Amazon’s Luxembourg tax bill spotlights EU-US fight over jurisdiction
4 October 2017. By Matthew Newman.
Amazon's final tax bill in a dispute with the EU over a sweetheart tax deal in Luxembourg may ultimately depend on a US court.
The US online retail giant was ordered today by the European Commission to pay 250 million euros ($294 million) of unpaid taxes to Luxembourg going back eight years.
Both Luxembourg and Amazon are likely to appeal the decision at EU courts, but legal proceedings in the US will affect how much the tech company could be forced to pay in Europe. Amazon already won an appeal in March against the US tax authority when a court found that its internal money-shuffling didn't amount to tax avoidance.
At issue is the amount of profits Amazon's operating subsidiary paid to a holding company in exchange for royalties on intellectual property. The commission said Amazon effectively transferred profits into the holding company by vastly overpaying for intellectual property. The holding company is a partnership and isn't subject to tax in Luxembourg.
This tax avoidance amounted to three-quarters of Amazon's operating profits for its European operations, the commission said. The intellectual property under debate includes the software that runs Amazon's websites in Germany, France and the UK, as well as the value of the Amazon brand and other copyrights.
The case highlights the debate over which jurisdiction — the EU or the US — should oversee how the likes of Amazon value their intellectual property in intra-group dealings. The dispute over royalty payments may prompt some observers to question whether the EU's Amazon case is really about jurisdiction and not about illegal state aid.
— Royalties —
The commission doesn't have an issue with Amazon using profits from its European operations to pay for intellectual property. But the EU regulator faults Luxembourg for accepting Amazon's methodology in calculating those payments.
Amazon, of course, won't take this quietly. The online giant will likely argue that the commission has fundamentally misunderstood its tax structure in Luxembourg.
The holding company was set up as an intermediary for the payments of royalties to the intellectual-property holders in the US. This is standard practice because Luxembourg doesn't have jurisdiction to tax US technology.
At the same time, the US tax authority has also taken issue with Amazon's "transfer pricing" between its Luxembourg subsidiaries. The Internal Revenue Service has argued that Amazon's payments to the holding company, through a plan called "Project Goldcrest," weren't conducted at "arm's length" and thus led to an artificially low US tax payment.
The concept of "arm's length" refers to guidelines developed by the Organization for Economic Cooperation and Development to ensure fair taxation in intra-company dealings. This means identifying profits as if the transactions were conducted between independent companies under "market conditions."
In the US court case, the IRS has argued that Amazon's "pass-through" entity — the untaxed holding company — amounted to an elaborate tax-avoidance scheme. The IRS sought to recover $1.5 billion in back taxes.
The European Commission, meanwhile, said that Luxembourg's tax ruling on Amazon's payments between the two companies in the same group were "not in line with economic reality."
— US court —
So, both the EU and US authorities have taken issue with Amazon's tax dealings in Luxembourg.
In the US, however, Amazon has won the first round. In March, a US judge rejected the IRS's challenge. EU Competition Commissioner Margrethe Vestager told journalists today that the US authority has filed an appeal in the case.
When asked about the appeal and its impact on the EU case, she said that Amazon's final tax bill in Luxembourg will be determined by the US proceedings.
"The court decision in the US affects the final calculations of the profit due to be taxed in Luxembourg," Vestager said.
Ultimately, if the IRS wins, then Luxembourg won't be forced to claw back so much money from Amazon.
Still, Vestager stressed that the commission has no say in how the US authorities evaluate what Amazon should pay for the "use or the development" of the intellectual property in the US.
"It's not for us, and we're not going to be looking into this," she said. "The appeal doesn't change the methodology that we have set up or how we have been looking into the case."