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European Commission to investigate Amazon's transfer pricing arrangements in Luxembourg

The European Commission is to conduct an "in-depth investigation" into whether corporation tax arrangements agreed between Amazon and the tax authorities in Luxembourg in 2003 were illegal state aid, it has announced.

The announcement comes shortly after the Commission gave further information and preliminary views on similar investigations opened in June into 'tax rulings' granted in favour of Fiat Finance and Trade, also in Luxembourg, and Apple in Ireland. A further announcement on the Commission's views in a case involving Starbucks' arrangements in the Netherlands is expected shortly.

Tax expert Heather Self of Pinsent Masons, the law firm behind Out-Law.com, said that although the Commission was not investigating the general tax regime of Luxembourg, it was increasingly looking as if the state was becoming "a focus of the state aid investigations".

"The tone of the Commission's comments relating to Luxembourg is generally harsher, so far, than their statements on Ireland and the Netherlands," she said.

The Commission said that Luxembourg "did not fully comply with the Commission's request for information as part of its information gathering exercise in relation to tax ruling practices in some Member States but only provided a limited sample". In June 2014 the Commission initiated infringement proceedings against Luxembourg. It said that the Luxembourg authorities "have still not fully complied with the Commission's information request".

In 2012 the Commission said that Luxembourg and France must stop applying a reduced VAT rate to electronic books (e-books) because doing so distorts competition across the rest of the EU and is in breach of EU tax laws.  The Commission does not have direct authority over national direct tax systems. Instead, its current investigations target certain advantageous fiscal regimes which could be prohibited under its state aid rules. Restrictions on state aid are intended to prevent the distortion of competition caused by national governments granting advantages or incentives to particular companies. If the Commission finds that state aid rules have been breached, any company found to have benefited can be ordered to pay back any illegal reliefs granted over a period usually up to 10 years.

According to its announcement, the Commission is investigating a 2003 tax ruling granted to Amazon's Luxembourg-based subsidiary, Amazon EU Sàrl, which is still in force. The ruling allows the company to pay a tax-deductible royalty to a limited liability partnership established in Luxembourg but not subject to Luxembourg corporate tax. The effect of the arrangement is that most of Amazon's EU profits are not taxed in Luxembourg despite being recorded by Amazon EU Sàrl, according to the Commission.

The Commission said it was concerned that the amount of this royalty underestimated the taxable profits of Amazon EU Sàrl and had not been granted in line with market conditions, and therefore enabled Amazon to pay less tax than other companies. It also highlighted the length of the arrangements, which have existed unchallenged since 2003. When the Commission set out its case against Apple in Ireland in September, the length of the arrangements when compared to a typical period of five years was similarly part of its challenge.

"National authorities must not allow selected companies to understate their taxable profits by using favourable calculation methods," said Joaquin Almunia, the competition commissioner. "It is only fair that subsidiaries of multinational companies pay their share of taxes and do not receive preferential treatment which could amount to hidden subsidies."

"The investigation concerning tax arrangements for Amazon in Luxembourg adds to our other in-depth investigations launched in June," he said.

Almunia will be succeeded as competition commissioner by Danish politician Margrethe Vestager next month. Giving evidence to a European parliamentary committee last week, Vestager said that she would consider tax-related state aid cases to be a "high priority" for her work.

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