Benjamin Franklin was wrong: Amazon can tax evade

“In this world nothing can be said to be certain, except death and taxes”, Benjamin Franklin said back in the 18th century. Three hundred years later in principle it maintains validity, when it comes to the former. Of course for most developed societies tax is a de facto obligation of the citizen.

Most of us we are not even asked to pay taxes; our employers keep a priori a good part of our salary, we buy anything 20% more expensive and in general we learn to live in a manner that we never think about taxes; we simply and subconsciously pay them by default. Well, this is not the case for companies, especially big ones, that are able to hire teams of experienced people to invent creative ways to pay less taxes.

Governments tolerate corporate tax evasion

Although less taxes paid by big companies mean less school renovations, the governments somehow tolerate to a certain extent this “corporate behaviour”, because with the taxes collected already some schools will be renovated anyway. However, some countries, EU member states, simply overdo it. Recently Apple, Stanbucks and Fiat Finance and Trade have been the aim of Mr Almunia and his team. The reason of this investigation is to confirm whether those multinationals are transferring prices and profits to their subsidiaries in order to benefit from taxation in EU member states that is low and also whether tax authorities are favourable.

Amazon under the magnifying glass

Currently the European Commission is investigating a 2003 deal made between Luxembourg tax authorities and Amazon, the world’s most successful e-shop. Apparently when you buy a pair of shoes online from your home in Europe, you always have a transaction between Amazon Luxembourg and yourself. The paradox is that at the end of the year Amazon Luxembourg is not making any significant profit. Now for a 14 billion euro company this would certainly attract the attention of any tax collector; if not the Luxembourgeois, the EU one for sure.

As Mr Almunia, EU Commissioner responsible for competition issues, puts it: “The Amazon subsidiary in Luxembourg records most of the group’s Europe profit. It pays a royalty to another entity in Luxembourg… “At this stage we consider the amount of this royalty, which lowered the taxable profits of Amazon, was not in line with market conditions. Luxembourg agreed to limit the amount subject to tax.”

It seems that Amazon’s CFO is a cunning one. Amazon Luxembourg is paying heavy invoices for intellectual property, sent by Amazon Europe Holding Technologies SCS (AEHT), the parent company. This of course shows in the P&L (Profit and Loss statement) of the Luxembourgeois company a very small EBITDA (earnings before tax). There you go!

Luxembourg the place to be

In principle the DG Competition is against any special treatment given by some member states to big multinationals. “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,” says Commissioner Almunia. The Commission clearly implies here that Luxembourg state is allowing this phenomenon to occur or is looking to another direction, since its deal with the American online giant.

In response to Almunia’s claim, the Finance Ministry of the small city/state replied with expected reassurance: “Luxembourg is confident that the allegations of state aid in this case are unsubstantiated and that the Commission investigation will conclude that no special tax treatment or advantage has been awarded to Amazon.” Similarly Amazon states officially that: “Amazon has received no special tax treatment from Luxembourg, we are subject to the same tax laws as other companies operating here”.

So, nobody shows any special fiscal treatment and thus nobody receives it. Can we go home now? Not yet. When Almunia and his team open an investigation they are never in a rush to close it. See Google’s case that is lasting now for 4 good years.

It seems that the aim of the Commission is to shoot against the big companies/brands. Is it because these are the only companies with a ‘creative’ CFO? Certainly not! There are two reasons instead; the first reason is that usually these companies make a hell of turnover and thus the fines to be paid are greater. This is highly needed, especially in a European economy that is lately shaky enough. The second reason is that by investigating or even fining the big, the small will hopefully become more prudent.

Millionaires are bound to tax evade

All in all, corporate tax evasion is a big issue, not only in Europe but globally. The source of evil in this case is the mere mentality of the major shareholder of a company; if you ask him, “why do you tax evade?”, the answer would be, “if you could make all this money, would you give half of it back to the state?”

While it is hard to answer the latter, as it is impossible to simulate your behaviour with a few million euros in your current account, it is reassuring to know that there are EU bodies like the Commission that monitor this activity and tries at least to put a break in the predator instincts of shareholders.

At the end of the day Amazon or any Amazon deserves every penny from its slim gross margin but definitely not at the expense of a new bridge, faculty or park that will make the rest of the taxpayers keep paying their taxes and  buying shoes online.