January 20, 2015

Luxembourg and Amazon are special friends, says the European Commission

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sweetheart candy 1It’s old news, right, that Amazon is going through Luxembourg for all its international sales? For instance, that Amazon.co.uk sells Kindle editions out of Luxembourg at 3% tax rather than going through the UK at a full 20% tax? We can speculate Amazon is using Luxembourg, and now the European Commissioner is going over all the notes they passed back and forth in class their correspondence to determine whether they’re special friends in an illegal arrangement to give Amazon special tax advantages.

The arrangement was made in 2003, but in terrible timing, the European Commission released a preliminary report this week (right before Valentine’s Day!). The EC’s “preliminary view is that the tax ruling . . . by Luxembourg in favour of Amazon constitutes state aid . . .and the Commission has doubts at this stage as to that ruling’s compatibility with the internal market.” The EC is playing it cool, but this means yes, the EC thinks they’re more than friends.

So Amazon passed Luxembourg a note in 2003 that said, “Do you like me? Check yes or no.” requesting state aid and Luxembourg checked “yes” agreed within eleven days. But both Amazon and Luxembourg deny that it was anything serious. Luxembourg was supposed to submit a letter to the European Commission to alert it of the new arrangement, but it appears Luxembourg forgot to send that note.

As we’ve written here before, Amazon transfers royalty payments (to the tune of €519 million last year) and “service fees” (an additional €379 million) between subsidiaries, then pays actual profits to the Luxembourg company Amazon EU, sometimes known as LuxOpCo.

Loek Essers of TechWorld explains in brazen detail:

[Amazon EU, or LuxOpCo] functions as Amazon’s head office for Europe and is the principal operator of the retail and business services offered through Amazon’s European websites.

LuxOpCo in turn is owned by another Amazon subsidiary, a limited liability company called Amazon Europe Technologies Holding SCS, also known as Lux SCS, which is set up in such a way that it is not subject to Luxembourg corporate income tax and net wealth tax.

In the tax structure set up in Luxembourg, LuxOpCo pays a tax-deductible royalty to Lux SCS, which means that as a result, most European profits are recorded in Luxembourg but not taxed there.

In 2013, LuxOpCo’s net turnover amounted to €13.6 billion. In that year Amazon recorded worldwide net sales of $74.5 billion and a post-tax net profit of $274 million.

Amazon has invented a clever way to avoid paying taxes. But the company’s unique in this regard; almost 1600 companies are using the same address in Luxembourg for the same purpose.

The EC has composed a twenty-three page letter intended to break up the two. And people are taking sides: Robert W. Wood of Forbes claims that more people are angry with Luxembourg than they are with Amazon! He writes, “Amazon and Luxembourg may both be embarrassed that Amazon’s effective tax rate is reportedly a trifling 4-6%.”

Embarrassed. This hardly seems the right word to describe Amazon’s reaction. The company still denies any wrongdoing. Meanwhile, Luxembourg is being investigated for “sweetheart deals” with Fiat, Apple, and Starbucks.

Tim Godfray, chief executive of The Booksellers Association, is ready for this split to be official. He says:

The Booksellers Association is pleased to learn that Luxembourg’s unfair tax agreements have been recognised by the European Commission. In 2013, Amazon paid just £4.2m Corporation Tax on UK sales of £4.3 billion, giving them a huge and unfair advantage over High Street bookshops. They have managed to build an estimated market share of 90% in e-books here in the UK.  Our high street booksellers are not able to move costs and sales from country to country–as Amazon has done–to get a tax arrangement below that of the UK.  We urge Xavier Bettel, the Prime Minister of Luxembourg, to take appropriate steps to work with the European Commission to end these tax deals which distort fair competition.

It won’t be pretty: if the EC rules against the sweetheart deal, Luxembourg will have to go back to Amazon’s apartment to collect a cardboard box full of hundreds of millions of Euros. The Commission aims to have a full report by the second quarter of the year.

 

 

Kirsten Reach was an editor at Melville House.

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