Why Amazon and Netflix Pay $0 in Corporate Taxes?

Amazon and Netflix are two of the most profitable firms in the entire world. For instance, last year, Amazon alone made over $12 billion in profits. However, it paid $0 in taxes! To make matters worse, the company was owed money in the form of tax rebates. This means that the federal government was actually going to pay Amazon money instead of collecting taxes from them! The same is the case with many large companies such as Netflix. This phenomenon is not restricted to technology companies only. For instance, there are companies like John Deere, which are engaged in the manufacture of farm equipment such as tractors and also tire manufacturers like Goodyear, which have not paid any corporate taxes in the past year.

This causes a lot of hue and cry amongst taxpayers. Sooner or later, many media outlets create sensational headlines that state that individual taxpayers are paying more in taxes as compared to these mega-corporations. The reality is that these news reports are not really false. However, they do present a misleading picture. Companies like Amazon are not cheating the United States government out of taxes. They are not using offshore corporate structures to evade taxes, and neither are they registered as foreign corporations themselves. In fact, Amazon does most of its business within high tax jurisdictions such as the United States and Germany.

Hence, the $0 tax bill is the result of some amount of tax planning and some luck. However, Amazon is within the confines of the law as far as its tax bill is concerned. There are some common tips and tricks which are used by companies to lower their tax bill. The common ones have been listed below.

It needs to be understood that companies are taxed on their income i.e., their revenues minus their expenses. Therefore, if a company is able to inflate its expenses to such an extent that as far as accounting is concerned, it doesn’t generate a profit at all, then it wouldn’t have to pay taxes. This is exactly how companies like Amazon and Netflix avoid taxes.

  • The first and the most common way used by companies to avoid taxes is the research and development tax break. Now, tech companies like Amazon obviously spend a lot of money on research and development. This money helps them build intellectual assets, which helps them stay ahead of the competition.

    Hence, the benefits of investment are reaped for several years. This is the reason that in various parts of the world, this expense is considered to be a capital investment and is amortized over many years. However, in the United States, the tax system is different. It allows for the complete deduction of all research and development expenses in the first year itself. Hence, companies are able to inflate their expenses and lower their taxable income.

    Most politicians in the United States do not have a problem with this provision. This is because it is this provision that has ensured that the United States continues to remain the research and development capital of the world. Companies from all over the world open their research and development centers in the United States because of the tax advantage.

  • Companies like Amazon and Netflix take advantage of one more such provision in order to overstate their expenses and reduce their income. This provision relates to the tax treatment of property, plant, and equipment, which is purchased in the United States. At the present moment, the law allows a tax deduction for all the money that has been invested in acquiring a new property, plant, and equipment within the boundaries of the United States. This rule has been created since it incentivizes companies to invest in the real economy.

    Prior to this rule, companies used their excess profits in order to buy back shares. When shares were purchased from the open market, the number of outstanding shareholders would reduce. As a result, the earnings per share, as well as the share price, would go up. However, this would create very little opportunity for the government.

    Governments wanted companies to invest more in real assets. This is because when they purchase real assets, indirect taxes become payable to the government. Also, when property and plant are purchased, companies open up facilities. As a result, the workforce gets employed. This creates tax revenue for the government in the form of employee taxes, such as social security contributions and FICA.

    Also, as companies open up facilities, the unemployment number goes down, and the government does not have to pay unemployment benefits to the workers. Thus the government benefits a lot when corporations invest in the real economy instead of buying back their shares. This is why they do not hesitate to give tax breaks.

    Now, companies like Amazon and Netflix are growing at breakneck speed. Hence, they do have to make certain investments such as plant, property, and equipment. When it comes to taxes, they deduct these investments. This inflates their expenses and reduces their taxable income.

Finally, companies like Amazon are able to deduct the stock compensation paid to their employees as business expenses. We will study that in detail in the next article.

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