UK’s £2bn Tax Gap, According to TaxWatch

In 2021, the UK’s coffers may have been lighter by nearly £2 billion, a sum that could have been collected from big tech firms had they not shifted their profits overseas. This claim has been put forward by campaigners advocating for a more transparent and fair tax system.

The Big Seven’s Tax Puzzle

TaxWatch, a campaign group focused on tax transparency, has highlighted how seven colossal tech companies from the US, namely Apple, Microsoft, Alphabet (Google’s parent company), Amazon, Meta (formerly Facebook), Cisco, and Adobe, paid significantly less in UK corporation tax and digital sales tax than what appears due, considering their economic activity in the country.

These corporations, some of the largest globally, have intricate international structures that often lead to profits being declared in countries other than where the actual sales are made. This complexity clouds the actual tax these companies should owe the UK, raising questions about the fairness of their tax contributions relative to their operations in the country.

TaxWatch’s analysis estimates that these tech behemoths raked in revenues of £60.5 billion in the UK in the 2021 tax year. By applying their global profit margins, the estimated profits from these revenues would be £14.8 billion. If taxed at the UK’s 19% rate, these profits translate to a potential tax bill of £2.8 billion. However, based on what these companies’ UK subsidiaries have paid, TaxWatch found they contributed only around £753 million in UK corporation tax and digital services tax. This discrepancy suggests a staggering £2 billion less in tax revenue for the UK.

It’s crucial to note that there is no indication these companies engaged in illegal tax evasion. Nonetheless, the gap points to the broader issue of how current international tax rules allow profits — and therefore taxes — to be moved away from where sales are made.

A Closer Look at the Numbers

While TaxWatch acknowledges that its figures are rough estimates, owing to limited data availability in public reports, it stresses that this very lack of transparency necessitates reforms like country-by-country tax reporting. Amazon has contested TaxWatch’s methodology, deeming the assumptions as incorrect, particularly regarding profitability. However, the campaign group maintains that their approach likely presents a more accurate picture of the profits these companies make from their UK operations.

All companies involved have affirmed their compliance with the relevant tax laws. An illustrative case is Microsoft’s UK outfit, which recently settled a tax discrepancy by paying £136 million in additional taxes for previous years after a review by HM Revenue and Customs.

Calling for Change

Claire Ralph, director of TaxWatch, emphasized the need for more clarity in how much tax big multinationals are paying in the UK. She cited Microsoft’s case as an example of how complex international tax rules can be manipulated to shift profits outside the UK tax net, thus depriving the Treasury of significant revenue.

The campaign group’s call for reform is echoed by its founder, Julian Richer, who initiated TaxWatch in 2018 out of frustration with the UK’s inefficient corporate tax system.

Steps Towards Reform

In response to such issues, some measures have been introduced. For instance, the UK implemented a digital sales tax in April 2020, mandating social media platforms, search engines, and online marketplaces to pay a tax amounting to 2% of their revenues — as opposed to profits — if their UK turnover surpasses £25 million.

On the international stage, the Organisation for Economic Cooperation and Development (OECD) members are expected to enforce a 15% minimum tax on corporate profits starting next year. This global agreement aims to discourage profit-shifting, although its actualization remains uncertain.

Several companies have expressed their support for these initiatives. Microsoft endorses a global tax approach preventing market distortions and double taxation. Meta acknowledges public concerns regarding how multinational companies are taxed and supports OECD’s efforts. Adobe asserts its adherence to the tax laws of every country it operates in, while Amazon refutes TaxWatch’s findings as being based on inaccurate assumptions.

The Way Forward

The conversation around the taxation of multinational companies, especially big tech, is complex and ongoing. While these corporations assert their compliance with existing laws, there’s a growing consensus among the public and organizations like TaxWatch that current regulations allow for significant disparities in where and how much tax these companies pay. The steps taken by the UK government and international bodies like the OECD signal a move towards a more equitable tax system, but the journey ahead requires robust dialogue, transparent reporting, and international cooperation.