The European Commission is formally investigating a tax-saving deal that Luxembourg gave Amazon in 2003 that may have allowed the company "to reap potentially illegal state subsidies for its European operations," the Financial Times reported.
Like some other U.S. companies with large operations in Europe, Amazon has been widely criticized in the U.K., France and elsewhere for paying little if any corporate tax, mainly because of corporate structures allowing the company to shift income to areas with the lowest rates.
In 2003, in a move that resembles Amazon's pressuring U.S. states and localities for grants and tax breaks in exchange for building facilities and collecting sales tax, Luxembourg issued a "comfort letter" capping Amazon's taxes in the country, effectively limiting them to less than 1% of Amazon's European income. "The ruling was agreed before Amazon set up its main Luxembourg companies, which are the hub for its European operations," the Times wrote.
"The Commission's central allegation is that Luxembourg allowed Amazon to misallocate profit within its corporate structure, in a manner that fell short of standards expected of an arms-length transaction between corporate subsidiaries," the paper continued. The Commission could require Luxembourg to collect taxes Amazon would have paid without the special deal.
Luxembourg is the headquarters of Amazon's European operating company, Amazon EU SARL, which pays hefty licensing fees (€2.1 billion, or $2.65 billion, in 2013) to Amazon Europe Holding Technologies SCS, which the Times described as "a U.S.-owned 'flow through entity' that holds intellectual property rights to the Amazon website. Amazon SCS is not liable for Luxembourg corporate tax."
Incoming European Commission competition commissioner Margrethe Vestager said at confirmation hearings last week that tax investigations are a "high priority" and she criticized, as the Times described it, "the injustice of big multinational companies being able to secure favorable terms unavailable to their smaller rivals."