How Amazon has Avoided Paying Taxes

Recently, the six biggest US tech companies – Facebook, Google, Amazon, Netflix, Apple, and Microsoft – have been accused of ‘aggressively avoiding’ over a hundred billion dollars of global tax over the past decade. The Fair Tax Mark, a tax transparency campaign group, has marked them in their report for avoiding tax by shifting revenue and profits through low-tax countries or tax havens and for delaying the payment of taxes they’ve incurred.

This blog singles out Amazon, a tech behemoth run by America’s richest person, Jeff Bezos, as the most-serious offender. It is reported that for the past decade, Amazon has paid only 3.4 billion dollars in tax on its income, despite achieving revenues of 960.5 billion dollars and profits of 26.8 billion dollars. According to the Fair Tax Mark, for the past decade, Amazon’s effective tax rate was 12.7%, while the US’s headline tax rate was 35% for most of that period.

Amazon has dismissed these accusations, saying they are false and that the company had a 24% effective tax rate on profits for the period of 2010-2018. Amazon stated that the company’s profit margins are low, which naturally results in a lower cash rate.

Their recent decision to move headquarters out of NYC has reignited this debate of Amazon not paying taxes. But, before yelling favoritism, it is worth understanding why Amazon doesn’t pay federal taxes. The first step is understanding economic incentives. To a layperson, incentives sound like free money, but for an economist, incentives are a lever for generating a better result, which offset the cost. Taxes are such a lever, but they are often interpreted by their primary effect of generating revenue, rather than their next effect of stimulating economic activity. So, following this general standpoint, Amazon is paying taxes but through tax deductions, tax credits, and other incentives.

Amazon’s Tax Breaks and Incentives

There are three dominant groups of Amazon’s tax breaks:

1. Investment in research and development

Amazon is able to profit from the research and development tax credit, a policy that encourages profitable companies to place earnings into research and development. Congress continually extends this with the thinking that innovation research is good, and Amazon is a company that does its fair amount of it.

2. Investment in property, plant, and equipment

Trump’s tax bill includes a temporary provision that allows companies to take a 100% tax deduction for equipment investment.

Amazon is sticking to this by not sharing buybacks and heavily investing in properties and equipment.

3. Employee stock compensation

Since 2018, companies can deduct the cost of stock-based compensation from their taxable earnings even though it doesn’t cost them any money to give their shares of their stocks to employees. Moreover, this cost is estimated so that the more your share prices rise, the larger the deduction for giving shares. Therefore, because Amazon’s profits have surged, the company’s stocks’ price went up, and the value of these deductions increased as well.

Take Away

So, the reason Amazon pays no corporate taxes is that it reinvests its profits into these operations. If Amazon had no corporate tax breaks, it would prevent the company from reinvesting and stopping them from creating better opportunities for the businesses and cities in which Amazon operates. Or so they say.

If you want to know more about this and other subjects pertaining to taxes and tax resolution, feel free to contact ​Golden Tax Relief​!

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