US internet giant Amazon may have been underpaying tax for more than 10 years because of a deal it reached with Luxembourg’s authorities, according to the European Commission.
Its suspicions that this amounted to unfair state aid, not available to competitors or other companies, has led the commission’s competition section to launch a full-scale investigation into the arrangement.
Similar investigations are under way into Ireland’s arrangement with Apple and with the Dutch state’s deal with Starbucks. Final decisions are expected in the spring. If found to have breached state aid rules, the companies are likely to be told to pay the unpaid taxes, going back a maximum of 10 years, to the governments concerned.
The Amazon case has similarities to Ireland’s Apple transfer pricing arrangement in that both involve paying royalties based on notional figures, to another company within the group but which is not liable for tax. In the Luxembourg case this company is known as a “transparent” company and so is not liable for tax in the country. The funds go to an offshore company, where they usually pay no tax.
EU marketing affiliates based in France, Germany, and Britain pay royalties to a Luxembourg-based company, which pays it on to the ‘transparent’ company.
The company holding the vast majority of the royalties does not employ anybody but is an accounting facilitator, based in Luxembourg.
The commission released a 23-page edited version of its initial findings sent to Luxembourg, and from the time it is published in the official journal in a number of weeks’ time, all interested parties will have a month to comment.
The complex way in which a cap is set for the amount of income that should be considered taxable is a key issue for the investigators, since it does not appear to be related to actual turnover or income of the company.
However, even if it is found to be just an ad hoc method of assessment, but it gives a result that is similar to what would be paid under normal, market conditions, then Luxembourg will be cleared of providing illegal state aid.
Luxembourg’s authorities have said they are confident of being cleared. In Ireland’s case, Finance Minister Michael Noonan has been equally optimistic and said any negative finding would be challenged in the courts.
Multinationals, especially from the US, using loopholes provided by mixing different tax rules to their advantage and basing themselves in the likes of Ireland, the Netherlands, or Luxembourg, are coming under pressure from EU countries and the US, to close these loopholes.
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