Concluding an investigation launched in 2014, the European Commission on Wednesday ruled that Luxembourg granted undue tax benefits to Amazon of around €250 million (or $293.5 million). The commission said that a ruling issued by the small, tax friendly country in 2003 allowed the e-commerce giant to inflate royalty payments that did not reflect economic reality. Luxembourg must now recover the amount owed, the commission said.
That tax ruling by Luxembourg granted a selective economic advantage to Amazon by allowing the company to pay less in taxes than other companies subject to the same national tax rules, according to a European Commission press release. "In fact, the ruling enabled Amazon to avoid taxation on three quarters of the profits it made from all Amazon sales in the EU," the EC said. Retail Dive’s request to Amazon for comment on the ruling wasn’t immediately returned.
In a statement to Retail Dive on the matter, an Amazon spokesperson said: “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. 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.”
Amazon isn't alone in its tax maneuvers abroad, but the EC appears ready to take a tough stance against global giants doing business on the continent that the commission judges aren't paying their fair share. The EC also took Ireland to task on Wednesday for failing to recover a whopping €13 billion ($15.3 billion) in taxes from Apple.
Amazon has 1,500 employees in Luxembourg, according to the Amazon spokesperson's email. But the EC said that Luxembourg's tax ruling enabled the company to shift the vast majority of its profits from an Amazon group company that is subject to tax in Luxembourg (Amazon EU) to one that isn't subject to tax (Amazon Europe Holding Technologies), which the EC says is illegal. This year Amazon won its case with the U.S. over the same issue. The Internal Revenue Service in March lost its bid to recover some $1.5 billion from Amazon's Luxembourg unit.
"As a result, almost three quarters of Amazon's profits were not taxed," Commissioner Margrethe Vestager, who is in charge of competition policy, said in a statement. "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."
It's a financial dance, partnering with tax friendly countries like Ireland and Luxembourg, that is especially common among technology companies and other businesses with large amounts of intellectual property licensed by their own operating units (and, in some cases, by partners or customers). Facebook and Apple are just two examples in Amazon's weight class that have moved such assets to international tax havens.
This isn't Amazon's first tussle with tax regulations, either. As an e-commerce retailer, it used to enjoy the benefits of selling products without sales tax, an advantage that became so deeply connected with Amazon that the online sales tax that has since been imposed is often called "the Amazon tax." Amazon now collects sales tax on purchases in all states that have such levies. But the fight's not over: South Dakota recently petitioned the U.S. Supreme Court to review its ruling in the early 1990s that set up the framework for where and why e-commerce companies must pay state sales taxes.
Amazon is garnering millions in tax benefits from cities where it establishes operations, most recently in New York, in exchange for employment promises. Cities nationwide are hoping to host the e-commerce giant's recently announced second quarters, and tax credit packages are part of the company's request for proposal.