Now it’s Amazon’s turn to feel EU heat over tax affairs

Competition officials in the European Union have opened an in-depth investigation against Amazon, to see whether its Luxembourgish tax arrangements amount to illegal state aid.

On the face of it, this looks similar to the investigation into [company]Apple[/company]’s Irish tax affairs that the European Commission opened in June. Last week the Commission outlined its justification for the case against Apple, arguing that low-taxation deals between the company and the Irish government gave Apple special treatment that other companies didn’t get. Apple denies this, but if the Commission finds against it, the company could be liable for billions in fines or back-payments.

Similarly, the Commission said on Tuesday that it was investigating a 2003 tax ruling, through which the Luxembourgish government agreed to let [company]Amazon[/company] pay minimal corporate taxes on its European operations. Amazon’s Luxembourgish transfer pricing arrangement has already annoyed the IRS since it may also be a drain on U.S. corporate tax revenue, but now the Europeans are also openly sceptical about whether the arrangement exists for any reason besides tax avoidance.

In the arrangement, Amazon funnels income from its European operations through a Luxembourg subsidiary called Amazon EU Sàrl, heavily reducing its tax bill in other EU countries while also paying very little in the Grand Duchy — because Amazon EU Sàrl then pays much of the money as royalties to a non-Luxembourg-taxable, U.S.-owned Amazon subsidiary that holds the “intellectual property rights” to the firm’s website.

Here’s how the Commission put it in a statement:

The tax ruling in favour of Amazon under investigation dates back to 2003 and is still in force. It applies to Amazon’s subsidiary Amazon EU Sàrl, which is based in Luxembourg and records most of Amazon’s European profits. Based on a methodology set by the tax ruling, Amazon EU Sàrl pays a tax deductible royalty to a limited liability partnership established in Luxembourg but which is not subject to corporate taxation in Luxembourg. As a result, most European profits of Amazon are recorded in Luxembourg but are not taxed in Luxembourg.

At this stage the Commission considers that the amount of this royalty, which lowers the taxable profits of Amazon EU Sàrl each year, might not be in line with market conditions. The Commission has concerns that the ruling could underestimate the taxable profits of Amazon EU Sàrl, and thereby grant an economic advantage to Amazon by allowing the group to pay less tax than other companies whose profits are allocated in line with market terms.

“National authorities must not allow selected companies to understate their taxable profits by using favourable calculation methods,” outgoing competition commissioner Joaquín Almunia said. “It is only fair that subsidiaries of multinational companies pay their share of taxes and do not receive preferential treatment which could amount to hidden subsidies.”

An Amazon spokesman told me today: “Amazon has received no special tax treatment from Luxembourg — we are subject to the same tax laws as other companies operating here.”

According to the Commission, the Luxembourgish authorities have been less than forthcoming with information about the deal, though they did cough up some information after the Commission told them to in June.

Now that the Commission has properly opened an investigation, Luxembourg and interested third parties have an opportunity to submit comments. The Commission also has another similar investigation going on regarding the Luxembourgish tax deal given to the financing arm of Italian car-maker Fiat.

Awkwardly, the premier of Luxembourg at the time the Amazon and Fiat deals were struck, Jean-Claude Juncker, is now the incoming president of the Commission.

This article was updated at 8.10am PT to include Amazon’s spokesman’s quote.