Tax Shelters Don’t Always Work. Just Ask Amazon

The offices of Amazon Europe Holding Technologies in Luxembourg on Nov. 20, 2012 Photograph by Francois Lenoir/Corbis

If Tim Cook really wanted to explain to Congress how screwed up the U.S. tax code is, he could have brought up another tech giant: Amazon.

Like Apple, Amazon stashes a lot of cash overseas (particularly in Luxembourg), far from the hands of Uncle Sam. And last year, that strategy didn’t work. The company’s tax bill grew from $291 million to $428 million, dragging Amazon to a loss for the year, in spite of massive gains in both revenue and profit.

Amazon’s effective tax rate in that time—the total it paid in federal, state, local, and international charges—was 78.6 percent. In other words, it turned over almost $4 out of every $5 of its profit to tax collectors.

In comparison, the nominal U.S. corporate tax rate is 35 percent—the highest in the world, at least on paper. So any self-respecting senator might wonder: How did we get so lucky?

Amazon posted pretax income of $882 million in the U.S. last year. Abroad, however, it suffered a $338 million loss, as the European economy foundered. The problem for Amazon was that it suffered those losses in sheltered places where it has low tax liability or none at all, so on its official return, government toll-takers mostly saw the profit.

All told, the lopsided loss added almost 32 percentage points to the company’s tax rate.

Tax shelters can be a whipsaw, and these are the same holdings that helped Amazon in the past. In 2005, Amazon set up shop in Luxembourg, which has grown particularly lenient with corporate citizens to bolster its own economic development. The move came under scrutiny from tax collectors in at least six sovereign governments, according to Reuters. It also worked. In 2010, for example, Amazon’s effective tax rate was 23.5 percent, as $611 million in overseas profit largely escaped U.S. tax collectors.

Last year it all backfired. And Amazon had a few other things exacerbating its tax bill. Most notably, it shelled out $833 million in stock-based pay—compensation that’s not deductible. And it took a $170 million impairment charge on its investment in LivingSocial, another hit that wasn’t included in pretax returns.

Congress should know Amazon isn’t alone in tax-dodging schemes gone sour. In the past year some 113 companies in the Standard & Poor’s 500-stock index had effective tax rates of more than 35 percent, according to data compiled by Bloomberg News. Some 18 of those firms, like Amazon, had tax rates over 50 percent.

On the other end of the spectrum, 18 companies had effective tax rates under 4.5 percent, including Citigroup and Wynn Resorts.

Considering those extremes, Apple, with a 30.5 percent tax rate, doesn’t seem particularly rotten.

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