The tax deal Luxembourg gave Amazon in 2003 that has allowed it to pay much lower taxes on its European operations than otherwise expected appears to amount to "unfair state aid," the European Union's antitrust office said in a preliminary finding.
In a 23-page letter released publicly (and quoted by the New York Times), the antitrust office said that through the deal, "the Luxembourgish authorities confer an advantage on Amazon." That "advantage is obtained every year and ongoing [and] is also granted in a selective manner."
In a statement, Amazon denied that it has received any special tax treatment.
The Wall Street Journal said that the method Luxembourg uses to calculate Amazon's taxes doesn't "appear to comply with international guidelines. Amazon's European head office, Amazon EU Sarl, is based in Luxembourg and had net revenue of €13.6 billion ($15.82 billion) in 2013."
The Journal added: "At issue are the prices that multinational companies charge for goods or services sold by one subsidiary to another, known as transfer-pricing arrangements. These could be manipulated to allow companies to shift profits away from high-tax jurisdictions, so international guidelines require that they be determined at 'arm's length,' reflecting transactions that would take place between independent companies.
"The commission questioned an internal royalty fee paid by Amazon EU Sarl to another Luxembourg subsidiary of Amazon, which has the effect of reducing Amazon's tax liabilities. The royalty is paid for the use of intellectual property, but 'is not related to output, sales, or to profit,' the regulator said."
The office's investigation of Amazon's Luxembourg tax deal is part of an investigation into tax-avoidance arrangements with several multinational companies, including Starbucks, Apple and Fiat. The investigations may result in the companies having to pay higher taxes both retroactively and in the future.
The Times noted: "It is not illegal in the European Union to try to lure businesses with low tax rates. But offering special deals to companies that are not available to their competitors can amount to illegal state aid."
The investigation was formally announced last October. At the heart of the matter is a "comfort letter" issued by Luxembourg that capped Amazon's taxes in the country, effectively limiting them to less than 1% of Amazon's European income.