It is widely known that Amazon is one of the largest companies in the world with revenues in 2018 exceeding USD 232 billion. The company is known not only with its online store, but also with Amazon Kindle (a series of e-readers), Amazon Echo (a brand of smart speakers), Amazon Video (an Internet video on demand), and Amazon hosting services. What is little known about Amazon is the fact that it paid 0% corporate income tax in 2018. Yes, 0% corporate income tax, irrespective of the high revenues. Furthermore, the legal optimization techniques used by Amazon are completely legal under the U.S. law. Below, we explain in detail the three tricks used by Amazon to outsmart the U.S. tax laws. Those three tricks are (i) relying on research and development tax credits, (ii) using tax deductions for investment in equipment, and (iii) deducting costs of stock-based compensations from taxable earnings.
Relying on research and development tax credits
The U.S. tax law stimulates research and development (R&D) activities by providing companies who engage in such activities with tax credits. By investing in a wide range of R&D activities, Amazon significantly reduces its tax burden while at the time acquires valuable know-how and access to innovative technologies. With regard to R&D projects, it is sufficient to mention Amazon Prime Air, a future delivery system that will allow Amazon to safely deliver packages to customers in 30 minutes or less using unmanned aerial vehicles (drones). Another product of Amazon R&D is a Kindle battery that lasts for two years, thus requiring Amazon customers to change their batteries only once on a biennial basis.
Using tax deductions for investment in equipment
The Trump tax bill contains a temporary provision that allows companies to take a 100% tax deduction for investment in equipment. Amazon heavily invests in equipment, e.g., in fulfillment centers, servers, and transportation infrastructure. It is worth mentioning that a single fulfillment center can have a size of 800,000 square feet and employ more than 1,500 full time associates. The associates often work with high-level robots, including, but not limited to, (i) palletizers, (ii) robo-stows, and (iii) drive units. Palletizers are robotic arms having grippers that detect and grab totes from conveyor belts and stack them on pallets for stowing or shipping. Robo-stows lift pallets of inventory to different levels in fulfillment centers or place them on drive units to be transported to other destinations. The drive units are robots that transfer packages around facilities.
Deducting costs of stock-based compensations from taxable income
The U.S. tax law allows companies to deduct the cost of stock-based compensation for tax purposes. Therefore, if Amazon issues new shares of Amazon stock and, as a result of this, Amazon’s shareholders incur costs because of the devaluation of their shares, the incurred costs will be tax deductible, irrespective of the fact that the issuance of shares does not directly lead to direct financial cost to Amazon.
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