European Commission: Amazon's tax arrangements in Luxembourg may have been illegal state aid

The Commission announced that it was conducting an "in-depth investigation" into the arrangements, which were set out in a 'tax ruling' by Luxembourg to Amazon, in October 2014. A non-confidential version of its letter to Luxembourg setting out its preliminary reasons for doing so (23-page / 192KB PDF) has now been published.

According to Commission, its early view is that the ruling granted Amazon selective and ongoing tax advantages in a way that breached its rules against state aid. It has asked Luxembourg to provide further information ahead of its final ruling. Under EU law, any "unlawful aid" granted to a particular company can be recovered from the recipient of that aid.

"At this stage, the Commission considers that the contested tax ruling appears to result in a reduction of charges that should normally be borne by the entity concerned in the course of its business, and should therefore be considered as operating aid," it said in the letter.

"According to the case law of the Court of Justice and Commission's decisional practice, such aid cannot be considered compatible with the internal market in that it does not facilitate the development of certain activities or of certain economic areas, nor are the incentives in question limited in time, digressive or proportionate to what is necessary to remedy a specific economic handicap of the areas concerned," it said.

Corporate tax expert Heather Self of Pinsent Masons, the law firm behind Out-Law.com, said that the letter had a "confident flavour".

"The investigation considers the ruling granted in November 2003 concerning the royalty payable by Amazon's EU operating company, Amazon EU Sarl," she said. "The royalty is paid to a Luxembourg partnership of which two Amazon US companies are members. Thisis not taxable in Luxembourg and which may not be subject to tax in the US either.."

One of the footnotes to the letter says that "due to a mismatch in the classification" of the Luxembourg partnership   between Luxembourg and the US " the taxation of the partners in the US can be deferred indefinitely as long as none of the profit is repatriated to the US".

"The Commission sets out a number of concerns about the way that this royalty has been calculated. In particular, the net effect is that the profit of the operating company - taxable in Luxembourg - is a fairly predictable number, rather than clearly reflecting the actual functions and risks carried out by that entity. This does not appear to comply with the 'arm's length' principle, and hence is potentially state aid," she said.

When the letter was written in October 2014, Luxembourg had not provided any details of the transfer pricing analysis carried out by Amazon as part of the arrangements, she said. The country's finance ministry has now confirmed that it has now submitted that information and is "fully cooperating with the Commission in the investigation" in a statement on its website.

Tax rulings are 'comfort letters' from national tax authorities giving specific companies clarity on how their corporate tax will be calculated or on the use of special tax provisions. They are often used to confirm transfer pricing arrangements; which refer to the prices charged for commercial transactions between various parts of the same group of companies, particularly prices set for goods sold or services provided by one subsidiary of a corporate group to another subsidiary of the same group.

If used to provide selective advantages to a specific company or group of companies, tax rulings may involve state aid within the meaning of EU rules. These rules are intended to prevent the distortion of competition caused by national governments granting advantages or incentives to particular companies. If the Commission finds that state aid rules have been breached, any company found to have benefited can be ordered to pay back illegal reliefs granted over a period usually up to 10 years.

The ruling granted by Luxembourg to Amazon relates to the level of royalty paid under transfer pricing arrangements by the company's Luxembourg-based operating company, referred to as 'Luxembourg OpCo', to its owner, a Luxembourg partnership. Because the partnership is transparent, this royalty income is not subject to corporation tax in Luxembourg. The Commission said that this ruling had been granted only 11 working days after the letter requesting it, and noted that it had been in force unchallenged for over 10 years.

"Even if the transfer pricing arrangement in the ruling request could have been considered to comply with the arm's length principle when that request was made to the Luxembourgish tax authorities, quod non, the appropriateness of the remuneration over the years should have been called into question, given the changes to the economic environment and required remuneration levels," the Commission said in its letter. "The Commission notes, in particular, that the duration is much longer than the length of tax rulings currently concluded by member states."

Corporate tax expert Heather Self said that one of the interesting things about the letter was that it referred to evidence given to the UK's Public Accounts Committee in 2012, when Amazon had been asked to defend its UK tax position.

"At that hearing, Amazon said that all of its strategic functions were carried out in Luxembourg, and the Commission is now saying that that would suggest that profits in Luxembourg should be higher," she said. "This is an indication of a developing trend for the Commission to 'join the dots' by looking at information which has already been disclosed to different fora."

The Commission announced that it was to ask all member states to provide information about their tax ruling practices at the end of last year, following its investigations into the ruling provided to Amazon as well as those granted to Apple in Ireland, Starbucks in the Netherlands and Fiat Finance and Trade in Luxembourg. Commission president Jean-Claude Juncker has also announced plans for a new directive on the automatic exchange of information on tax rulings between member states.