EU stings Amazon for $482m
Penalty is stern warning to big tax dodgers
European Union regulators sent a warning to any company using fees on i ntellectual property rights to shift profits away from the taxman by slapping Amazon.com Inc with a 250 million ($482m) bill and giving Luxembourg another rap on the knuckles.
The EU took a dim view of a structure that allowed Amazon to slash its taxable profits in Europe over about a decade by channelling them to a tax-free unit in Luxembourg that was meant to license the technology behind its web shopping platform.
Officials found one big problem with the arrangement: the unit was just a shell company, how could it therefore perform complex duties such as licensing and managing intellectual property? Impossible, according to the EU. Both Amazon, which is a major employer in Luxembourg, and the country’s Government deny they broke any rules.
As EU competition commissioner Margrethe Vestager put it yesterday, “an empty shell” with “no employees, no offices and no business activities” can’t possibly perform activities that would allow it to lay claim to billions of euros of royalty revenue. Yet according to the EU, that’s just what Luxembourg allowed the company to do, in breach of its own tax rules.
“It’s not enough to put IP rights in an empty shell and claim that all the revenue that generated these IP rights should be awarded from a tax perspective to that empty shell,” said Edoardo Traversa, a professor who specialises in tax law at Belgium’s Universite Catholique de Louvain.
Traversa pointed the finger at Luxembourg, referring to a time when its tax authority appeared to have been rubber st amping t ax arrangements via what are known as rulings “without too much scrutiny”.
Clients “would basically write the ruling and then the Luxembourg tax administration would sign it,” he said. Luxembourg’s policy has completely
It’s not enough to put IP rights in an empty shell and claim that all the revenue that generated these IP rights should be awarded from a tax perspective to that empty shell. Edoardo Traversa
changed since.
Lots of US companies — including healthcare firms like Merck and tech firms like Facebook — move their intellectual property assets to tax havens overseas. From there, they effectively rent out their core innovations to operating units of the same company.
Such techniques are usually perfectly legal but, in Europe, they can run afoul of the EU’s state-aid rules when governments allow special exemptions to the detriment of other companies. For tax purposes, the EU considers that transactions between a multinational’s subsidiaries should be set at the same price an unrelated company would pay — a concept that is known as the arm’s length principle.
In the Amazon case, given the unit collecting royalties had no employees, the EU said it was hard to explain how the payments could be justified.
The Amazon decision comes a year after a record 13 billion tax recovery-order against Apple Inc. It is one of a growing list of cases in the EU’s crackdown on loopholes that started in 2013 — when watchdogs started to root out deals among the thousands of otherwise legal tax pacts governments have arranged for companies for years. At stake in all these decisions are billions of euros squirrelled away in tax havens, out of the reach of authorities in the countries where they make most of their sales.
With the Amazon decision, the EU simply decided to reallocate a huge chunk of profits to the taxable Amazon EU Sarl unit. That move will cost the internet retailer about 250 million in back taxes and shows other multinationals what sort of profit shifting won’t fly in Europe.
Amazon is the fifth in a series of EU decisions against special tax deals and appeals by the governments and companies concerned have been piling up in the bloc’s courts and may take years to settle. —