On 16 January 2015, the European Commission published the non-confidential details of its decision taken in October 2014 to open a formal state aid investigation into a ruling by the Luxembourg tax authorities in favour of Amazon’s transfer pricing arrangements dating back to 2003. The ruling applies to Amazon’s subsidiary Amazon EU Sàrl, based in Luxembourg, which records most of Amazon’s European profits.
The subsidiary pays a tax deductible royalty to a limited liability partnership established in Luxembourg, but not subject to corporate taxation in that country. The letter from the EC to Luxembourg sets out its preliminary view that the tax ruling by Luxembourg in favour of Amazon constitutes state aid within the meaning of TFEU article 107(1) and that the Commission has doubts at this stage as to that ruling’s compatibility with the internal market. The letter also refers to evidence that Amazon gave to the Public Accounts Committee in the UK.
The EC’s key reasons for its view were as follows: first, that Luxembourg did not submit the economic analysis of the functions and risks of Amazon EU Sàrl that Amazon indicated it had provided to the Luxembourgish tax authorities in 2003; second, that the EC questioned whether the transfer pricing method applied and the royalty calculation method in the agreement was in line with the OECD transfer pricing standards, and expressed its desire to review this.
‘On the basis of [the] observations [in this letter],’ the EC wrote, ‘the Commission is of the opinion that the Amazon ruling does not comply with the arm’s length principle. Accordingly, the Commission is of the opinion that through the contested tax ruling the Luxembourgish authorities confer an advantage on Amazon. That advantage is obtained every year and on-going, when the annual tax liability is agreed upon by the tax authorities in view of that ruling. That advantage is also granted in a selective manner.’
Heather Self (Pinsent Masons) said ‘the tone of this letter suggests that the Commission is particularly confident in its case on this occasion’, adding: ‘The letter … highlights the speed with which Luxembourg’s tax ruling was granted – within 11 days of the request. Moreover, Luxembourg has not met the Commission’s request to provide it with any transfer pricing report that Amazon had submitted to its tax authorities, which the Commission suggests is evidence that the arrangements were not held up to proper scrutiny. We do not know whether that information has now been provided to the Commission. As with the investigation into Apple’s transfer pricing arrangements in Ireland, the Commission also takes issue with the length of the agreement on the transfer pricing arrangements. Amazon’s transfer pricing arrangements stood unrevised for ten years, despite changes to the economic environment. The EU says that comparable arrangements in other European countries have typically lasted no longer the five years.’
Meanwhile, Jonathan Schwarz, Temple Tax Chambers barrister, commented: ‘The Commission is becoming the ultimate enforcer of the arm’s length principle in Europe. A new risk for transactions out of the arm’s length range is a claw-back of excess tax relief even if the pricing is agreed by a tax authority.’
The Commission is also investigating Ireland’s tax ruling over Apple and Luxembourg’s tax ruling over Fiat.
On 16 January 2015, the European Commission published the non-confidential details of its decision taken in October 2014 to open a formal state aid investigation into a ruling by the Luxembourg tax authorities in favour of Amazon’s transfer pricing arrangements dating back to 2003. The ruling applies to Amazon’s subsidiary Amazon EU Sàrl, based in Luxembourg, which records most of Amazon’s European profits.
The subsidiary pays a tax deductible royalty to a limited liability partnership established in Luxembourg, but not subject to corporate taxation in that country. The letter from the EC to Luxembourg sets out its preliminary view that the tax ruling by Luxembourg in favour of Amazon constitutes state aid within the meaning of TFEU article 107(1) and that the Commission has doubts at this stage as to that ruling’s compatibility with the internal market. The letter also refers to evidence that Amazon gave to the Public Accounts Committee in the UK.
The EC’s key reasons for its view were as follows: first, that Luxembourg did not submit the economic analysis of the functions and risks of Amazon EU Sàrl that Amazon indicated it had provided to the Luxembourgish tax authorities in 2003; second, that the EC questioned whether the transfer pricing method applied and the royalty calculation method in the agreement was in line with the OECD transfer pricing standards, and expressed its desire to review this.
‘On the basis of [the] observations [in this letter],’ the EC wrote, ‘the Commission is of the opinion that the Amazon ruling does not comply with the arm’s length principle. Accordingly, the Commission is of the opinion that through the contested tax ruling the Luxembourgish authorities confer an advantage on Amazon. That advantage is obtained every year and on-going, when the annual tax liability is agreed upon by the tax authorities in view of that ruling. That advantage is also granted in a selective manner.’
Heather Self (Pinsent Masons) said ‘the tone of this letter suggests that the Commission is particularly confident in its case on this occasion’, adding: ‘The letter … highlights the speed with which Luxembourg’s tax ruling was granted – within 11 days of the request. Moreover, Luxembourg has not met the Commission’s request to provide it with any transfer pricing report that Amazon had submitted to its tax authorities, which the Commission suggests is evidence that the arrangements were not held up to proper scrutiny. We do not know whether that information has now been provided to the Commission. As with the investigation into Apple’s transfer pricing arrangements in Ireland, the Commission also takes issue with the length of the agreement on the transfer pricing arrangements. Amazon’s transfer pricing arrangements stood unrevised for ten years, despite changes to the economic environment. The EU says that comparable arrangements in other European countries have typically lasted no longer the five years.’
Meanwhile, Jonathan Schwarz, Temple Tax Chambers barrister, commented: ‘The Commission is becoming the ultimate enforcer of the arm’s length principle in Europe. A new risk for transactions out of the arm’s length range is a claw-back of excess tax relief even if the pricing is agreed by a tax authority.’
The Commission is also investigating Ireland’s tax ruling over Apple and Luxembourg’s tax ruling over Fiat.
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