

First, back to basics: the issue here is a flaw in the UK tax system which allows companies to avoid tax by setting up headquarters elsewhere. Just to repeat that for the hard of thinking, that’s the UK tax system – the one the Scottish Government doesn’t control.

Second, direct public subsidies to attract Amazon investment were utilised in Wales in 2007 under a Labour-led Assembly, and again under the current Tory-Lib Dem UK government in places such as Staffordshire in 2011. That investment in England and Wales was welcome and sensible – every bit as much as the Scottish Government decision to assist Amazon in developing operations in Scotland. But for Labour and the Lib Dems to launch an attack on the SNP is ridiculous.

Third, let’s separate out the decision-making process here. Scottish ministers have limited financial powers. One of them is to attract inward investment which, the world over, involves both tax incentives and direct subsidies.

Why do governments around the globe compete to offer the best terms? For jobs and growth, pure and simple. The 2,000 permanent jobs and 3,000 temporary jobs created in Scotland are desperately needed.

Think not only of the multiplier effect for the local economy in Dunfermline, Fife and Edinburgh but also about the message such investment sends out. It shouts of confidence in Scotland and its future. That decision was, and is, the right one.

By contrast, the inability of the UK government to sort itself out over corporation tax stands as a testimony to either an inability to combat a loophole which has been exploited for years, or a failure of will amongst UK ministers to ensure that, as the rest of us are being squeezed, multinational companies seeking tax “efficiency” also pay their share.

Amazon sold £7 billion worth of books in the last three years in the UK, but made its UK business a subsidiary of its European headquarters in Luxembourg. The company profits are therefore taxed in Luxembourg, saving a fortune.

But let’s be clear: the loophole isn’t new and Amazon isn’t the first company to take advantage of it. WPP, the global advertising company run by Sir Martin Sorrell, moved its headquarters to Ireland in 2008 and reconfigured the business to reduce the tax bill.

In one sense it is a wholly rational response of commercial entities to an opportunity presented by the collective failure of the tax authorities across the EU to prevent one tax regime being played off against another. The shareholders of those companies would doubtless be unimpressed if, despite the option of lower tax and greater profit, the board decided in an outbreak of Christian charity to stay put and pay more. If a loophole is created and tolerated, don’t be surprised if companies take advantage of it.

The much bigger question is really about differential rates of corporation tax across the EU and the degree to which national autonomy will always allow one country to seek advantage over another.

Plainly, the playing field isn’t level: consider the low levels of Irish corporation tax or the sympathetic “double taxation” rules of Luxembourg. But is that a race to the bottom or simply a necessary and inevitable distortion of a European market which has so far palpably failed to provide cohesion or uniformity?

Given the political fallout from the euro crisis – a heightened sense of the threat to national democracy and sovereignty – I sense that any ceding of economic powers is all the more unlikely.

The issue for Scotland therefore remains: whether as an independent nation or indeed one within the UK which had devolved control of corporation tax, the differential rate of corporation tax could contribute to greater growth and prosperity.

The Scottish Government paper in November 2011 suggested that a 3 per cent cut relative to the rest of the UK would mean 27,000 new jobs over the medium to longer term and an increase in GDP, investment and exports.

It isn’t a silver bullet and doesn’t make Scotland a global economic power, but it is a vital additional lever without which Scotland is hamstrung.

This is a global marketplace of fast- moving capital. The twin challenge for national governments is to attract jobs, growth and investment whilst ensuring that multinationals pay their dues.

In securing 5,000 jobs, the Scottish Government did its bit. In ignoring Amazon’s practice since 2006, can the last two UK governments say the same?