Tax avoidance is the news of the moment and online auction site eBay has become the latest in a string of major corporations exposed for paying too little tax.
Last week coffee chain Starbucks was in the news for reportedly paying just £8.6m in tax on revenues of some £3bn since 1998.
Prior to this story, Google, Amazon, Vodafone and others have been in the news charged with paying too little tax at a time when the exchequer is struggling to raise funds.
Newspapers have been quick to add that the practices conducted by all these businesses is entirely legal and it is therefore the ethics of big companies avoiding tax which is causing so much public ire.
Related: Google criticised over legal £6m tax bill on £395m UK turnover
eBay avoidance
eBay generated some £789m in sales in 2010, with a group-wide profit margin of around 23% you would expect a profit of £181m which would generate corporation tax of over £50m. However, eBay paid just £1.2m in tax that year.
eBay and others are using tax avoidance measures to ship profits made in the UK to other jurisdictions where the rates of corporation tax are lower. For eBay profits are sent to Luxembourg, whilst for Google profits are sent to another tax haven, Bermuda, impressing analysts by retaining an overall tax rate of just 2.4% for tax since 2007.
Speaking in relation to the Google tax avoidance, tax economist Martin Sullivan said: "It's remarkable that Google's effective rate is that low," he said.
"This company operates throughout the world, mostly in high-tax countries where the average corporate rate is well over 20 percent," he added.
The Google avoidance scheme
Google's revenues from Europe, Africa or the Middle East are charged to their global HQ in Ireland. Irish law allows money to be sent to other EU countries without paying tax and so most of the revenue collected by Google is sent to the Netherlands and from there to Bermuda.
As well as being entirely legal, companies are obliged to maximize their revenues to shareholders by paying the lowest amount of tax possible.
Irving Plotkin is a managing director at PWC.
"A company's obligation to its shareholders is to try to minimize its taxes and all costs, but to do so legally," he told Bloomberg.
Disclosure obligations
The UK currently operates a 28% corporation tax rate, which it is thought drives companies to siphon profits abroad. From April 2014 the corporation tax rate will be lowered to 22%.
The furore over tax avoidance has prompted Her Majesty's Revenue and Customs (HMRC) to introduce disclosure rules, obliging companies to notify HMRC of their legal tax avoidance measures. It is hoped that the disclosure obligations will allow HMRC to act quickly to legally close tax loopholes in future.
Sources:
E-bay is latest overseas company to pay little UK tax (The Telegraph)
The Tax Haven That's Saving Google Billions (Bloomberg)
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