EU Opens Probe Into Amazon's Tax Deal With Luxembourg

(RTTNews) - The European Commission said Tuesday that it has opened an in-depth investigation into online retailer Amazon.com Inc.'s (AMZN) tax deal with Luxembourg.

The European Union regulator's probe of Amazon is an expansion of its investigations on possible tax avoidance by multinational companies, including U.S. technology giant Apple Inc. (AAPL) and coffee retailer Starbucks Corp. (SBUX), in Europe following the 2008 financial crisis.

The European Commission, the European Union's antitrust authority, commenced a formal probe in June whether tax deals granted to Apple in Ireland, Starbucks in the Netherlands, and Italian automaker Fiat SpA's (FIATY.PK) finance arm in Luxembourg, amounted to illegal state aid.

The Commission plans to eventually demand these companies to return their unpaid taxes. The tax practices of these multinational companies are said to have enabled them to shrink their tax bills through the use of specially-structured corporate tax arrangements.

The Commission said Tuesday that its investigation of Amazon will look into possible state aid granted by Luxembourg to the online retailer through a tax ruling that dates back from 2003. The regulator noted that the tax ruling is still in force, meaning that it is used to determine the tax paid by Amazon in Luxembourg every year.

The European Commission said, "As in our other ongoing investigations concerning Apple in Ireland, Starbucks in the Netherlands and Fiat Finance and Trade in Luxembourg, this tax ruling deals with transfer prices between entities of the same group."

The Commission's probe focuses on 'transfer-pricing arrangements,' under which companies can redistribute profit within a group by charging for goods and services sold by one subsidiary to another, located in different countries.

The Commission noted that the ruling it is looking at relates to Amazon's subsidiary in Luxembourg, which records most of the group's European profits. This subsidiary company pays a royalty to another entity based in Luxembourg, but is not subject to corporate taxation in Luxembourg, the EC said.

The Commission said, "Today we observe that through this mechanism most European profits of Amazon are recorded in Luxembourg but are not taxed there. The terms for calculating this royalty are essential. These transfer pricing arrangements are set out in the ruling of 2003 that is the focus of this investigation."

According to the European Commission, if it is confirmed that Amazon is granted a favorable treatment based on a 10 year-old tax deal, this would certainly be unfair for companies who do pay taxes on market terms. The EC further noted that such a special advantage would be a "clear distortion of competition".

Joaquin Almunia, the EU's antitrust chief, clarified that he was not calling into question the general tax system of Luxembourg, but was launching the probe to find out whether Luxembourg's tax authorities have been "too accommodating" to Amazon in applying transfer pricing rules.

In late September, the European Commission said its preliminary view is that tax deals granted by Ireland to Apple constituted illegal state aid. The EC said it was of the opinion that the contested rulings do not comply with the arm's length principle and through those rulings, the Irish authorities conferred an advantage on Apple.

AMZN is trading at $320.46, down $1.74 or 0.54 percent on a volume of 431,576 shares.