Amazon’s Luxembourg tax deal under the EU spotlight

The European Commission announced Tuesday, October 7 that it is examining the tax deal between Luxembourg and the giant American Company Amazon. It will investigate whether Luxembourg broke EU state aid rules by agreeing to a deal that allows Amazon to operate almost tax free in Europe.

 

 

 

 

EU investigators believe Luxembourg gave Amazon favorable terms in a 2003 tax ruling, which caps its overall bill to less than 1% of the retailer’s European income.

 

A Questionnable Corporate Structure

 

The European Commission’s main allegation is that Luxembourg allowed Amazon to misallocate profit within its corporate structure in a manner that fell short of standards expected of an arms-length transaction between corporate subsidiaries.

Amazon.com, Inc.’s main European subsidiary, Amazon EU SARL based in Luxembourg, reports almost no profit despite generating almost 14 billion euros of sales each year. Amazon apparently uses inter-company payments to form a tax shield for the group. It reduces its taxes by placing intellectual property in tax havens and charging affiliates large fees for using it. By setting up in Luxembourg, and channeling sales through its units there, the world’s biggest online retailer has been able to minimize corporate taxes.

 

Allegations of Illegal State Aid

 

The transactions between the group’s subsidiaries are not directly ruled by law, but by the agreement negotiated between the firm and the local authorities under an arrangement known as a “tax ruling”. It is not illegal under European Union rules for a member country to use attractively low tax rates to attract foreign businesses. However, making special corporate tax deals that are not available to all companies – and therefore allow some companies an economic advantage over others – could be considered illegal state aid. Indeed, European Union law forbids any member from giving one company an agreement that isn’t available to all businesses.

The European Commission is examining if the tax deal between Amazon and Luxembourg is an illegal state aid, while the US Company has denied receiving preferential treatment. 

 

 Increasing Scrutiny Likely  

 

The case could have significant financial consequences. Amazon’s Luxembourg arrangements have deprived European governments of hundreds of millions of dollars in taxes, while the European Commission has said the total cost of tax avoidance and evasion is around one trillion euros a year. Companies found guilty of breaching EU rules on state aid could be forced to repay what authorities in Brussels determine to have been the amount of support given.

Amazon is not the only company, nor is Luxembourg the only country, under scrutiny. The European Commission opened investigations in June regarding tax deals between Apple and Ireland, Fiat and Luxembourg and recently between Starbucks and Netherlands.

The EU’s ruling on the Amazon case will likely have significant consequences on the tax strategy of foreign companies operating in the EU. It will also indicate whether EU authorities are prepared to make any substantive changes to the current tax regime or whether the current discourse is simply political gamesmanship. Whether or not any actual changes come about from this case, the scrutiny it has generated will likely cause foreign companies operating in the EU to re-examine and potentially change their tax structures and strategies.

 

 

Audrey Hourse

 

Learn more :

European Commission, Press release, Oct. 7th, 2014, IP/14/1105

« State aid: Commission investigates transfer pricing arrangements on corporate taxation of Amazon in Luxembourg»