Amazon not the only company to have shifted headquarters out of UK, other multinationals could do same and save billions
Despite George Osborne's assertion in the budget that a cut in corporation tax to 22% by 2014 was "an advertisement for investment and jobs in Britain," many multinational companies do not agree. Amazon is not the only company to have shifted its European headquarters outside of the UK.
One of the first things that Kraft, the US food giant, did after it took over Cadbury in 2010 was to integrate the British acquisition into its existing European corporate structure, headquartered in Switzerland, which has a corporate tax rate that can be as low as 8%.
But the headline corporation tax rate is not the only factor companies consider when deciding where to locate. Luxembourg has an effective corporate tax rate of 28.8%, but is regarded by some as a benign regime. Luxembourg, for instance, does not have legislation to govern the prices companies within a single group charge each other for goods and services.
Those multinationals that choose their locations carefully can see a substantial benefit to their overall tax charge. In its filing with the US securities and exchange commission for the financial year to June 2011, Microsoft explained the reason why its effective tax rate was so far below the US statutory rate of 35%.
Microsoft racked up an effective tax rate of just 18% and said this was due to the tax rates in its regional operating centres in Ireland, Singapore and Puerto Rico being lower than the US statutory rate. Indeed, 16 of the 17 percentage points reduction in Microsoft's effective rate was due to income earned overseas being taxed at a lower rate.
Google is another company with European headquarters in Ireland where the headline corporation tax rate is just 12.5%. It has been criticised because, like Amazon, it channels revenues generated in the UK to Ireland without paying corporation tax on the associated profits.
In its defence, Google insists it has complied with all tax rules and points out that the company has an obligation to work in a tax-efficient manner on behalf of its shareholders.
However, the US multinationals are beginning to find a problem with their tax efficiency. Many are building up big cash piles overseas to avoid remitting that money to the US, where it would be subjected to a 35% tax charge.
Apple, which also has an Ireland-based European headquarters, is estimated to have amassed a cash hoard in excess of $64bn (£40bn) in its overseas subsidiaries. This money cannot be repatriated to the US without significant tax consequences.
One solution for the multinationals is to finance acquisitions using cash which is banked overseas. Both Google and Amazon have done this. However, that still leaves billions of dollars just sitting in bank accounts.
Apple is orchestrating a share buyback scheme and paying its shareholders a dividend in a bid to bring down its total $100bn cash pile. But this does not represent any direct investment into economies around the world which are in desperate need of the cash the corporate giants are clinging on to. It is no surprise that the lobby for the introduction of a cash repatriation tax holiday in the US is becoming increasingly vocal.