Luxembourg Backed ‘Cosmetic’ Amazon Deal in 11 Days, EU Says

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Amazon posted a net loss of $437 million in the third quarter last year, its worst since at least 2003. Photographer: Chris Ratcliffe/Bloomberg

The European Union stepped up criticism of Luxembourg’s sweetheart tax pacts, saying the country approved a “cosmetic” deal with Amazon.com Inc. in 11 days, potentially letting the company shift billions of euros to a tax-free unit.

The EU told Luxembourg officials that the deal, based on a “cosmetic arrangement,” gives the Internet retailer an unfair advantage over competitors and could lead to the repayment of any back taxes that are considered illegal state aid. The comments were in a letter sent in October, and released today, that outlined the EU’s reasons for starting an investigation.

The ruling was done “in an unusually short time,” said Richard Murphy, director of Tax Research LLP in the U.K. “This suggests that appropriate due diligence wasn’t done and that this was more akin to rubber stamping.”

The probe is one of several the EU is conducting into tax deals national governments struck with companies, including an Irish pact with Apple Inc., Netherlands’ treatment of Starbucks Corp. and another Luxembourgish compact with Fiat Finance & Trade. The scrutiny has cast a shadow over the first months of former Luxembourg Prime Minister Jean-Claude Juncker’s tenure as president of the European Commission.

The Luxembourg ruling allows Amazon EU Sarl to pay a tax-deductible royalty to a limited liability partnership that licenses the group’s intellectual property rights but isn’t subject to corporate taxation.

Tax-Free Unit

The intellectual property held by the tax-free unit wasn’t described by Amazon when they requested a ruling from Luxembourg in 2003, the EU’s letter said. The Luxembourgish authorities also failed to outline the underlying assets of the intellectual property, the commission said.

The tax-deductible royalty payments have enabled Amazon to transfer as much as 500 million euros a year to the unit, according to a person familiar with the case who asked not to be identified as the probe is ongoing.

“The key question is, did Luxembourg agree too readily to the payment of royalties to an operation which was not taxed and conferred a significant advantage to Amazon,” said Murphy. “The EU should win because it does appear to be an outright case that insufficient questions were being asked.”

Seattle-based Amazon, which posted a net loss of $437 million in the third quarter last year, said that it has received no special treatment from the government.

“We are subject to the same tax laws as other companies operating here,” Drew Herdener, a spokesman for the company in Luxembourg, said in an e-mailed statement.

‘Show Factually’

The EU regulator is “really trying to show factually that this ruling marks a difference between the normal tax practices for any other company in Luxembourg and the one that Amazon was subject to,” said Mario Mariniello, research fellow at the Bruegel think tank in Brussels. If Luxembourg can “come up with a very good justification, then the case is not going to be pursued against them.”

The EU’s state-aid probe into agreements with Amazon and the disclosure of thousands of pages of secret tax deals with companies from around the world have shaken Luxembourg, whose population of about 550,000 enjoys the highest income per capita of any EU nation. Prime Minister Xavier Bettel has vowed to rein in sweetheart tax deals to clean up its “damaged image.”

Luxembourg is “fully cooperating” with the commission, the country’s finance ministry said in a statement today.

“Luxembourg is confident that the allegations of state aid in this case are unsubstantiated and that it will be able to convince the commission in due time of the legitimacy of the tax ruling and that no selective advantage has been granted,” the ministry said.

Juncker Role

Juncker, who was Luxembourg’s prime minister for almost 19 years until late 2013, has said that he had no involvement in the deals. He took over as head of the EU’s executive arm on Nov. 1.

Juncker has distanced himself from the probes into the tax deals, which were started before he took office. He’s stated that Margrethe Vestager, the competition commissioner, is in charge of the cases.

Luxembourg last month abandoned its court challenge against the EU’s demand for details of discounted tax deals with multinational companies after the EU extended its quest for such documents to the entire bloc.

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