On 4 October 2017 the European Commission announced its decision that Luxembourg had granted Amazon illegal State aid in the form of anti-competitive tax benefits. Luxembourg must now recover approximately €250 million from Amazon. Also on 4 October the Commission announced its decision to refer Ireland to the European Court of Justice for failing to recover illegal tax benefits of up to €13 billion from Apple.
The Amazon decision
In October 2014 the Commission launched an in-depth investigation into Luxembourg’s tax treatment of Amazon. As a result of the investigation the Commission concluded that a tax ruling given to two companies in the Amazon group by Luxembourg in 2003, and extended in 2011, amounted to an illegal tax advantage of around €250 million.
The Commission’s investigation focused on Luxembourg’s tax treatment of two Luxembourg-incorporated subsidiaries in the Amazon group – Amazon EU and Amazon Europe Holding Technologies. Both are wholly owned and controlled by the US parent company, Amazon.com, Inc. Amazon EU is the operating company responsible for Amazon’s European retail business. Amazon Europe Holding Technologies is a holding company, structured as a limited partnership, which the Commission described as “an intermediary between the operating company and Amazon in the US”.
The Commission’s investigation examined the structure by which Amazon set up its European sales operations using these two companies for the period May 2006 to June 2014. During this time Amazon’s sales operations in Europe were structured in such a way that all European Amazon website sales were technically made through Amazon EU, the Luxembourg operating company, recording in Luxembourg all its European sales and profits stemming from these sales. The holding company, Amazon Europe Holding Technologies (whilst not itself actively making use of intellectual property rights (IPR)) granted Amazon EU an exclusive IPR licence which enabled Amazon EU to run Amazon’s European retail business. Amazon EU then paid the holding company royalties in return for the use of those rights.
The tax ruling
This structure was endorsed by the Luxembourg tax ruling issued in 2003 and extended in 2011. The ruling authorised a way to calculate the taxable base of the operating company, Amazon EU. The ruling also approved a method for calculating royalty payments from the operating company to the holding company for the Amazon IPR from which only the operating company benefited. These royalty payments, which remained untaxed (as the holding company is structured as a limited partnership which means it is not subject to corporate taxation under Luxembourg law), amounted to over 90 per cent of Amazon EU’s operating profits on average. The Commission has described these royalties as “inflated” and not reflecting economic reality, stating that:
“Under the method endorsed by the tax ruling, the operating company’s taxable profits were reduced to a quarter of what they were in reality. Almost three quarters of Amazon’s profits were unduly attributed to the holding company, where they remained untaxed. In fact, the ruling enabled Amazon to avoid taxation on three quarters of the profits it made from all Amazon sales in the EU.”
The Commission found that the Luxembourg tax ruling endorsed an unjustified method to calculate Amazon’s taxable profits in Luxembourg, enabling Amazon to shift almost three quarters of its profits from a company that is subject to tax to a company which is not. The selective tax treatment of Amazon which gave Amazon a significant competitive advantage compared to other businesses therefore was illegal under EU State aid rules.
Aid which is found to be incompatible with the Treaty on the Functioning of the European Union (TFEU) must by recovered by the relevant Member State. The Commission has determined that the methodology for calculating the amount Luxembourg must now recover covers the eight-year period Amazon had its structure in place. The Commission further characterised the amount as reflecting the value of the competitive advantage Amazon received, equalling the difference between what the company paid in taxes and what it would have paid without the benefit of Luxembourg’s favourable tax ruling. The Commission has estimated this to be around €250 million, plus interest. The Luxembourg tax authorities are now to determine the exact amount.
Ireland taken to Court over the Apple decision
On 4 October 2017 the Commission announced its decision to refer Ireland to the Court of Justice for failing to implement a Commission decision of 30 August 2016 in which it ordered Ireland to recover up to €13 billion of illegal State aid from Apple.
The deadline for recovery was 3 January 2017, four months from the official notification of the Commission decision. Ireland has yet to recover any of the sum and is only planning to complete its work on the calculation of the exact amount of the illegal aid granted to Apple by March 2018 at the earliest.
Ireland appealed the Commission’s 2016 decision to the Court of Justice. However, this does not suspend its obligation to recover the illegal aid (under Article 278 of the TFEU).
The wider framework
The above decisions form part of a series of Commission investigations into corporate tax deals. In October 2015 the Commission decided that Luxembourg and the Netherlands had granted illegal tax advantages to Fiat and Starbucks respectively. In January 2016 the Commission found that Belgium had given numerous companies illegal tax advantages. Speaking on 4 October 2017 Competition Commissioner Margrethe Vestager described the Commission’s work in relation to corporate tax deals as “by no means done”, which, together with the recent decisions, sends a clear signal that the Commission expects companies to pay their fair share of tax.