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Amazon Luxembourg Tax Deals Under EU Lens

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Europe’s competition regulators are investigating whether Luxembourg gave Amazon.com, Inc. (NASDAQ:AMZN), the world’s second-biggest online retailer, preferential tax treatment that enabled the retailer to operate almost tax-free in Europe. While Luxembourg’s finance ministry denied any wrongdoing, Amazon denied receiving any preferential treatment.

Amazon.com, Inc. (NASDAQ:AMZN) EU investigating 2003 deal

The European Commission is poised to launch an investigation into whether Luxembourg broke EU state aid rules. Citing people familiar with the developments, the Financial Times reports that EU investigators believe Luxembourg gave Amazon favorable terms in a 2003 tax ruling, which caps its overall bill to less than 1% of the retailer’s European income.

The European Commission’s main allegation is that Luxembourg allowed Amazon  to mis-allocate profit within its corporate structure in a manner that fell short of standards expected of an arms-length transaction between corporate subsidiaries.

The online retailer is structured so that all online sales in Europe are technically between customers and a Luxembourg company. Amazon.com, Inc. (NASDAQ:AMZN)’s main European subsidiary, Amazon EU Sarl, reports almost no profit despite clocking almost 14 billion euros of sales each year. Such an arrangement is partly made possible because it pays hefty fees to its immediate parent, Amazon Europe Holding Technologies SCS (AEHT), a tax exempt partnership, in return for using Amazon’s intellectual property.

Interestingly, companies found guilty of breaching EU rules on state aid could be forced to repay what Brussels determines to have been the amount of support given.

The online retailer is already locked in a court battle with the U.S. Internal Revenue Service over the arrangement by which the Luxembourg partnership came to enjoy the rights to sell on Amazon’s intellectual property outside the U.S.

Not only Amazon.com, Inc. (NASDAQ:AMZN), others under probe

As reported earlier, regulators with the EU are investigating Apple Inc. (NASDAQ:AAPL)’s recent tax deal with Ireland, a popular tax haven for international corporations. The EU is also looking into Starbucks Corporation (NASDAQ:SBUX)’s dealings in the Netherlands and Fiat Finance and Trade’s in Luxembourg. However, the probe could have far-reaching impact. If the investigation results in changes to tax laws in the EU, then numerous technology companies will be affected because they’ll have to change their business structures.

Last week, EU regulators provided further details on their recently expanded investigation of Apple’s agreements with Irish and other national regulatory authorities. Regulators said that Irish rulings granted to Apple Inc. between 1991 and 2007 “do not comply with the arm’s length principle” of the Organization for Economic Cooperation and Development.

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