European Commission lays bare Amazon tax deal with Luxembourg
High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article.
Luxembourg’s unorthodox tax deal with Amazon was laid bare by European Commission investigators on Friday, who believe it artificially lowered and “capped” the online retailer’s tax bill, in breach of EU law.
In a 23-page letter outlining preliminary conclusions from its probe, Brussels alleges that Amazon’s European hub was founded on favourable and selective tax treatment that amounts to an illicit state subsidy, which may need to be clawed back.
The case has political significance because Amazon’s tax deal was negotiated in 2003 while Jean-Claude Juncker, the commission president, was serving as Luxembourg’s premier. It follows thousands of pages of leaks that have piled pressure on Mr Juncker by showing how other multinationals operating in the Grand Duchy pay negligible tax.
High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article.
In the commission’s view, Luxembourg deviated from international standards to offer Amazon a ceiling on its tax exposure that did not reflect the business risk assumed by its European headquarters in Luxembourg. The cap on income taxable in Luxembourg is less than 1 per cent — approximately €75m in 2013 on Amazon operating company turnover of around €13.6bn.
It claims the tax ruling at issue was not properly evidenced, used inappropriate methods and crucially permitted an intra-group royalty payment that — if proven to be exaggerated — “would unduly reduce the tax paid by Amazon in Luxembourg by shifting profits to an untaxed entity from the perspective of corporate taxation”.
Amazon gave Luxembourg no explanation of the intellectual property for which the royalty was paid. It varies according to “residual profit” not taxed in Luxembourg and amounted to around €500m in 2013. The commission notes that the ruling was issued within 11 working days of the first Amazon request, “a very short period of time had a transfer pricing report been submitted and assessed in this case”.
“The Luxembourgish authorities confer an advantage on Amazon. That advantage is obtained every year and ongoing,” the letter concludes. The commission adds that it “has no indication at this stage that the contested measure can be considered compatible with the internal market”.
Luxembourg said it was “confident that the allegations of state aid in this case are unsubstantiated”. Amazon said it “has received no special tax treatment from Luxembourg — we are subject to the same tax laws as other companies operating here.” It employs roughly 1,000 staff in the Grand Duchy.
High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article.
An in-depth probe into the Amazon tax ruling in Luxembourg was announced in October. The grounds for the launch of the probe are outlined in the letter to the member state, which was cleared for publication on Friday. Mr Juncker was appointed commission president after the inquiry was launched and has said he will not interfere in the case.
Luxembourg-Amazon is one of four commission investigations into tax rulings, or comfort letters. Other deals include Ireland’s arrangements with Apple and Luxembourg’s clearance of structures used by Fiat, and Holland’s approval of Starbucks’ tax base. The commission is empowered to order countries to recoup any illegal aid stretching back up to 10 years. It is aiming to conclude some of its investigations in the Spring.
High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email ftsales.support@ft.com to buy additional rights.
In its letter, the commission outlines half a dozen problems with a 2003 ruling that defines transaction terms between Amazon EU Sarl, its main European retail company, and Amazon Europe Holding Technologies SCS, a US-owned “flow through entity” that holds intellectual property rights to the Amazon website. Amazon SCS is not liable for Luxembourg or US corporate tax.
At issue is why Amazon’s main operating company, holding inventory and bearing business risk, would accept a cap on its taxable profits if it were in a truly arm’s length relationship with Amazon SCS.
Under the tax ruling, the remuneration for the operating company is set at 4-6 per cent of operating costs. But this is constrained by a cap of 0.55 per cent of European turnover. The residual profit is paid in a royalty to Amazon SCS, which pays no corporate tax. A floor on tax payments is also included but the complex calculations involved render it ineffective.
“It appears that the floor and the cap are used to ensure a relatively predictable level of taxable profit; they do not seem to be based on any arm’s length reasoning,” the commission argues.
“The transfer pricing arrangement put in place by Amazon and accepted by the contested tax ruling effectively contains a cap on a remuneration which seems too low.”
In its letter the commission notes that no transfer pricing report had been shown to the commission with Amazon’s evidence to justify margins agreed in 2003. Submitting such a report is routine in tax negotiations. While most so-called transfer pricing agreements in Europe last for three to five years, the 2003 Amazon ruling has not yet been revised. Luxembourg on Friday said that it has now provided “detailed transfer pricing reports” as requested by the commission.
