Amazon, Luxembourg and Ireland hit by EU’s latest turn of the screw over competition

Margrethe Vestager, European Commissioner for Competition, in Brussels - Berlaymont, last week. (Copyright European Union, 2017 / Source: EC - Audiovisual Service / Photo: Lukasz Kobus)

Margrethe Vestager, European Commissioner for Competition, in Brussels – Berlaymont, last week. (Copyright European Union, 2017 / Source: EC – Audiovisual Service / Photo: Lukasz Kobus)


Last week, the European Commission has ordered Amazon to pay a 250 million euros ($293 million) bill in back taxes to Luxembourg, as a consequence of “undue tax benefits”. The Commission also announced that it is planning to take the Irish government to European court over its failure to recover €13bn in unpaid taxes from Apple Inc., related to a 2016 ruling. The latest moves represent a turn of the screw by Brussels to make US tech giants pay more taxes in Europe, as well as the latest chapter of a discussion on taxes and competition in the bloc.

Background

Launched almost three years ago, in 2014, the European Commission’s investigation concluded that a tax ruling issued by Luxembourg in 2003, and prolonged in 2011, lowered the tax paid by Amazon in Luxembourg “without any valid justification”. The European watchdog indeed alleges that the Seattle, Washington-based company benefited from a so-called sweetheart tax deal for almost a decade, that granted it illegal state support from Luxembourg, the hub for its European operations.

In an official statement, the European Commission explained that Amazon to shifted the vast majority of its profits from an Amazon Group company, that is subject to tax in Luxembourg (Amazon EU the “operating company”), to a company which is not subject to tax (Amazon Europe Holding Technologies). “In particular”, the official EU statement says, “the tax ruling endorsed the payment of a royalty from Amazon EU to Amazon Europe Holding Technologies, which significantly reduced Amazon EU’s taxable profits”.

The ruling

So last Wednesday the European Commission announced it has concluded that Luxembourg granted undue tax benefits to Amazon of around €250 million, and that the EU member State must now recover the illegal aid provided to Amazon. Commissioner Margrethe Vestager, in charge of competition policy, said: “Luxembourg gave illegal tax benefits to Amazon. As a result, almost three quarters of Amazon’s profits were not taxed”. “In other words, Amazon was allowed to pay four times less tax than other local companies subject to the same national tax rules. This is illegal under EU State aid rules. Member States cannot give selective tax benefits to multinational groups that are not available to others”, she also added.

The European Commission also explained in its official press release that its investigation showed that the level of the royalty payments, endorsed by the tax ruling, was “inflated and did not reflect economic reality”, and that the tax ruling granted a “selective economic advantage to Amazon by allowing the group to pay less tax than other companies subject to the same national tax rules”. In particular, the Commission believes that, thanks to the fact that under Luxembourg’s general tax laws, only the operating company is subject to corporate taxation in Luxembourg, the holding company (Amazon Europe Holding Technologies), received a substantial, unfair advantage.

The reaction

The Financial Times last week quoted Amazon as saying: “We believe that Amazon did not receive any special treatment from Luxembourg and that we paid tax in full accordance with both Luxembourg and international tax law. We will study the commission’s ruling and consider our legal options, including an appeal”. Tech magazine Engadgenet also reported that Amazon said : “Our 50,000 employees across Europe remain heads-down focused on serving our customers and the hundreds of thousands of small businesses who work with us.”

Luxembourg’s government, for its part, said: “As Amazon has been taxed in accordance with the tax rules applicable at the relevant time, Luxembourg considers that the company has not been granted incompatible state aid”.

Boiling Apple

In a separate announcement, the Commission has also announced it is taking further steps against Apple Inc. and, as an actor of the same complex play, against Ireland. On 30 August 2016, a Commission decision concluded that Ireland’s tax benefits to Apple were illegal under EU State aid rules, because it “allowed Apple to pay substantially less tax than other businesses”. Now the European competition watchdog as decided to refer Ireland to the European Court of Justice “for failing to recover from Apple illegal State aid worth up to €13 billion”, as required by a Commission decision.

With an official European Commission statement on October 4, Commissioner Margrethe Vestager said: “Ireland has to recover up to 13 billion euros in illegal State aid from Apple. However, more than one year after the Commission adopted this decision, Ireland has still not recovered the money, also not in part”. “We of course understand that recovery in certain cases may be more complex than in others, and we are always ready to assist. But Member States need to make sufficient progress to restore competition. That is why we have today decided to refer Ireland to the EU Court for failing to implement our decision”, she added.

The deadline for Ireland to implement the Commission’s decision on Apple’s tax treatment was 3 January 2017. “The Commission has therefore decided to refer Ireland to the Court of Justice for failure to implement the Commission decision, in accordance with Article 108(2) of the Treaty on the Functioning of the European Union (TFEU)”, the official EC press release therefore stated.

“Intensive work”

Ireland on Wednesday immediately described as “extremely regrettable” an EU decision to take the country to the European Court of Justice, but promised to collect money owed as soon as possible. Dublin said the Commission’s August order for the U.S. tech giant to pay the unpaid taxes was “unjustified”, but it had agreed to collect the money and was seeking one or more investment managers to handle an escrow account, as reported by Reuters.

“It is extremely regrettable that the Commission has taken this action, especially in relation to a case with such a large-scale recovery amount,” Irish finance ministry said in a statement. “Irish officials and experts have been engaged in intensive work to ensure that the State complies with all its recovery obligations as soon as possible, and have been in constant contact with the European Commission and Apple on all aspects of this process for over a year”.

Open disputes

Amazon’s and Apple’s cases are two of the four among such tax probes launched by the European Commission since 2013, although there are more competition-related cases opened on the desk of EU regulators, including FIAT, McDonald’s and Google. The Commission has indeed promised it will scrutinize tax arrangements between large multinationals and the bloc’s member states, as part of a major reform of EU tax rules, including changes to cross-border VAT that is due to be discussed in the coming days and weeks.

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