Striking another blow against tax breaks for Silicon Valley giants, the European Commission has ruled that Luxembourg improperly allowed Amazon to avoid taxes on three quarters of its profits.
The ruling follows a three-year investigation into a tax benefit that Luxembourg initially granted Amazon in 2003. According to the commission, the tax break saved the e-commerce giant around 250 million euros ($294 million) and enabled it to pay four times less tax than other local companies subject to the same national tax rules.
While there are no fines under EU law, the commission ordered Luxembourg to reclaim the difference between what the company paid in taxes and what it would have been liable to pay without the tax break.
“Luxembourg gave illegal tax benefits to Amazon,” Margrethe Vestager, the EU’s commissioner for competition, said in a news release. “As a result, almost three quarters of Amazon’s profits were not taxed.”
EU regulators have been trying to rein in corporate tax avoidance, with Silicon Valley companies a particular target. Last year, they directed Ireland to reclaim around $15.2 billion from Apple.
The EU’s investigation into Amazon focused on its network of subsidiaries in Europe and so-called transfer pricing. In 2003, Luxembourg had ruled that Amazon EU Sarl, which operates Amazon’s retail business throughout Europe, could pay a royalty for use of intellectual property to Amazon Europe Holding Technologies.
That significantly reduced Amazon EU’s taxable profits because, as a limited liability partnership, Amazon Europe Holding was not subject to corporate tax in Luxembourg.
According to the commission, however, the level of the royalty payment was inflated and did not reflect the “economic reality” that the holding company “was an empty shell that simply passed on the intellectual property rights to [Amazon EU] for its exclusive use.”
“It did not, and could not, perform any activities, to justify the level of royalty it received,” the commission said.
Amazon is considering an appeal of the decision. “We believe that Amazon did not receive any special treatment from Luxembourg,” the company said, adding that it “paid tax in full accordance with both Luxembourg and international tax law.”