The European Commission has ruled that Amazon must pay €250m in back taxes to Luxembourg, in the Commission’s latest efforts to crack down on tax avoidance by tech giants.

EU Commissioner in charge of competition policy, Margrethe Vestager, criticised the sweetheart deal, stating: “Luxembourg gave illegal tax benefits to Amazon. As a result, almost three quarters of Amazon’s profits were not taxed.”

Luxembourgian tax rulings allowed Amazon to pay lowered taxes “without any valid justification” according to the Commission, due to technicalities relating to the company’s operating structure in Europe.

As a result, “Amazon was allowed to pay four times less tax than other local companies subject to the same national tax rules.”

Vestager said: “This is illegal under EU state aid rules. Member states cannot give selective tax benefits to multinational groups that are not available to others.”

Amazon EU and Amazon Europe Holding Technologies (Amazon EHT) are both Luxembourg-incorporated companies operating in the EU that come under the parent Amazon group umbrella.

Amazon EU, the operating company, employs 1,500 people in Luxembourg and is subject to tax there, while Amazon EHT, the holding company, is not subject to tax. The Luxembourg tax ruling allowed Amazon to shift the vast majority of its profits to Amazon EHT and thus circumvent paying large amounts of tax.

The Commission’s investigation determined that the Luxembourg tax rulings, first issued in 2003 and then prolonged in 2011, allowed the company to pay a large volume of royalty payments to Amazon EHT which “were inflated and did not reflect economic reality.”

The Commission elaborated that the holding company was basically an “empty shell” which acted as an intermediary between the operating company the US parent company, uninvolved in the operations of the company. Thus: “It did not, and could not, perform any activities, to justify the level of royalty it received.”

In a widely quoted statement, Amazon said: “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.”

Interestingly, current President of the European Commission, Jean-Claude Juncker, was prime minister of Luxembourg from 1995 – 2013 and the minister for finances between 1989 – 2009, during which time the Amazon tax ruling initially occurred. He denies any wrongdoing.

This is the latest development in an ongoing debate over how to fairly tax multinational tech companies, who are often able to pay less tax than traditional brick and mortar companies due to technicalities relating to operating in the digital space rather than a physical one, and purported favourable treatment from certain European governments.

Last year Apple was ordered to pay €13bn (£11.5bn) to Ireland in back taxes, a ruling that Apple and Ireland dispute. The Commission is now taking Ireland to court for failing to collect these taxes.

Frank Haskew, head of ICAEW tax faculty, commented: “The taxation of these businesses is already the subject of much debate and there is continuing work at the OECD to address these issues. Some progress has been made, for example the UK has already introduced the ‘diverted profits tax’ and the EU is now also seeking to finalise its own proposals for the taxation of digital businesses.”

He added: “It is important that future work is directed to achieving a realistic international consensus. US companies are the major players in international digital commerce and the US is trying to find a tax reform path that will command support in the US. All these efforts need to be coordinated if there is to be a sustainable solution to address the current problems.”

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