According to the European Commission, Amazon received tax advantages between 2006 and 2014.
The European Commission opened its investigation into Amazon (AMZN) and Luxembourg’s tax arrangements in October 2014. In it, the Commission alleged that the U.S. online retail giant benefited from a sweetheart tax deal with Luxembourg that amounted to state aid. Luxembourg is Amazon’s European hub.
Luxembourg and U.S. technology companies have been at the center of the Commission’s probes into tax affairs and antitrust. Last year, the EU ordered Ireland to recover 13 billion euros in back taxes from Apple (AAPL). The Commission is also looking into the tax deal between McDonald’s (MCD) and Luxembourg.
The EU has promised to scrutinize tax arrangements between large mulitnationals and the bloc’s member states. This case is likely to increase tensions between Europe and the U.S. After the Commission’s decision on Apple, Chief Executive Tim Cook denounced it as “total political crap.” The Amazon tax ruling is also set against a push by President Donald Trump to come up with a money repatriation plan for U.S. firms with big cash piles abroad.
At the heart of the EU’s investigation into Amazon is its network of subsidiaries in Europe and so-called transfer pricing. That is the price of goods that one subsidiary of a company sells to another subsidiary under the same corporation. This in itself is not illegal. But what is illegal is if this transfer of goods is mis-priced, therefore affecting the profits a company makes, and subsequently how much tax it pays.
In 2004, Amazon restructured its operations to create Amazon EU Sarl, which was its European operating headquarters. Amazon EU Sarl pays a royalty to the parent company in Europe for use of intellectual property. But that parent company is a limited liability partnership which is not subject to corporate tax in Luxembourg.
The Amazon ruling could be embarrassing for Jean-Claude Juncker, the current president of the European Commission, who was Luxembourg’s prime minister between 1995 and 2013.
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