Amazon is the most recent corporate giant to join the list of companies facing European Commission probes into tax arrangements with European Union (EU) member states.
The inquiry into Amazon is to determine whether Luxembourg gave the company illegal preferential tax treatment, violating European Union competition regulations.
This latest inquiry follows similar investigations into tax arrangements between Apple Inc. and Ireland, Starbucks Corp. and the Netherlands, and Fiat S.p.A. and Luxembourg.
A country’s use of attractively low tax rates to lure businesses is not illegal under EU rules, but making special corporate tax deals that are not available to all companies could amount to illegal state aid.
The Amazon investigation centers on a 2003 agreement with local authorities that reportedly has let the company cap the amount of tax it paid, regardless of its European profits.
Avoiding taxes with transfer pricing deals
The Commission contends that Amazon is able to use transfer pricing deals in which most of the company’s European revenue is sent to a Luxembourg-based subsidiary. That subsidiary then pays royalties to a separate Amazon unit, which effectively reduces the profit the company generates from its European operations and cuts its tax bill, according to European authorities.
Transfer pricing relates to the prices set for goods sold or services provided by one member of a related group to another. Advance pricing arrangements (APAs) determine, before any intragroup transaction takes place, an appropriate set of criteria for setting the prices for those transactions.
In the meantime, the Commission has said it is investigating Ireland’s transfer pricing practices as well as those of other EU member states, including the Netherlands. Any APA or similar arrangement within the EU could potentially be subject to review and lead to increased tax liabilities for the relevant taxpayers for periods as far back as 10 years.
The Commission said it will investigate whether Ireland followed transfer pricing guidelines promulgated by the Organization for Economic Cooperation and Development in reaching transfer pricing agreements with Apple.
Apple’s tax dealings with Ireland have generated considerable attention, including a Senate investigation in the United States. But in Luxembourg, the tax investigations could potentially have a much bigger effect due to the large number of multinationals with operations in that small country.
The Commission has said no conclusions have been drawn in the three cases.
The Commission has stated that the fight against tax evasion should be one of the main priorities of the EU’s Directorate-General for Competition. This increased attention likely means additional challenges for multinationals with a presence in the EU.”
If you have any questions about transfer pricing, please contact Yoko Yamamoto.