Commission criticises Amazon’s tax deal with Luxembourg

Commission alleges that complex tax arrangements allowed Amazon to channel profits away from other EU member states.

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Amazon and Luxembourg struck a sweetheart tax deal allowing the online retailer to cap its taxable profits at just 0.55% of its European turnover, according to charges published by the European Commission today (16 January).

The Commission described how remaining profits would be paid in the form of a licence fee to another Luxembourg-based company that manages Amazon’s intellectual property (IP) rights. The Commission said it believes that the tax deal could constitute state-aid.

The decision to open a state-aid case against Luxembourg dates back to October 2014, although the preliminary findings were published for the first time today.

The case is uncomfortable for Jean-Claude Juncker, the president of the European Commission, who was Luxembourg’s prime minister and finance minister when the deal with Amazon was struck.

The decision describes how Amazon funnels profits from around Europe to its European headquarters in Luxembourg, where it has various legal entities. One such entity is the IP owner, which happens to be a so-called ‘transparent company’ – ie, a company that does not pay tax.

The Commission’s case is based around a formula agreed in 2003 to calculate the amount of tax that Amazon would pay in Luxembourg and the royalties to be paid to the IP owner.

The Commission argues that the formula is deliberately complex and misleading, giving the impression that Amazon’s tax is calculated as a percentage of its profits whereas in reality it is capped at a tiny share of turnover, regardless of whether Amazon makes huge profits or not.

Furthermore, the Commission suggests that the agreement allows Amazon to dress up its actual profits as royalties, which it can pay out tax-free.

As part of its defence, Luxembourg provided the Commission with guidelines on tax rulings issued to tax administrators. The guidance dates from 1989.

In the next few weeks the Commission will publish the decision in the Official Journal, at which point members of the public, competitors and other stakeholders will be able to submit comments on the investigation.

This is the second open state-aid case against Luxembourg regarding a tax ruling. The first case was opened in February 2014 and involved the company Fiat Finance and Trade.

Juncker and the authorities in Luxembourg were badly shaken by the publication in November of hundreds of leaked deals between the Grand Duchy’s tax authorities and multinationals, often guaranteeing tax rates as low as 1%.

Juncker has insisted that he did not know the details of the deals and that he was not the “architect” of Luxembourg’s tax system.

The European Parliament is currently considering whether to conduct an inquiry into member states’ tax affairs.

Margrethe Vestager, the European commissioner for competition, is also conducting investigations into tax deals between Apple and Ireland, and Starbucks and the Netherlands.

This has led politicians from the United States to complain that the Commission is focusing its efforts on tax dodging by US companies, while ignoring similar deals struck by European companies.