By JAMES KANTER and MARK SCOTT
January 16, 2015
The New York Times
BRUSSELS — The European Union’s antitrust office on Friday released a preliminary finding that a tax deal between Amazon and the Luxembourg government appears to amount to unfair state aid that may have enabled the company to underpay its taxes for a decade or more.
The inquiry is part of a wider investigation into whether a string of multinational companies, including Apple and Starbucks, sharply cut their tax bills and broke the competition rules of the European Union.
In the face of Europe’s continuing economic problems, the region’s politicians are taking a tougher stance on many of the complex practices used by multinational companies to reduce their tax burdens in the 28-member bloc.
“The European Commission’s documents certainly suggest that this tax deal wasn’t properly scrutinized,” said Catherine Robins, a tax partner at the law firm Pinsent Masons in Britain. “Anyone else who has similar arrangements in Luxembourg will really have to look at how this could affect their operations.”
In a 23-page letter released on Friday, Europe’s antitrust authorities outlined a tax arrangement in which Amazon used subsidiaries in Luxembourg to reduce the company’s overall tax obligations.
Like many other international companies, Amazon has its European headquarters in Luxembourg — a tiny country with a population of roughly 500,000 — to take advantage of the country’s low taxes.
Through a deal struck in 2003, authorities in Luxembourg “confer an advantage on Amazon,” the antitrust authority said in the letter. It added that the “advantage is obtained every year and ongoing,” and that it “is also granted in a selective manner.”
Both Amazon and Luxembourg’s Finance Ministry denied that the online retail giant received special tax treatment or benefits. The finance ministry described the European Commission’s letter as “a mere formal step in the procedure,” adding that it “contains no new elements.”
The ministry added that it had submitted all the information requested by the commission, and that it was cooperating fully with the investigation. “Luxembourg is confident that the allegations of state aid in this case are unsubstantiated,” it said.
The publication of the letter reflects heightened scrutiny of how low-tax nations in the European Union have helped large multinationals reduce their tax bills by billions of dollars, at a time when the budgets of larger countries, like France and Italy, are squeezed. The European Commission is already investigating the tax arrangements of Starbucks in the Netherlands, of Apple in Ireland and of a unit of Fiat in Luxembourg.
The Amazon tax investigation — made public last year — focuses on a deal the company struck with Luxembourg in 2003 to cap the amount of tax it paid through so-called transfer pricing, according to the commission. Luxembourg’s tax authorities took a mere 11 days to approve Amazon’s tax structure in the country, the commission noted.
Under the arrangements, most of the company’s European revenue was sent from one unit in Luxembourg to a separate subsidiary that was not liable to pay corporate tax in the country. That reduced the profit that the company generated from its European operations and cut its tax bill, the commission said.
Europe’s competition authorities have asked Luxembourg for more details on why it was “deviating” from international standards when handling this complex structure between Amazon’s two units.
They also called for more details of how royalty payments made between the units were structured, as the unit that received these payments was not subject to taxation in Luxembourg, according to the European Commission’s documents.
The antitrust authorities did not say how much back taxes Amazon might be forced to repay the Luxembourg government if its investigation proved wrongdoing.
In 2013, Amazon reported a 14 percent rise in revenue, to $15.7 billion, for its European operations, which are run from Luxembourg, according to regulatory filings.
Yet that unit reported a pretax profit of $33 million in 2013. It subsequently paid more than $2 billion in royalty payments to the separate Amazon subsidiary for use of the company’s intellectual property.
The European authorities suspect the arrangement involving the two units was “not related to output, sales, or to profit,” and was merely “cosmetic.”
The prominent cases in Luxembourg, where many big multinationals like Microsoft and Apple have operations, put Jean-Claude Juncker, the recently installed president of the European Commission in an awkward position. Mr. Juncker’s role includes oversight of the investigations, yet at the same time, his critics accuse him of having helped turn Luxembourg into a tax haven during his nearly two decades leading that country.
This week, apparently seeking to emphasize its role as an important investor in the European Union, Amazon announced that it had created and filled more than 6,000 new permanent jobs across the bloc in 2014. That is the most the company has hired in one year since unveiling its first European Union websites in 1998.
Luxembourg has also been the subject of intense scrutiny since Nov. 5, when the International Consortium of Investigative Journalists published a reportaccusing more than 300 companies, including the Pepsi Bottling Group, Ikea and FedEx, of benefiting from preferential tax deals.
Mr. Juncker — whose posts in Luxembourg from 1989 to 2013 included finance minister, treasury minister and prime minister — has declined to recuse himself from taking part in the final decisions on the cases in Luxembourg.
As a formal matter, Margrethe Vestager, who became the bloc’s competition commissioner late last year, is leading the tax investigations.
Discouraging overly generous tax rulings would especially benefit smaller companies that “cannot prioritize the resources to tax advice in the same way as bigger companies,” Ms. Vestager told a group of reporters last month.
Yet, Ms. Vestager also suggested the need to keep the investigation focused on the cases concerning Fiat, Amazon, Apple and Starbucks to ensure her findings are strong enough to withstand any eventual challenge in the European Union courts.
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