You’ve probably seen headlines about how Amazon didn’t pay any federal tax in 2018, or how Facebook has a surprisingly low tax bill, given its popularity. You might wonder whether these companies have particularly devious accountants … or whether the reported low tax is some kind of accounting joke.
The truth is that Amazon and Facebook (plus other huge companies) are avoiding tax legally. It might seem unfair or even unethical to you – but what they’re doing isn’t illegal.
Here’s what you need to know:
Amazon and Facebook Are Paying Some Tax
Even the best CPA in the world can’t avoid every single tax for a huge corporation altogether. (You can find more about being a CPA on this website). So both Amazon and Facebook do pay some tax … it’s just surprisingly little.
You might have seen headlines about Amazon not paying any federal income tax at all in 2018. In fact, as The Guardian reports, they actually had a negative federal tax rate:
In 2018, Amazon nearly doubled its profits, from $5.6bn to $11.2bn. But far from paying the statutory 21% income tax rate, it reported a $129m federal income tax rebate for the year – a tax rate of -1%.
While Amazon’s tax bill in the US was less than zero, though, the situation worldwide is slightly different. Amazon is definitely good at avoiding tax, but they do pay some – for instance, in the UK in the first quarter of 2018, Amazon paid 1.7 million pounds UK tax on profits of 72.4 million pounds. Definitely not a lot, for a company of their size, but not zero, either.
And, although Amazon didn’t pay any federal tax in the US, they do pay state and local taxes.
What about Facebook? They did pay some federal tax in 2018 … but less than you might expect, as The Mercury News explains here:
Facebook paid $1.7 billion in federal income taxes on $8.8 billion in domestic profits. That’s less than half the $4.4 billion the company paid in federal taxes in 2017.
Around the world, Facebook is, again – like Amazon – good at keeping their tax bill to a minimum. In the UK, for instance, they made sales of £1.3 billion but paid just £15.8 million in tax.
How Do Facebook and Amazon Legally Avoid Tax?
It might seem staggering that Amazon, Facebook, and other large corporations are acting legally.
The truth is, they are. They have some nifty tricks for keeping their tax bill to a minimum, including:
- Taking advantage of research and development (R&D) tax credit. Obviously, companies like Facebook and Amazon do a fair amount of research and development – allowing them to significantly reduce their tax bill.
- Investing in equipment under a (temporary) 100% tax deduction. Proponents of this deduction say it encourages companies to grow; detractors say that big corporations like Amazon would have made purchases anyway, even without the hefty tax deduction.
- Compensating employees (in part) with shares of their own stocks. Both Amazon and Facebook do this, meaning they can deduct the cost of the stock-based compensation from their taxable earnings … despite the fact it doesn’t actually cost them anything to give away shares in their own company.
So, while it might seem unfair that Amazon, Facebook, and other internet behemoths seem to pay so little tax, what they’re doing falls well within the bounds of the law. They’re not hiding profits in dodgy off-shore accounts or engaging in any shady tax evasion measures … they’re simply taking advantage of every opportunity to pay less tax.
