This week, the European Commission has ordered Luxembourg to recover €250 million from Amazon in illegal tax benefits granted to it and has also referred Ireland to the Court of Justice of the EU ("CJEU") for failing to recover from Apple €13 billion in illegal tax benefits which it had granted.
Luxembourg and Amazon
On Wednesday, the Commission adopted a decision that undue tax benefits granted by Luxembourg to Amazon are illegal under EU state aid rules. Luxembourg had granted a tax ruling which reduced Amazon's tax bill for more than eight years, between May 2006 and June 2014, substantially less than what other businesses paid ("the Ruling").
Amazon's tax structure
The Commission's decision related to two companies in the Amazon group, based in Luxembourg. The first was an operating company called "Amazon EU". It had over 500 employees and ran Amazon's European retail business. The second was its direct parent "Amazon Europe Holding Technologies", a holding company with no employees, no offices and no business activities. The operating company paid taxes in Luxembourg, the holding company didn’t (this is legal under Luxembourg tax law).
The operating company recorded profits from all Amazon sales in the EU. The operating company used certain intellectual property ("IP") which was licensed to it from Amazon in the US. The holding company essentially was an intermediary between Amazon in the US, which developed the IP, and the operating company, which used the IP.
The holding company received a royalty from the operating company, as intermediary. It passed on part of this money to Amazon in the US, as annual contribution to the development costs of the IP. This method was endorsed by Luxembourg in its Ruling.
Amazon's illegal advantage
The Commission found that this method inflated the royalty paid by the operating company as significantly more than what the holding company needed to pay to Amazon in the US. It reduced the operating company's taxable profits to a quarter of what they were in reality.
The Commission concluded that this level of royalty could not be justified because: (i) the holding company was an empty shell that simply passed the IP rights to the operating company – it could not perform any activities to justify the level of payments received; and (ii) the operating company actively managed and added value to the IP by investing in marketing and gathering customer data.
The Ruling enabled Amazon to shift almost three quarters of its profits from the operating company (a company that is subject to tax in Luxembourg) to the holding company (a company which is not subject to tax in Luxembourg). The Commission found that Luxembourg's endorsing this method amounted to state aid.
Ireland and Apple
In August 2016, the Commission had announced that Ireland granted undue tax benefits of up to €13 billion to Apple and that these tax benefits were illegal under EU state aid rules. This selective treatment allowed Apple to pay substantially less tax than other businesses; an effective corporate tax rate of 1% on its European profits in 2003 down to 0.005% in 2014. The Commission ordered Ireland to recover up to the illegal aid from Apple in order to remove the distortion of competition created by the aid. Ireland had until 3 January 2017 to implement the Commission's decision.
Ireland appealed the Commission's decision to the CJEU. However, under EU law, appeals do not have suspensory effect and Ireland is still under an obligation to recover the illegal aid immediately and effectively. On 4 October 2017, the Commission decided to directly refer Ireland to the CJEU for failing to recover the money (or a part of it) from Apple more than a year later. If Ireland does not comply with the judgment, the Commission can ask the CJEU to impose penalty payments for a breach of EU state aid rules.
Commentary
Multinationals should sensibly review their tax transfer arrangements with governments because any selective tax reductions may need to be recovered and this can have significant consequences on a company's financials.