BRUSSELS— Amazon.com Inc. ’s “cosmetic” tax arrangements in Luxembourg may give the U.S. online retailer an illegal advantage over competitors, European Union regulators said Friday, marking the latest phase of a widening crackdown on alleged sweetheart tax deals for multinationals.
Amazon is one of four companies whose tax affairs are being scrutinized by the European Commission, the EU’s top antitrust authority, amid concerns that they constituted illegal aid from governments. Other targets of the investigation include Apple Inc., StarbucksCorp. and Fiat SpA, all of which face sizable back-tax demands if the regulator’s suspicions are confirmed. All of the companies have denied receiving special treatment.
In Amazon’s case, the back-tax bill could reach hundreds of millions of euros, a person familiar with the matter said.
The probes represent a groundbreaking move by the commission to combat tax avoidance in the absence of an agreement among the bloc’s 28 governments. The commission has no authority to weigh in on national tax policies, but is empowered to police EU state-aid rules that prohibit selective subsidies.
In its preliminary decision Friday on Amazon, running 23 pages, the commission criticized a 2003 tax agreement, which is still in force, that establishes the taxes payable by Amazon in Luxembourg.
Central to the case is a royalty fee, estimated at about €500 million ($577 million) annually, which Amazon’s European head office, Amazon EU Sarl, pays to another Luxembourg subsidiary. The royalty, for use of the group’s intellectual property rights, reduces Amazon’s tax bill in Luxembourg because the second subsidiary isn’t subject to local corporate tax.
The commission questioned the methodology used to calculate that royalty, which it described as “cosmetic,” and said Luxembourg’s tax calculations didn’t appear to comply with international guidelines. Luxembourg’s authorities may not have properly assessed the 2003 deal given they approved it within “a very short period” of 11 working days, the regulator said. It also expressed concern that the deal was still in force after more than a decade “without any revision.”
Amazon EU Sarl had revenue of €13.6 billion in 2013. Luxembourg estimates its profit at between €60 million and €70 million, a person familiar with the matter said. Luxembourg’s corporate tax rate is about 28%.
In a statement, Luxembourg said it was “confident that the allegations of state aid in this case are unsubstantiated and that it will be able to convince the commission in due time of the legitimacy of the tax ruling.”
A spokesman for Amazon said the company had received no special tax treatment from Luxembourg. “We are subject to the same tax laws as other companies operating here,” he said.
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 said Amazon’s internal royalty fee was “not related to output, sales, or to profit.” The rule for calculating the fee “seems to contain a cosmetic arrangement for how to present the royalty and has no bearing on the amount of the royalty,” it said.
It asked Luxembourg to explain the nature of the intellectual property for which internal fees are paid, and to detail the scale of royalties over the past 10 years.
Amazon and other interested parties have several weeks to provide feedback before the commission announces its final decision. Margrethe Vestager, the EU’s top competition official, has said she hopes to wrap up all four tax investigations by June.
Luxembourg’s tax practices have come under a fierce spotlight in recent months afterleaked documents revealed details of hundreds of highly favorable deals it has granted to companies including PepsiCo Inc. and FedEx Corp.
The Grand Duchy had until recently resisted the commission’s requests for tax documents, and was fighting the case in court. But last month Xavier Bettel, the country’s prime minister, agreed to share information on tax deals secured by multinational companies, after the commission also asked other EU countries to share their tax rulings.