European Union regulators sent a warning to any company using fees on
intellectual property rights to shift profits away from the taxman – slapping
Amazon.com Inc with a €250mil 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 located 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 on Wednesday,
“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
specializes in tax law at Belgium’s Universite Catholique de Louvain.
Traversa pointed the finger at Luxembourg, referring to a time where
its tax authority appeared to have been rubber stamping tax 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 in an interview. Luxembourg’s policy has
completely changed since.
Lots of US companies – including health care firms like Merck & Co
and tech firms like Facebook Inc – 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 that the unit collecting royalties had no employees, the
EU said it’s hard to explain how the payments could be justified.
The Amazon decision comes a year after a record €13bil tax recovery-order
against Apple Inc. It’s 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
squirreled away in tax havens, out of the reach of authorities in the countries
where they make most of their sales.
The set-up criticised by the EU was put together in the mid-2000s when
Amazon transferred its IP rights to a Luxembourg subsidiary. Up until 2014, the
Luxembourg unit, called Amazon Europe Holding Technologies SCS, or AEHT,
recorded royalty revenue of about €5.2bil before adjustments for inflation and
exchange rates.
Amazon, which said it will have 65,000 employees in Europe by the end
of this year, of which about 1,500 will be in its Luxembourg EU base, has
defended its tax payments in the region.
It asserts that regulators there are mistaking high revenue for high
taxable profits. It has argued its profits there have been crimped by heavy
investments in the IP and strong competition.
Luxembourg’s finance ministry said on Wednesday it “considers that the
company has not been granted incompatible state aid.” Amazon also disagreed
with the EU’s assessment and said it will consider an appeal at the bloc’s
courts.
To move revenue from Amazon’s e-commerce businesses in France, Germany
and Britain, those units first made royalty payments to the company’s European
operating subsidiary in Luxembourg, called Amazon EU Sarl, the EU said. That
unit is subject to taxes, but it slashed its taxable income by making
deductible royalty payments to the tax-free AEHT unit for the regional sites’
use of Amazon’s web shopping platform and trademarks.
Huge chunk
With Wednesday’s 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 €250mil in back taxes and shows other multinationals
what sort of profit shifting just 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.
“It may take several years before the first cases are settled,” said
Raymond Luja, tax professor at Maastricht University, and also counsel to law
firm Loyens & Loeff in Amsterdam. “These processes could take many years,
and the commission can’t simply wait and see what the final outcome is in the
meantime.”
“For the commission, dealing with transfer
pricing is a learning process as well and we may gradually see a change in how
they approach transfer pricing” and the application or not of
“anti-tax-avoidance measures in the near future,” said Luja. — Bloomberg
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