Amazon wins bid to overturn EU state aid ruling

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Amazon wins bid to overturn EU state aid ruling

Amazon may be about to open up its tax files

The European General Court has ruled that Amazon’s cost-sharing arrangement in Luxembourg did not breach EU competition law. The US company will not be expected to pay €250 million ($303 million) in back taxes.

The European Commission did not prove that Amazon had secured an “undue reduction” in its tax base, according to a May 12 ruling by the General Court. As a result, the court found that there was “no selective advantage” in favour of Amazon’s Luxembourg-based subsidiary.

The court, which is a constituent court of the European Court of Justice (CJEU), said the Commission’s 2017 findings on the case were “incorrect in several respects”. This is a serious blow to the Commission’s efforts to curtail what it sees as abusive tax structures perpetrated by multinational enterprises (MNEs) such as Apple.

However, on the same day as the Commission lost the Amazon case, it won a similar state aid case against the French utility company Engie. The conflicting rulings imply there is still hope for the EU, and Margrethe Vestager, executive vice president of the Commission, has not ruled out an appeal.

“The Commission’s decision concerned a tax ruling issued by Luxembourg to Amazon, by virtue of which three quarters of the profits made from all Amazon sales in the EU went untaxed until 2014,” said Vestager. The Commission is planning to study the judgment and reflect on its next steps.

At the same time, the executive vice president emphasised the urgent timeline for achieving international tax reform.

“We are close to achieving a historic global agreement on the reform of the international corporate tax framework,” said Vestager.

“The Commission is in the process of putting forward a proposal for a digital levy, so that companies benefiting from the digital single market fairly contribute to the EU budget,” she added.

Companies such as Amazon and Apple have come under intense scrutiny from the European Commission in recent years. Many EU member states, including France, have imposed digital services taxes (DSTs) in response to the tax arrangements that these companies have established in other EU countries with lower corporate rates.

The European Commission could launch an appeal within two months and ten days of the decision. This would mean taking the case to the CJEU, and Amazon would have to prepare for another lengthy round in court.

Facts of the case

The US company structured its European operations through Amazon EU Sàrl, a Luxembourg-based operating subsidiary, to shift profits to Amazon Europe Holding Technologies. The latter holding company was a limited partnership with no employees, offices or business activities.

The holding company held the intellectual property (IP) rights under a November 2003 cost-sharing agreement with Amazon US. This arrangement allowed the holding company to grant an exclusive license to Amazon EU and receive royalty payments in return.

These royalty payments were paid to Amazon US to cover the costs of developing the IP. The US company has defended its position by arguing that the IP transfer was conducted at arm’s length. By contrast, the European Commission argued that the royalties were inflated to reduce the company’s taxable profits.

On the one hand, the Luxembourg authorities and Amazon favoured the comparable uncontrolled price (CUP) method, while on the other hand, the European Commission argued that the residual profit method was “more reliable”.

The CUP method was used to calculate the arm’s length range for the royalty rate of 10.6% to 13.6%, whereas the residual profit method reached a different range: 10.1% to 12.3%.

The case relates to the way that Amazon used this structure, with the support of the Luxembourg tax authority, between May 2006 and June 2014. The US multinational group overhauled its European structure in an unsuccessful bid to prevent a clash with the European Commission.

Not only has the Commission challenged Amazon on the structure, it has called into question its tax history in the EU. This kind of arrangement was not unusual in the past, but times have changed since the BEPS project was finalised in 2015.

The European Commission has set its sights on changing the international tax system. Amazon may have won this appeal, but these kinds of tax arrangements are nonetheless likely to be relegated to the past.

 

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