Amazon and the Scottish Government

Amazon has avoided paying corporation tax over three years on UK sales of more than £7.6bn. The company has been rightly criticised for this. But the Scottish Government has also come under criticism for paying Regional Selective Assistance grants and other public support amounting to £10.6 million. The support has been given to Amazon's fulfilment and distribution centres in Dunfermline, Gourock and also a customer call centre in Edinburgh.

You can see the vulnerability of the Scottish Government's position when one of its economic arguments for an independent Scotland is the opportunity it would be given to lower the rate of corporation tax to attract new inward investment and so, it hopes, promote the growth of the Scottish economy.

Whatever one might think about this argument for an independent Scotland is it right that the Scottish government should be criticised because Amazon has avoided paying corporation tax?

I think the answer to this question is an emphatic no!

The payment or non-payment of tax is a separate issue from the contribution of Amazon activities to the Scottish economy. Clearly, HMRC should do everything in its power to ensure that Amazon cannot indulge in sophisticated transfer pricing arrangements to avoid paying UK tax. But whether Amazon should have invested in Scottish activities with Scottish Government support depends on the estimate of the net contribution of activities to the Scottish economy.

It appears that with the investment last year Amazon will have around 1000 jobs in Scotland. To criticise Amazon's business model and the quality of the jobs provided as some have done is again a red herring. The critical question is what would the counterfactual have been to the investments? In non jargon: what would have happened if the Scottish government had not paid the £10.6 million to Amazon in grants?

First, if Amazon would have come to Scotland anyway then there would have been no additionality and the Government support would have been a mistake. But the project will have gone through a significant appraisal process by Scottish Government economists and civil servants. They must have concluded that there was a high probability that the investments would have gone to another jurisdiction, probably Ireland. Nobody appears to have criticised the support as lacking additionality. And if the project is additional then there would be secondary multiplier effects creating further jobs from the spending from the incomes earned in the newly created jobs and from any local purchases made by Amazon's Scottish investments.

Secondly, would the £10.6 million have been better used by Scottish companies? Nobody knows for certain. But I doubt it. There is no evidence of competing Scottish owned investments complaining because they could not get grants. Indeed, given Scotland's weak business birth rate this is one key reason why the Scottish government needs to hunt for inward investment. There is currently no domestic Scottish alternative.

Thirdly, would Amazon's Scottish investments have led to the displacement of other Scottish activity? This would also have formed part of the Scottish Government's ex ante appraisal of its support for the investments. Displacement could occur through the jobs market if the incoming investment bids up local wages. This again seems unlikely when unemployment is so high. I doubt no Scottish employer had to shed jobs due to higher wages following Amazon's creation of 1,000 jobs. Displacement can also occur through the goods market. That is Scottish produced goods and services may be displaced as Scottish consumers switch away to buy the Scottish Amazon product. Is this likely? Again I think the answer is no. To argue as some have done on Twitter that the demise of Waterstones and other booksellers based in Scotland is due to Amazon's Scottish investments is risible. Yes, their demise may be due to Amazon but not to their Scottish investments. That would have happened wherever they located.

So, we should welcome Amazon to Scotland, while criticising strongly their apparent tax avoidance. And on this occasion, we should give the Scottish Government a break.

Comments

[Martin Huxford]

Hi Brian
Clearly it woule be sensible toi check wether a company are paying Uk tax before giving them 10.5 million of taxpayers money. All of our taxes are higher because Amazon pay no tax.

[Pat Elsmie]

I'd be curious to know how the additionality stacks up, especially over the longer term. And to what level the intitial incentive given to any incoming business has managed to keep them in a lengthy association with Scotland. Seems to me many have come, and gone.

So what is it about doing business in Scotland that gives rise to "weak business birth rate" and subsequent need for the Scottish government to "hunt for inward investment"? What are we not doing right locally on one hand and on the other, cannot provide enough of for investors?

[Donald]

@Martin Huxford the Scottish Government has no involvement in the collectoion of Corporation Tax as the Westminster Parliament has it as a "reserved issue" which is solely the preserve of the Westminster Parliament. To blame the Scottish Government for something that they have no responsibiity for or even control of is wrong. The same Unionists kicking up a fuss now would if the Scottish Government had denied Amazon a grant be screaming from the rooftops about how the Scottish Government was costing jobs. Also these same Unionists and the Media are also hostile to Scottish Governent demands that Corporation Tax be devolved to the Scottish Parliament which would help combat tax easion of this kind in Scotland.

Furthermore when quaetioned by journalists from the Independent I believe HMRC run by the Westminster Parliament from London has stated that they have no plans to close this loophole and yet the Scotsman newsaper does not deem this worthy of criticis. Brian Ashcroft I commend you for your insightful analysis in overturning the ludicrous propoganda of the Scotsman newspaper.

[Marga]

Martin, if you expect government grants to be based on whether or not the company concerned pays UK tax you will probably not find many companies complying. Let's be realistic here, including placing the blame if any where it is due - fairly and squarely on the UK government.

[Alex Gallagher]

Cutting corporation tax to beggar your neighbour is a neo-liberal policy benefiting capital and not people or populations.

It also undermines the nation state by setting state against state to the benefit of neither and limiting the ability to calculate and collect taxes and pay for government and benefits.

Cutting corporation tax to beggar another part of the same country is stupid and nasty.

[Stephen Boyd]

First post I've strongly disagreed with Brian! My response here: http://betterwayeconomy.typepad.com/better-way-economy-blog/2012/04/amazon-a-response-to-brian-ashcroft.html All in the name of constructive debate

[Ian Jenkins]

Amazon are being bribed to supply needed employment in Scotland? A sign of things to come. Years ago a German industrialist forecast that States would pay companies to provide employment on their territory.

The uncertain political future is also a big factor in the argument over Scottish independence. Unionists argue that Britain would be diminished on the world stage if Scotland were to go its own way - reports the latest 'Economist'. Scotland's departure might simply speed up the political process we see being allowed to happen at present. Maybe political will for survival will be stronger in an independent Scotland.