LONDON — The European Commission has added Amazon to the string of multinational companies whose tax activities it is questioning, announcing Tuesday it was investigating whether Luxembourg had given the company illegal preferential tax treatment.
The inquiry, which will explore whether Luxembourg broke the European Union’s competition rules, follows similar investigations into the tax arrangements of Apple in Ireland and Starbucks in the Netherlands.
The commission, the administrative arm of the European Union, also previously said it was examining whether Luxembourg had granted unfair tax advantages to Fiat Finance and Trade, a unit of the Italian automaker.
A country’s using attractively low tax rates to lure businesses is not illegal under European Union rules. But making special corporate tax deals that are not available to all companies could amount to so-called illegal state aid.
Most Read Business Stories
- Downtown Seattle's troubles go beyond the pandemic
- Oregon company's iron battery breakthrough could eat lithium's lunch
- Former Boeing pilot indicted on fraud charges related to 737 MAX crashes that killed 346
- New apartments are built, but renters can’t get in. Here’s what is causing the logjam in Seattle
- For Pike Place Market and its vendors, COVID was yet another test of survival
Apple’s tax dealings with Ireland have generated considerable attention, including from a U.S. Senate investigation. But as the European Commission casts a wider net in Luxembourg, a tiny country where many big multinationals have operations, the tax investigations there could potentially have a much bigger impact on global corporations.
“The tone of the commission’s comments relating to Luxembourg is generally harsher than their statements on Ireland,” said Heather Self, an accountant at the British law firm Pinsent Masons, noting that the country was “becoming a focus of the state-aid investigations.”
The Amazon inquiry is also the latest sign of the heightened scrutiny big U.S. technology companies are receiving in Europe, where lawmakers have routinely questioned their tax practices, privacy policies and dominance of the business sectors in which they operate.
Amazon also has faced a criticism in Germany, where local unions have gone on strike over the past 18 months and where the country’s book publishers have accused the e-commerce company of violating local competition rules.
The European Commission is questioning whether Luxembourg gave Amazon a tax deal that might have enabled the company to gain unfair cost advantages over competitors.
“In a time when budgets are tight, companies should not be allowed to negotiate special tax treatment,” Joaquín Almunia, the vice president of the European Commission responsible for competition issues, told reporters Tuesday. “Some multinational companies are using tax strategies to reduce their tax burden, eroding the tax bases in some European states.”
In a statement, Amazon said it had not received any special tax treatment from Luxembourg.
“We are subject to the same tax laws as other companies operating here,” it said.
Luxembourg said it was cooperating with the European Commission’s investigations.
The Amazon investigation centers on a complex web of company subsidiaries in Luxembourg. As part of a 2003 agreement with local authorities, Amazon was able to cap the amount of tax it paid, regardless of the company’s European profits, according to Almunia, who said that the tax arrangement remained in place.
The commission contends that Amazon is able to use so-called transfer-pricing deals in which most of the company’s European revenues are sent to one Luxembourg-based subsidiary. That subsidiary then paid royalties to a separate Amazon unit, which had the effect of reducing the amount of profit the company generated from its European operations. This complicated system allowed Amazon to cut its tax bill, according to European authorities.
Although Amazon generated more than half of its $74 billion in revenue from the United States last year, European countries — particularly Germany and Britain — remain some of the company’s largest global markets. Amazon’s European operations generated revenue of about $20 billion in 2013, or about two-thirds of the company’s international sales, according to company filings.
The use of its international tax structure helped cut Amazon’s 2013 tax rate in the United States, which has a nominal rate of 35 percent, to 31.8 percent, according to the company’s regulatory filings. Part of that lower rate had been a result of a “foreign tax differential” of 8.1 percentage points linked to the Luxembourg strategy for its European taxes, the company said.
Luxembourg also has become home to a number of other large international companies, many of which have been attracted by its corporate tax policies. The steel giant ArcelorMittal has its headquarters there, while the British telecom company Vodafone has a financial subsidiary in the country. Neither company is under investigation by European authorities for its tax arrangements.
The commission’s continued focus on Luxembourg, which may have to recover back taxes from Amazon or other companies if Europe’s antitrust officials eventually find wrongdoing, represents awkward timing for Jean-Claude Juncker, the former prime minister of that country, who is to become president of the European Commission in November.
Critics have accused Juncker of helping to turn the small landlocked country of 550,000 people into a tax haven during his almost two decades as prime minister. Now he will be expected to play some sort of oversight role in the continuing inquiries after he assumes his new role next month.