Luxembourg Amazon deal under EU scrutiny

luxembourg_villeEU watchdogs are investigating how Amazon avoided paying billions in tax using a dodgy deal with the Luxembourg government.

Leaked tax documents from accounting firm PwC in Luxembourg show how Amazon sidesteps the 30 percent tax rates so they can price rivals out of the market.

The Luxembourg documents, obtained in a review led by the International Consortium of Investigative Journalists, contain some of the first hard numbers and details on how Amazon pays virtually no tax for its non-US earnings.

The deal was hatched in secret in 2003 and was part of a cunning plan by Amazon after it was investigated by French tax authorities and the US Internal Revenue Service. In 2011, Amazon reported US tax authorities were demanding $1.5 billion in federal tax and penalties covering 2005 to 2011 in connection with the royalties payments. In 2012 the French government slapped a $252 million tax bill on Amazon. The company is appealing both matters in court.

So to fix this problem, Amazon hatched up a deal with teeny weeny countryLuxembourg. Almost all Amazon’s income outside the US ends up in a Luxembourg company, Amazon EU Sàrl, which was the beneficiary last year when Amazon notched up £4.3 billion ($7.9 billion) of sales in the UK and paid only £4.2 million in income tax.

A secret appendix to an annual report filed with the Luxembourg government shows the missing cash went in two related-party deals. Amazon EU paid €379 million in “service fee expense” and €519 million in royalties to Amazon Europe Holding Technologies.

So, in other words, Amazon Europe paid €105 million to Amazon Technologies in Nevada to license the rights to Amazon’s intellectual property – the patents and software for the websites, including that button that buys a book with one click.

Amazon Europe onsold the rights to use this intellectual property to Amazon EU for €519 million – five times what it had paid the US Company. ­Amazon Europe made an instant profit of €414 million, which would have been taxable, except that Amazon Europe is a limited partnership and does not pay tax in Luxembourg.

Amazon EU ended up paying 0.5 per cent tax. Amazon Europe’s money ended up tax-free in Gibraltar.

Luxembourg is not exactly being forthcoming about providing information about the deal either. In fact, the European Commission complained that Luxembourg has provided only limited information about the Amazon deal.

This is causing problems because there is nearly €1.2 billion of cash generated by Amazon which is missing. Some think the cash might have been “invested” in Amazon Data Services Ireland. However, either way it is proving very difficult to find.