Amazon Hit With $294 Million Bill in EU Tax Crackdown

Updated on
  • Ireland faces lawsuit over Apple’s billions in unpaid tax
  • McDonald’s decision is also expected from EU authority soon

Amazon Must Pay $294 Million in EU Tax Crackdown Inc. was slapped with a European Union order to pay 250 million euros ($294 million) plus interest in back taxes to Luxembourg as the world’s biggest online retailer became the latest U.S. giant to run afoul of the bloc’s tough rules on government subsidies.

In another attack on sweetheart tax deals that it claims tilt the balance in favor of a select few big businesses, the European Commission chided Luxembourg for allowing the company to cut its taxable profits “to a quarter of what they were in reality.”

The EU authority also said it’s suing Ireland for failing to recover a single penny of last year’s record 13 billion-euro bill from Apple Inc. The Irish finance ministry attacked the EU’s decision to go to court as “wholly unnecessary.”

Governments “cannot give selective tax benefits to multinational groups that are not available to others,” EU Competition Commissioner Margrethe Vestager said Wednesday, just over a year since she delivered her record tax bill to Apple. “Amazon was allowed to pay four times less tax than other local companies subject to the same national tax rules” and “this is illegal under EU state-aid rules.”

Why Amazon’s Sweetheart Tax Deal Is Target of EU: QuickTake Q&A

While Amazon’s bill is far less than Apple’s, the message from Vestager was just as clear. It’s one of a growing list of cases in the EU’s crackdown on loopholes that started in 2013 -- when watchdogs started to root out deals among the thousands of otherwise legal tax pacts governments have arranged for companies for years. At stake in all these decisions are billions of euros squirreled away in tax havens, out of the reach of authorities in the countries where they make most of their sales.

“The impact of a tax structure can be real, and detrimental to fair competition irrespective of the technical legality of a tax scheme: it is not true that because a tax scheme is legal it is beneficial to society or fair markets.,” said Richard Murphy, director of Tax Research LLP in the U.K. “There is then an over-arching imperative for the commissioner to act to protect markets.”

In the Amazon case, “the real question is why it took so long for this case to be brought,” said Murphy. “The only answer to that is that opacity prevented attention being drawn to it.”

The EU said that Amazon’s tax rulings endorsed inflated tax-deductible royalty payments for intellectual property to a unit that wasn’t subject to corporate tax. The arrangement “significantly” reduced its European firm’s taxable profits and “did not reflect economic reality.” The structure was in
place from May 2006 to June 2014, the commission said. The company then changed to a new structure that is outside the scope of the commission’s state aid investigation.

Picking on U.S.

Fresh from levying record antitrust fines on Google, Vestager has insisted she’s not singling out American companies, pointing to European firms that have been penalized. But moving against Amazon also risks further stoking tensions with the U.S., which is still sore over the Apple ruling.

The move comes as U.S. President Donald Trump is weighing plans to rein in revenue lost when companies shift profits to tax havens. The proposals would allow U.S. companies to bring back, or repatriate, years’ worth of foreign earnings after paying a low tax rate.

Amazon, which said it will have 65,000 employees in Europe by the end of this year, of which about 1,500 in its European base in Luxembourg, denied receiving special treatment.

“We paid tax in full accordance with both Luxembourg and international tax law,” Amazon said in an emailed statement. “We will study the commission’s ruling and consider our legal options, including an appeal.”

Luxembourg, which has gained a reputation for doling out special deals to big firms in the Grand-Duchy, also denied Amazon had been singled out unfairly.

‘Fully Cooperating’

Luxembourg’s finance ministry said it “will use appropriate due diligence to analyze the decision and reserves all its rights” but that it has been “fully cooperating with the commission” during the probe.

The decision “refers to a period going back to 2006,” Luxembourg said. “Over time, both the international and the Luxembourg legal frameworks have substantially evolved. As Amazon has been taxed in accordance with the tax rules applicable at the relevant time, Luxembourg considers that the company has not been granted incompatible state aid.”

Vestager hinted that the Amazon decision is just the latest in a long line of decisions in the pipeline. “I don’t think that we’re done,” she told reporters in Brussels.

The EU is also poised to rule on McDonald’s Corp.’s tax affairs in Luxembourg in the coming weeks, according to three people familiar with the cases who spoke on condition of anonymity. And a more general attack on special tax deals that EU countries offer big corporations is already in the works.

Starbucks Corp. and a Fiat Chrysler Automobiles NV unit were the first companies to be targeted by the EU and in 2015 were ordered to repay as much as 30 million euros each to the Netherlands and Luxembourg respectively. The following year, 35 companies including Anheuser-Busch InBev NV had to pay as much 700 million euros in total back to Belgium.

Appeals have been piling up at the EU courts, and lawyers are waiting on rulings to establish legal precedents on the use of state-aid law.

Drop in Value

In the Apple case, part of the delay may stem from negotiations over the terms of the escrow account, as Ireland sought an indemnity to make sure it isn’t liable for any drop in the value of the fund while the case winds its way through the EU courts. In the end, it was agreed that Ireland and Apple will jointly choose investment managers, a decision which could sidestep the need for a formal indemnity.

Once it’s collected, Irish authorities were planning to place the money in an escrow account pending an appeal. If the appeal, which could take as long as five years, is successful, the money will be returned to Apple. The government is seeking managers to invest the money while the appeal is going on.

"I hope that both decisions are seen as a message that companies must pay their fair share of taxes as the huge majority of companies do,” Vestager told reporters on Wednesday.

— With assistance by Dara Doyle

(Updates with analyst comments in sixth paragraph.)
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