Amazon state aid decision 'likely to worry' other US multinationals, says expert

The decision is "likely to worry" other US multinationals with Luxembourg rulings, according to Jason Collins, a tax expert at Pinsent Masons, the law firm behind Out-Law.com.

"This ruling will be more of a concern for US multinationals than last year's Apple ruling," he said. "This is because Amazon was using a 'check the box' entity which is a more typical structure for US technology companies operating in Europe. The decision will be a concern for the significant number of other US multinationals with Luxembourg rulings relating to 'check the box' structures."

The decision follows one in August 2016 that Ireland had granted €13 billion of unlawful state aid to Apple and earlier rulings concerning Starbucks and Fiat. Although the European Commission does not have direct authority over national direct tax systems of EU Member States, it can investigate whether tax incentives breach EU ‘state aid’ law. State aid can occur whenever state resources are used to provide assistance that gives organisations an advantage over others. A tax ruling which reduces a company's tax burden can be a transfer of state resources and can be seen to constitute an advantage if the incentive was not available to all.

The Amazon decision concerns the tax treatment in Luxembourg of two Luxembourg incorporated entities in the Amazon group. In 2014 a Luxembourg company operated Amazon's retail business throughout Europe. It had more than 500 employees, and sellers and buyer using any of Amazon's websites in Europe were contractually engaging with this company.

The other Luxembourg entity (the holding company) was a limited partnership with no employees, no offices and no business activities. It acted as an intermediary between the operating company and Amazon in the US. It held intellectual property rights for Europe under a cost-sharing agreement with Amazon in the US.

The decision relates to Amazon's structure in 2014. In 2015 it changed the way it operates in Europe and the Commission's investigation does not relate to its current structure. 

The Commission's investigation concerned a ruling given by the Luxembourg tax authorities to Amazon in relation to the way the profits of the operating company were calculated for Luxembourg tax purposes. The ruling endorsed substantial payments by the operating company to the holding company for the use of the intellectual property rights. These payments amounted to on average 90% of the operating company's profits.

The Commission said that the royalty payment from the operating company to the holding company "was inflated and did not reflect economic reality". Its press release said that the tax ruling meant that the operating company's taxable profits were reduced to a quarter of what they were in reality. "Almost three quarters of Amazon's profits were unduly attributed to the holding company, where they remained untaxed. In fact, the ruling enabled Amazon to avoid taxation on three quarters of the profits it made from all Amazon sales in the EU," it said.

The holding company was a limited partnership, which is regarded as a partnership in Luxembourg and not taxed there. It was regarded as a 'check the box' entity for US tax purposes, which meant it was taxed as a company by the US and so not taxed in the US until profits were repatriated. According to the Commission the profits in the holding company remained untaxed.

The limited partnership paid a royalty to the US under the cost sharing arrangement. The Commission did not challenge the level of this payment. The payment the operating company was required to pay to the limited partnership was 1.5 times higher than the payment the limited partnership was required to pay to the US.

"The Commission's main objection seems to be that the limited partnership's profits appear not to have been taxed anywhere. The days of US 'check the box' structuring are numbered – and if the US does not manage to reform its system soon, they may find that it is the EU which will collect the tax," Jason Collins 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," Amazon said in a statement.

"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,” it said.

Last month the US Treasury published a unified framework on tax reform which proposed moving to a more territorial tax system. It proposed a cut in the headline corporate tax rate from 35% to 20% and a one-off tax charge on foreign assets which are repatriated back to the US.