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Growing fear over wider implications of EC investigations after Amazon Luxembourg deal deemed state aid

In a preliminary ruling, the European Commission (EC) has deemed tax deals between Luxembourg and Amazon as state aid.

EC investigations into the likes of Starbucks, Amazon and Google have left many taxpayers concerned about reputational damage, compliance costs and legal uncertainty.

On January 16, the EC publicly released a document outlining tax arrangements between Luxembourg and Amazon, concluding that the deals were illegal and constituted state aid.

The EC said both parties had failed to provide the appropriate transfer pricing documentation and had broken both EU law and OECD guidelines.

The Luxembourg finance minister said: “Luxembourg is confident that state aid allegations in this case are without merit and will be able to convince the Commission of the legitimacy of the anticipatory decision in question and that no competitive advantage was granted.”

Amazon claims it received “no special tax treatment from Luxembourg” and was subject to the same tax laws as other companies operating in the country.

The investigation relates to a tax arrangement made on November 6 2003 between Luxembourg and the Amazon Group.

LuxOpCo is the head office of Amazon Europe and is the principal operator of the retail and business services offered through Amazon’s European websites.

Amazon Europe Technologies Holding SCS (Lux SCS) holds all the shares and licences Amazon group’s intellectual property (IP) rights to LuxOpCo to operate the European websites in return for a tax deductible royalty payment.

The EC listed a number of problematic findings:

· Luxembourg did not submit, to the Commission, any transfer pricing report prepared by Amazon in support of the transfer pricing arrangement, even though it was requested to do so;

· The Commission doubts whether the Luxembourg tax authorities properly confirmed, by the contested tax ruling, that the transfer pricing arrangement presented in Amazon’s ruling request reflected what a prudent independent operator, acting under normal market conditions, would have accepted;

· The ruling request by Amazon was assessed within 11 working days from the receipt of the first letter constituting the ruling request, which is a very short period of time for a transfer pricing report to have been submitted and assessed in this case;

· The method proposed by Amazon’s tax adviser in the ruling request and accepted by the Luxembourg tax authorities in the contested tax ruling does not seem to correspond to any of the methods listed in the OECD guidelines;

· The royalty payment approved by the contested tax ruling is not related to output, sales, or to profit. Instead, the royalty is calculated as residual profit;

· The fact the ruling request indicates the royalty rate will be expressed as a percentage of revenues does not comply with paragraph 6.16 of OECD guidelines. The royalty should be calculated based on revenues not the percentage of revenues;

· The IP for which Lux SCS is remunerated is not described in the ruling request or by the Luxembourg authorities. Therefore, it is impossible to conclude, on that basis, that Lux SCS performs more complex functions than LuxOpCo; and

· The remuneration accepted in that ruling is still accepted as being at arm’s-length by the Luxembourg tax authorities more than 10 years later, without any revision.

Wider implications

In an earlier article, TPWeek looked at how EC investigations could negatively impact legitimate transfer pricing arrangements. It seems that fears of a witch hunt, which could bring innocent parties into the mix, have not subsided.

In a letter addressed to the EC regarding the Starbucks Netherlands investigation, Keith O’Donnell, managing partner of Atoz Luxembourg, wrote: “We as a firm and many of our clients are concerned about the consequences that these proceedings – and their outcome – might have on their tax affairs and their business in general.”

The EC’s preliminary ruling on the Amazon Luxembourg tax deals has reaffirmed taxpayer’s fears and suggests that consequences could be far reaching.

Legal uncertainty

Legal uncertainty is a huge concern for advisers and taxpayers. O’Donnell said: “As advisers to business, we are of the view that the impact on business of State Aid investigations is consistently underestimated.”

For any business operation comprising of a long term investment, obtaining clarity over costs, including taxes, through open dialogue with tax authorities has always been widely encouraged.

However, with these investigations, the EC has removed much of the certainty that taxpayers seek from tax authorities and has added itself into the process. This creates a greater degree of unpredictability.

“It may be stating the obvious, but any institutional behaviour creating additional uncertainty for enterprises sits uneasily with a general European agenda of trying to create economic growth,” said O’Donnell.

Business consequences

“It should first be pointed out that opening a State Aid investigation in relation to the tax affairs of a single MNE is not a neutral act. Because of the attendant publicity and press coverage, the business consequences can be profound,” said O’Donnell.

Whether innocent or not, the process is damaging to any business’ reputation and equates to additional time and money spent managing the legal process.

“This is particularly the case for businesses with a significant consumer brand, a type of business that seems, for some reason, to be selected by the Commission in recent times for individual MNE State Aid investigations,” added O’Donnell.

Multinationals will undoubtedly experience lengthier audits and increased compliance costs with the additional dimension of EC involvement in their tax affairs.

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