Luxembourg will have to reclaim €250 million ($294 million), plus interest, from Amazon for “undue tax benefits” after the European Commission announced its state aid decision in the case. But the amount is surprisingly small and many say the decision doesn’t tackle the real issue.
Today’s decision concludes a two-year investigation into a tax ruling issued by Luxembourg in 2003, and prolonged in 2011, which lowered the tax paid by Amazon in Luxembourg while current European Commission President Jean-Claude Juncker was prime minister of the land-locked country.
The Commission said Amazon gained a selective economic advantage over other companies by obtaining a so-called sweetheart tax deal that allowed it to inflate the level of its royalty payments to a related party, both owned by Amazon US, thus not reflecting economic reality. Moreover, it said Luxembourg was wrong to endorse an unjustified method to calculate Amazon's taxable profits in the country.
"Luxembourg gave illegal tax benefits to Amazon," proclaimed EU Competition Commissioner Margrethe Vestager. "As a result, almost three quarters of Amazon's profits were not taxed. In other words, Amazon was allowed to pay four times less tax than other local companies subject to the same national tax rules. This is illegal under EU state aid rules. Member states cannot give selective tax benefits to multinational groups that are not available to others."
Tax rulings that have offered very low tax rates to multinationals have become increasingly controversial in recent years. Data leaks and state aid investigations have revealed how they have been used to facilitate aggressive tax planning or unfair competitive advantages – an issue that has led to state aid investigations into the tax affairs of Starbucks, Apple, Fiat, McDonald’s and Amazon, to name a few.
The Luxembourg government is now tasked with determining the precise amount of Amazon’s unpaid tax in Luxembourg by calculating the value of the competitive advantage granted to Amazon.
"We believe that Amazon did not receive any special treatment from Luxembourg and that we paid tax in full accordance with both Luxembourg and international tax law," the company told International Tax Review. "We will study the Commission's ruling and consider our legal options, including an appeal. Our 50,000 employees across Europe remain heads-down focused on serving our customers and the hundreds of thousands of small businesses who work with us."
Meanwhile, Luxembourg’s finance ministry said it will "use its due diligence to analyse the decision and reserves all its rights", stressing that it is fully committed to tax transparency.
Amazon’s tax ruling allowed Amazon EU, the company’s retail business in Luxembourg (the operating company), to shift the vast majority of its profits to Amazon Europe Holding Technologies, a Luxembourg limited partnership with no employees, no offices and no business activities (a holding company).
This holding company held certain intellectual property (IP) rights for Europe under a so-called "cost-sharing agreement" with Amazon US. Although Amazon Europe Holding Technologies made no use of these IP rights, it granted an exclusive license to this IP to Amazon EU, which allowed it to receive inflated royalty payments in return.
These royalty payments were then paid annually by the holding company to Amazon US through the cost-sharing agreement to contribute to the costs of developing the IP. Amazon recently won a US tax court case on the arm’s-length price concerning the transfer of IP to the holding company through this cost-sharing arrangement.
"In particular, the tax ruling endorsed the payment of a royalty from Amazon EU to Amazon Europe Holding Technologies, which significantly reduced Amazon EU's taxable profits," the Commission said, claiming that the royalty payments exceeded, on average, 90% of Amazon EU’s operating profits. "They were significantly (1.5 times) higher than what the holding company needed to pay to Amazon in the US under the cost-sharing agreement."
Amazon used this structure endorsed by the tax ruling between May 2006 and June 2014. Ahead of the launch of the Commission’s state aid investigation in 2014, it changed the way it operates in Europe in June 2014 to ensure it was outside the scope of the investigation for subsequent years, but this did not stop the Commission examining its earlier tax affairs.
Decision a success for a tax justice?
Today’s decision is the fifth in a series of state aid cases against multinationals concerning illegal tax benefits, but it fails to tackle the underlying problem of big companies being able to avoid paying their fair share of tax in the EU.
Last year, the Commission announced that Apple must pay back €13 billion in illegal state aid that it had received from the Irish government – a controversial issue that has today led the Commission to refer Ireland to the European Court of Justice for failing to recover the money from Apple. Before that in 2015, Starbucks and Fiat were told to pay back millions for similar matters. Separately, the Commission said that tax advantages granted by Belgium under its "excess profit" tax scheme were illegal, which has benefitted at least 35 multinational companies.
Still to come are decisions on the unfair tax incentives achieved by McDonald's and GDF Suez (now Engie).
Elena Gaita, policy officer for corporate transparency at Transparency International EU, told International Tax Review that although Commissioner Vestager’s work is welcome, EU state aid rules are not the answer. "Retroactively looking at individual companies and countries is ineffective, as this problem is systematic – it’s not just Amazon," she said. "The long-term solution is the reform of our current tax system and the first step is by introducing a mechanism that will allow for ex ante transparency into all large multinationals’ tax affairs."
Sven Giegold, the Greens/EFA Group spokesman for economic and financial affairs in the European Parliament agreed that although the EU Commission's decision is a success for tax justice, the recovery of €250 million is "low compared to Amazon's level of tax dumping" and that "competition law cannot replace a truly European tax policy".
"Amazon and Apple are not isolated cases, we have a systematic problem with tax avoidance," Giegold told International Tax Review. "Countries such as Luxembourg, Ireland or the Netherlands fuel with special conditions a dangerous tax competition in Europe. It is high time that we introduce a common tax base for corporate taxes and minimum tax rates in Europe. We also need public country-by country reporting to make corporate tax transparent."
Oxfam’s EU policy adviser on inequality and tax, Aurore Chardonnet, said swift action is necessary on public CbCR. "Only tax transparency will allow citizens to hold decision-makers to account, expose companies’ potential wrong-doing and fix the tax system. In July, the European Parliament voted for rules for multinationals to automatically disclose where they generate their profits and where they pay their taxes. These should now swiftly be adopted."
Frank Haskew, head of the ICAEW Tax Faculty, said these state aid cases highlight the difficulty in adapting existing corporate tax rules to tax internet based businesses, and any change requires a global effort.
"The taxation of these businesses is already the subject of much debate and there is continuing work at the OECD to address these issues. Some progress has been made, for example the UK has already introduced the 'diverted profits tax’ and the EU is now also seeking to finalise its own proposals for the taxation of digital businesses. It is important that future work is directed to achieving a realistic international consensus. US companies are the major players in international digital commerce and the US is trying to find a tax reform path that will command support in the US. All these efforts need to be coordinated if there is to be a sustainable solution to address the current problems."
The above article was published on www.internationaltaxreview.com on 4 October 2017 and has been republished with the approval of the Publisher.