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How can Amazon pay tax on profits it doesn't make? How can Amazon pay tax on profits it doesn't make?
(4 months later)
A Guardian investigation has revealed that Amazon paid just £3.2m in corporation tax in the UK last year. But this says less about the company's tax avoidance, and more about its one-of-a-kind growth strategy – and the leeway its investors give it to try to achieve it.A Guardian investigation has revealed that Amazon paid just £3.2m in corporation tax in the UK last year. But this says less about the company's tax avoidance, and more about its one-of-a-kind growth strategy – and the leeway its investors give it to try to achieve it.
There's no doubting Amazon is an enormous company. It paid UK tax on £320m of sales last year, but told investors that British sales in 2012 were over £4bn; whichever number you take, it's clear that vast sums of money flow through its coffers.There's no doubting Amazon is an enormous company. It paid UK tax on £320m of sales last year, but told investors that British sales in 2012 were over £4bn; whichever number you take, it's clear that vast sums of money flow through its coffers.
The thing is, companies don't pay tax on sales, but on profits. And Amazon is a company with a very strange attitude to profit: it doesn't seem to like it. In the year 2012, it made a worldwide loss of $39m, even as it had sales totalling $61bn. That year was an aberration, with a costly acquisition weighing the company down, but previous years have been similar. 2011 saw just $631m net income on worldwide sales of $48bn, and in 2010 – the company's most profitable year to date – it scraped $1.15bn of profit on revenue of $34bn.The thing is, companies don't pay tax on sales, but on profits. And Amazon is a company with a very strange attitude to profit: it doesn't seem to like it. In the year 2012, it made a worldwide loss of $39m, even as it had sales totalling $61bn. That year was an aberration, with a costly acquisition weighing the company down, but previous years have been similar. 2011 saw just $631m net income on worldwide sales of $48bn, and in 2010 – the company's most profitable year to date – it scraped $1.15bn of profit on revenue of $34bn.
Amazon's strategy is to aggressively cut margins everywhere it can, in an attempt to grow into the biggest retailer the world has ever seen. That means that, even as its sales rise and rise (because where else is cheaper to shop than Amazon?) its profit stagnates. Some days, it seems like half its activity consists of loss-leaders, taking a hit on some aspect of its business in order to, potentially, make it back later.Amazon's strategy is to aggressively cut margins everywhere it can, in an attempt to grow into the biggest retailer the world has ever seen. That means that, even as its sales rise and rise (because where else is cheaper to shop than Amazon?) its profit stagnates. Some days, it seems like half its activity consists of loss-leaders, taking a hit on some aspect of its business in order to, potentially, make it back later.
So you buy your Amazon Kindle Paperwhite (which it sells at cost price), and get an Amazon Prime subscription (a scheme by which Amazon loses money on postage to encourage you to buy more). That subscription lets you take books out for free from the Kindle Owners Lending Library (some of which Amazon pays full wholesale price for) and, in the US, watch some of the new TV series Amazon has produced, also for free (I don't need to explain how the company loses money on that). Oh, and on top of everything else, you can buy physical goods from Amazon at margins so slim that the publishers worry whether anyone else will ever be able to compete with it.So you buy your Amazon Kindle Paperwhite (which it sells at cost price), and get an Amazon Prime subscription (a scheme by which Amazon loses money on postage to encourage you to buy more). That subscription lets you take books out for free from the Kindle Owners Lending Library (some of which Amazon pays full wholesale price for) and, in the US, watch some of the new TV series Amazon has produced, also for free (I don't need to explain how the company loses money on that). Oh, and on top of everything else, you can buy physical goods from Amazon at margins so slim that the publishers worry whether anyone else will ever be able to compete with it.
Amazon pays barely any taxes because it makes barely any profit. And it makes barely any profit because it doesn't try to, instead preferring to focus on, in the words of CEO Jeff Bezos, "proactively delighting customers" to earn "more business" from those customers. What's amazing is that this strategy hasn't just been weathered by the company's shareholders – who are, presumably, hoping for a profit some day – it's been positively embraced. Even as its net income has dropped, the company's stock has risen ever higher. Its price-to-earnings ratio, a measure of how many more times the company's price per share is than its profit per share, currently stands at more than 3,000.Amazon pays barely any taxes because it makes barely any profit. And it makes barely any profit because it doesn't try to, instead preferring to focus on, in the words of CEO Jeff Bezos, "proactively delighting customers" to earn "more business" from those customers. What's amazing is that this strategy hasn't just been weathered by the company's shareholders – who are, presumably, hoping for a profit some day – it's been positively embraced. Even as its net income has dropped, the company's stock has risen ever higher. Its price-to-earnings ratio, a measure of how many more times the company's price per share is than its profit per share, currently stands at more than 3,000.
It's hard to imagine where all those investors think the extra profits will come from. Do they expect Amazon to suddenly announce one day that it has finished trying to grow, and will be raising prices immediately? Or do they think that eventually, every single one of its competitors will have given up, and folded beneath the company's relentless expansion?It's hard to imagine where all those investors think the extra profits will come from. Do they expect Amazon to suddenly announce one day that it has finished trying to grow, and will be raising prices immediately? Or do they think that eventually, every single one of its competitors will have given up, and folded beneath the company's relentless expansion?
That future feels closer every day. But inevitably, someone will work out how to compete with the company and actually win. Surely they will. Right?That future feels closer every day. But inevitably, someone will work out how to compete with the company and actually win. Surely they will. Right?
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