Does Amazon Pay Taxes? A tax optimization’s lesson from a giant

The United States imposes a 21% tax rate on all corporations. Does Amazon pay those taxes? What about the other countries Amazon is installed?

Short Answer: They do. In a really clever way.

How amazon pays taxes?

Major corporations pay less taxes

In general, the amount major corporations are paying is significantly lower than the required amount.  In 2018, Amazon made more than $10 billion in profits; as per the tax filings from the Securities and Exchange Commission, the corporation had to zero out its income taxes earning a rebate of about $129 million thanks to tax credits alone.

A favorable tax climate

In recent years, it has been much easier for reputable corporations like Amazon to keep off from paying the required federal tax because:

– Legislative adjustments like the 2017 Tax Cuts and Jobs Act allows for tax rebates from major corporations.

– Additionally, a nonprofit think tank known as the Institute on Taxation and Economic Policy assessed quite a number of fortune 500 companies, and Amazon was categorized under those that did not have any federal income tax expenses in the year 2018.

Amazon guarantee that they pay their taxes

Amazon’s financial statement

Amazon’s financial statements however show that it does pay taxes; in 2017 alone approximately $1 billion was paid as income tax. 2018 recorded a slight increase of up to $1.18 billion including international, state, and local taxes.

All these figures show that Amazon has a lot to pay in terms of state, local, and payroll taxes.

According to an Amazon spokesperson, Amazon had to pay billions in taxes apart from the mandatory federal income taxes including both local and state taxes; the spokesperson further mentioned that Amazon contributes to the total US workforce bringing in more than 250,000 workers. They also affirmed to the public that Amazon pays all taxes they are required to pay in the country and any other country they have dealings with, including $2.6 billion and $3.4 billion in corporate tax and tax expense respectively that is over the past three years from 2018.

What’s more, the spokesperson mentioned that corporate tax is based on profits rather than revenues, and Amazon’s profits remain relatively modest since retail business is highly competitive with low margins. 

The art of tax optimization

As we just saw, amazon pay taxes. But here is how they do to pay way less, to the point they pay almost nothing.

Tax breaks and underlying incentives

The three major drivers of tax breaks in Amazon are:

  1. an investment in research and development
  2. investment in plant, property and equipment
  3. employee stock compensation.

1. Investment in research and development

Amazon largely focuses on investing in research and development to benefit from the tax credit. it was ranked the first company in Research and Development spend in the year 2017 at $22.6 billion; Alphabet followed closely in the second position with a total of $16.6 billion investment in R&D. Several innovations from Amazon originate from such investments.

2. Investment in plant, property and equipment

Amazon is eligible for tax credits because of investment in plant, property, and equipment. Several cities can thrive from Amazon investing in real estate as well as job creation. There has been a significant increase in Amazon’s PPE expenditure over the previous five years amounting to about $60 billion by the end of 2018.

3. Employee Stock Compensation

The third driver of Amazon’s tax breaks is employee stock compensation. Compared to cash compensation, stock-based compensation records an increase in tax deductions whenever the stock increases. This move can create adverse incentives but it is vital to analyze the benefits that it brings relative to the cost. This type of tax policy can create misaligned management incentives but it also develops incentives for the management to push for the best possible return for investors.

Take away: Does Amazon Pay Taxes?

It is true to say that Amazon doesn’t pay any corporate tax and it’s simply because the company injects those profits back to its operations. Consider a scenario where Amazon doesn’t have corporate tax breaks; this could hold back any incentives the company has towards reinvesting. Reinvesting is a means of creating greater business opportunities and consequently, the cities in which they operate thrive.