The European Commission has opened an investigation into whether or not Amazon is avoiding tax through its Luxembourg EU headquarters.
At the heart of the investigation is the arrangement by which Amazon’s subsidiary, Amazon EU Sàrl, pays tax in Luxembourg. The company pays a tax-deductible royalty to a second limited liability partnership, also established in Luxembourg but not subject to corporate taxation in Luxembourg.
As a result, the European Commission says, “most European profits of Amazon are recorded in Luxembourg but are not taxed in Luxembourg”.
The investigation will examine whether the amount of the royalty, which lowers the tax paid by Amazon EU Sàrl each year, “might not be in line with market conditions”.
“The Commission has concerns that the ruling could underestimate the taxable profits of Amazon EU Sàrl,” it continues, “and thereby grant an economic advantage to Amazon by allowing the group to pay less tax than other companies whose profits are allocated in line with market terms.”
Joaquín Almunia, the Spanish politician who is currently head of competition policy at the EC, said that “national authorities must not allow selected companies to understate their taxable profits by using favourable calculation methods.”
“It is only fair that subsidiaries of multinational companies pay their share of taxes and do not receive preferential treatment [that] could amount to hidden subsidies,” Almunia added.
Amazon’s tax affairs have long been under scrutiny. In May, Margaret Hodge, the Labour head of the Commons’ public accounts committee, called for a boycott of the company after revealing that the company paid just £4.2m in tax in the UK in 2013.
“It is an outrage and Amazon should pay their fair share of tax,” Hodge said at the time. “They are making money out of not paying taxes. I no longer use Amazon. We should shop elsewhere.”
Part of the reason for Amazon’s low tax bill is the company’s wildly disproportionate profit and income. While its revenue has grown consistently, peaking at $75bn in 2013, its overall profit has remained flat due to heavy reinvestment of income from mature services into growing areas.
Since corporation taxes are largely determined by profit rather than revenue, that heavy reinvestment filters down to the company’s tax bill. Over the past four years, the amount of tax Amazon has paid in the US has dropped, from $1.5bn to $506m, as has the amount of profit it reports, from $1.15bn to $274m, even as its revenue has increased from $34.2bn to $74.5bn.
Amazon had not replied to a request for comment ahead of publication.