Etailer Amazon – along with internet giant Google and coffee chain Starbucks – has come under increased media scrutiny over how much tax it pays in the UK. Retail Week takes a look at the tax laws for international retailers operating in the UK.

Why are we talking about this?

Amazon director of public policy, Andrew Cecil, faced the House of Commons Public Accounts Committee on Monday about how much tax it pays in the UK and was accused of being “totally evasive” about the turnover and profitability of its UK business.

What was Amazon’s response?

Speaking to the committee, Cecil said Amazon does pay corporation tax and in the last five years has paid more than £100m in payroll taxes and tens of million pounds in business rates.

The sticking point is that Cecil said the UK operation is part of a “single European company” based in Luxembourg, so therefore by having the company based out of the country it minimises the amount of UK corporation tax it pays. He explained that Amazon UK does not own the inventory that it sells and only provides services to its Luxembourg headquarters.

Cecil outlined that accounts filed at Companies House reveal Amazon UK recorded a turnover of £207m in 2011 from providing services in the UK for Amazon Europe companies, on which it made a £1.8m corporation tax payment.

He added that he “could not disclose” how much of the €9.1bn sales generated by its pan-European business came from its UK operation. When pressed for further details, Cecil said he would have to come back at a later date and that the company “had never broken out” revenue figures on a country basis. Yet, according to the parent company’s annual report, UK net sales were 11-15% of total net sales of $48.1bn in the year to December 31, 2011.

What are the tax laws in the UK for international retail companies like Amazon?

According to Richard Asquith, managing director of legal firm TMF Group, the law depends on what a company sells. If the goods, such as physical goods, including books, and electronic goods (ebooks on the Kindle), are being dispatched from the Netherlands, then there is no UK corporation tax. The business pays corporation tax where it is based, which in Amazon’s case is Luxembourg.

Asquith says: “It is part of the European Union free market that anybody in any country can sell cross border without having to establish a local company in the region it is selling to or pay local corporation tax. This is a system set up by the EU and the member states to encourage free trade, which the UK is at the heart of. It’s an EU system, not an Amazon one.”

As the EU looks to encourage cross border trade to stimulate competition, Asquith says the problem is that for it to work from a taxation point of view, so it’s equal for each country, there needs to be a harmonised tax system in which countries have similar tax rates. The problem he explains is that there isn’t one, so companies can shop around for the best tax rate.

Asquith adds: “It is a failing by national governments. So each national government country creates a tax system for their country, but they don’t create one for international trade. The UK, and other countries, create incentives for international trade but then don’t tax accordingly.”

However, he says there is a further anomaly in the case of Amazon. If goods are being sold into the UK, companies have to charge UK VAT at 20%to the consumer, but if they are selling digital products such as ebooks, they only have to charge VAT at the rate of the country in which they are based - in the case of Luxembourg, that is 3%. There is no UK corporation tax on goods sold from another country. UK VAT does apply on physical goods, books and CDs, but not on products including Kindle ebooks.

Do shoppers care?

Asquith says: “I don’t think shoppers will care. If I knew I could get something cheaper for whatever reason I would try and find it. Tax issues don’t enter people’s consciousness.”

However, if negative media coverage, including a front page splash in the Daily Mail, continues for Amazon, as well as for Starbucks, Google and eBay, it might keep the issue in consumers’ minds, therefore giving them a reason to shop elsewhere. Especially if the coverage continues with further committee hearings to come, and Amazon is recalled for further questioning. As a result, online retailers such as Rakuten Group’s with a similar price offering could take advantage.