The recent media focus on President Trump’s alleged tax payment in 2017 of $750, has once again brought the perennial issue of Corporate Tax avoidance into the spotlight. At the same time, the ‘Big Four’ technology firms – Facebook, Alphabet (Google), Amazon and Apple – face renewed government scrutiny over antitrust and market dominance issues. While these concerns are not new, Creating Future Us (CFU) believes that in the Digital Age, they should serve as a clarion call to key stakeholders, such as Boards and investors, to step up and hold tech behemoths more fully to account over the ethics of their tax practices – before such accountability is thrust upon them by regulators.
Amazon – a Prime example
Amazon’s innovative tax mitigation strategies have drawn much criticism over its 26-year history – never more so than now. Through its broad range of services and platforms, Amazon arguably has a global reach into our homes and lives like no other tech firm, yet is estimated to be paying an effective tax rate of less than 0.5%. As such, it serves as a prime exemplar of this phenomenon. Can these egregiously low outlays be justified, for an organization that simultaneously avails itself a wide range of tax-funded public services (infrastructure, an educated workforce, functional government departments), while making virtually no contribution to their upkeep?
In this light, it seems that society at large has, through these deferred taxes, unwittingly invested, and taken venture capital-like risks in Amazon’s exponential growth. However, unlike early direct investors, who have most definitely reaped their just rewards, society’s payback is less apparent. CFU proposes that this seeming deficit could be viewed alternatively, as a stewardship opportunity for Amazon. Rather than seeing unpaid taxes as a blow to public coffers, Amazon’s tax-deferred accumulation could instead constitute a type of Societal Trust Fund. The question then becomes whether Amazon has already, or could be directed to, adequately make good on this investment. We take a closer look.
Society’s ROI in Amazon?
According to the letter of the law, Amazon has done nothing wrong; it has simply used its knowledge, innovation, and ability to be geographically amorphous, to exploit both the incentives and weaknesses within antiquated tax regulations across the globe, to arrive at its current position. So if tax laws and regulations have failed to adequately capture a decent ‘return’ for society’s investment in Amazon, then to what extent should Amazon be otherwise tracking its total contributions versus, say, its bricks and mortar competitors? Does this contribution measure up, if not in financial terms, then in societal wellbeing? And in the absence of action (or ability) by governments to clamp down in this manner, what – or who – should be influencing the decisions that Amazon makes about the beneficiaries of its considerable spoils?
Amazon’s tax breaks arise due to four key areas, analyzed below from a societal payback perspective:
Research and Development: Amazon topped the list of U.S. companies’ R&D spend in 2017, at $22.6 billion. It is possible that tax breaks played a positive role in driving this significant expenditure, as well producing the secondary benefits R&D spend usually confers upon the cities (and their businesses) in which it is made. However, given Amazon’s ambitious business plans and growth strategy, it is likely that such investment would have been made nonetheless, regardless of tax break incentives. Furthermore, not all of Amazon’s R&D investments are necessarily beneficial for society.
For instance, a considerable portion of that $22.6bn was spent on technologies such as Alexa and Amazon Go, the cashier-less store – both of which have significant negative implications for the labor market. While such automation can boost economic growth, create efficiency, and improve living standards, it can also present serious challenges for workers and communities, including job displacement, disruptions to local economies, changing skill needs, and potentially rising inequality.
Property, Plant and Equipment (PPE): Amazon’s PPE expenditure is increasing annually, netting to approximately $72 billion as of the end of 2019. Although such investment can create new jobs, the quality and security of these is not a given; Amazon has been accused of treating its employees poorly, and is also on an accelerated drive to automate a significant number of additional jobs, particularly in its circa 300 fulfillment centers. It is therefore questionable whether Amazon’s investment in PPE really is a net gain to society.
Dividends: The benefit of dividend payments to society is really dependent on how these are distributed across shareholder groups; pension funds would undoubtedly constitute a positive benefit, however, since much of the wealth creation from Amazon has landed in private hands (through the capital appreciation of its stock from reinvestment and executive compensation), the overall social good becomes much more difficult to ascertain.
Employee (Stock based) Compensation: In 2017, Amazon paid $4.2 billion of share-based compensation to its employees. However, these stock rewards are not offered to all employees, and are likely heavily skewed towards the senior-most executives. While employees who receive these options are required to pay taxes on stock appreciation, these taxes can be minimized for personal gain – and the already-affluent recipients are much more likely to access the tax advice that enables them to do so. The net effect might therefore be negligible in terms of payback to taxpayers, while also exacerbating the wealth gap and its effects on societal inequality.
Amazon at a Pivot Point?
CFU contends that Amazon is now at a crossroad, facing critical ESG choices that could cast it in a more heroic light. With increased pressure from its most influential stakeholders (investors and non-executive directors in particular), Amazon could rewrite its legacy, and use its leadership role as one of the world’s most valuable companies to effect real and lasting societal benefit. CFU believes that Amazon – and its peers, must begin to monitor and better quantify their financial and non-financial net gains from operating in open and supportive societies. These gains should be overtly allocated to a Societal Trust Fund, dedicated to direct reinvestment into society, thereby ensuring their continued social license to operate.
As an example, Amazon has the resources and insight to make a meaningful contribution to reskilling the labor force they replace with automation, as we mentioned in our recent piece on GPT-3, the pace of technological change is such that there is a real risk of reskilling efforts quickly becoming obsolete; a leading-edge firm like Amazon is therefore ideally placed to ensure that this does not happen. Likewise, Amazon has the intellectual and financial might to sponsor, or even lead, partnerships with public institutions to develop programs that maximize the protection and prospects of displaced workers. Other areas of mutual benefit worth deliberating are: contributions to improving infrastructure such as 5G, modernizing and reinvigorating postal services, improving and ‘greening up’ roadways – especially relevant, considering Amazon’s reliance on these infrastructures for its ongoing prosperity.
With the right stakeholder buy-in, this forward-thinking approach could serve Amazon, both reputationally and financially – by increasing its sustainability, longevity – and therefore profit, as well as staving off the worst implications of enforced regulation that might otherwise be coming their way. Amazon has an opportunity here to steward the kind of transformational self-governance that will truly set it apart.