Amazon.com Inc. has become the latest major U.S. company to wind up in a formal probe conducted by European Union regulators regarding the legality of Luxembourg tax arrangements.
The investigation is part of a broader crackdown on tax avoidance by European multinationals, including Apple Inc. and Starbucks Corp. European governments and regulators have continued to bolster revenues and address concerns that international groups are enjoying unfair tax advantages over local companies.
The European Commission expressed concern that a 2003 tax deal granted to Amazon in Luxembourg capped the U.S. company's tax payments in the Grand Duchy. Under the arrangement, Luxembourg could be required to recover from Amazon any funds that amount to selective state subsidies, which are illegal under EU law.
The commission said Luxembourg had provided it in August with "information on a number of cases" it had requested, including Amazon. With regulators sorting through information from tax deals in Belgium, Ireland, the Netherlands and the U.K., consequences related to the probe could be widespread.
A spokesperson for Amazon said the company had enjoyed the same level of tax treatment as any other company in Luxembourg. "We are subject to the same tax laws as other companies operating here," the spokesperson said.
While Luxembourg's finance ministry has cooperated fully with the EU's investigation, it said that it was "confident that the allegations of state aid in this case are unsubstantiated."
While speaking at a news conference in Brussels, EU antitrust chief Joaquin Almunia, suggested Amazon's 2003 tax deal could have allowed the company to underestimate taxable profits from its Luxembourg-based subsidiary, Amazon EU Sarl. The unit pays a tax-deductible royalty to another Amazon entity that is established in Luxembourg but isn't subject to local corporate taxes.
Mr. Almunia suspects the royalty may have been "exaggerated so as to avoid tax obligations," and that the deal "contains a cap on tax" that Amazon is required to pay, which could also be illegal under EU law.
Amazon has argued that its taxable profits are small due to its very low-margin retail business in which it invests heavily.
Source: Fairless, Tom, "EU Opens Probe Into Amazon's Tax Affairs in Luxembourg," The Wall Street Journal, October 7th, 2014