By Tom Fairless
BRUSSELS-- Amazon.com Inc.'s "cosmetic" tax arrangements in
Luxembourg may give the U.S. online retailer an illegal advantage
over competitors, European Union regulators said Friday, marking
the latest phase of a widening crackdown on alleged sweetheart tax
deals for multinationals.
Amazon is one of four companies whose tax affairs are being
scrutinized by the European Commission, the EU's top antitrust
authority, amid concerns that they constituted illegal aid from
governments. Other targets of the investigation include Apple Inc.,
Starbucks Corp. and Fiat SpA, all of which face sizable back-tax
demands if the regulator's suspicions are confirmed.
In Amazon's case, the back-tax bill could reach hundreds of
millions of euros, a person familiar with the matter said.
The probes represent a groundbreaking move by the commission to
combat tax avoidance in the absence of an agreement among the
bloc's 28 governments. The commission has no authority to weigh in
on national tax policies, but is empowered to police EU state-aid
rules that prohibit selective subsidies.
In its preliminary decision on Amazon issued Friday, which runs
to 23 pages, the commission criticized a 2003 tax agreement which
establishes the taxes payable by Amazon in Luxembourg, and which is
still in force.
Central to the case is a royalty fee, estimated at around EUR500
million ($577 million) annually, which Amazon's European head
office, Amazon EU Sarl, pays to another Luxembourg-based
subsidiary. The royalty, for use of the group's intellectual
property rights, reduces Amazon's tax bill in Luxembourg because
the second subsidiary isn't subject to local corporate tax.
The commission questioned the methodology used to calculate that
royalty, which it described as "cosmetic," and said Luxembourg's
tax calculations didn't appear to comply with international
guidelines. Luxembourg's authorities may not have properly assessed
the 2003 deal given they approved it within "a very short period"
of 11 working days, the regulator said. It also expressed concern
that the deal was still in force after more than a decade "without
any revision".
Amazon EU Sarl had net revenue of EUR13.6 billion in 2013.
In a statement, Luxembourg said it was "confident that the
allegations of state aid in this case are unsubstantiated and that
it will be able to convince the commission in due time of the
legitimacy of the tax ruling."
A spokesman for Amazon said the company had received no special
tax treatment from Luxembourg. "We are subject to the same tax laws
as other companies operating here," he said.
At issue are the prices that multinational companies charge for
goods or services sold by one subsidiary to another, known as
transfer-pricing arrangements. These could be manipulated to allow
companies to shift profits away from high-tax jurisdictions, so
international guidelines require that they be determined at "arm's
length," reflecting transactions that would take place between
independent companies.
The commission said Amazon's internal royalty fee was "not
related to output, sales, or to profit." The rule for calculating
the fee "seems to contain a cosmetic arrangement for how to present
the royalty and has no bearing on the amount of the royalty," it
said.
It asked Luxembourg to explain the nature of the intellectual
property for which internal fees are paid, and to detail the scale
of royalties over the past 10 years.
Amazon and other interested parties have several weeks to
provide feedback before the commission announces its final
decision. Margrethe Vestager, the EU's top competition official,
has said she hopes to wrap up all four tax investigations by
June.
Luxembourg's tax practices have come under a fierce spotlight in
recent months after leaked documents revealed details of hundreds
of highly favorable deals it has granted to companies including
PepsiCo Inc. and FedEx Corp.
The Grand Duchy had until recently resisted the commission's
requests for tax documents, and was fighting the case in court. But
last month Xavier Bettel, the country's prime minister, agreed to
share information on tax deals secured by multinational companies,
after the commission also asked other EU countries to share their
tax rulings.
Write to Tom Fairless at tom.fairless@wsj.com
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