EU Commission Moves on Tax for Amazon and Apple

October 4, 2017

After reading some of the simplistic reports about the EU
Commission attempts to make Apple and Amazon pay more tax, it may feel like Commissioner
Margrethe Vestager should be waving a placard rather than running an
important part of the EU Commission but nothing could be further from the truth
– and she is not easily ignored. Her moves, based on competition law, to force
Apple and Amazon to pay more tax threaten any form of special arrangement
between governments and large-scale employers/revenue earners.

The big money involves Apple. By comparison, the amount
sought from Amazon is small change. But it is worth noting, especially as it is
so often skated over, that the Commission action is directed at the Member
States and not (technically at least) at the megacorps themselves.

Ireland and Apple

The European Commission has 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 reported here.

The Commission decision of 30 August 2016 concluded
that Ireland’s tax benefits to Apple were illegal under EU State aid rules,
because Ireland had allowed Apple to pay substantially less tax than other
businesses. As a matter of principle, EU State aid rules require that illegal
State aid is recovered in order to remove the distortion of competition created
by the aid.

Commissioner Margrethe Vestager, in charge of
competition policy, 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

The deadline for Ireland to implement the Commission’s
decision on Apple’s tax treatment was 3 January 2017, ie four months from the
official notification of the Commission decision. Until the illegal aid is
recovered, Apple is said to continue to benefit from an illegal advantage.

Although Ireland has made progress on the calculation of the
exact amount of the illegal aid granted to Apple, it is only planning to
conclude this work by March 2018 at the earliest. 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 decision to refer is regarded by Ireland as ‘extremely
disappointing’. It has long held the position that most of the tax that the EU
Commission considers should have been paid is owed to the US government and not
to Ireland.

Luxembourg and Amazon

In another move relating to a government’s line on tax, the
Commission has announced action against Luxembourg, stating that its lax
taxation policy, as exploited by Amazon, amounted to an abuse of competition.

The Commission has concluded that Luxembourg granted undue
tax benefits to Amazon of around €250 million. This is illegal under EU State
aid rules because it allowed Amazon to pay substantially less tax than other
businesses. Luxembourg must now recover the illegal aid.

Commissioner Vestager 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. … Member
States cannot give selective tax benefits to multinational groups that are not
available to others.’

The Commission decision is likely to be opposed by both
Luxembourg and Amazon.

Following an investigation launched in October 2014, the
Commission has 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 tax ruling enabled Amazon to shift the vast majority of its
profits from an Amazon group company that is subject to tax in Luxembourg (Amazon
EU) to a company which is not subject to tax (Amazon Europe Holding
Technologies). In particular, 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 Commission’s investigation suggests that the level of
the royalty payments, endorsed by the tax ruling, was inflated and did not
reflect economic reality. On this basis, the Commission concluded 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
fact, the ruling enabled Amazon to avoid taxation on three quarters of the
profits it made from all Amazon sales in the EU.

Both Amazon EU and Amazon Europe Holding Technologies are
Luxembourg-incorporated companies that are fully-owned by the Amazon group and
ultimately controlled by the US parent,, Inc.

Amazon EU (the ‘operating company’) operates Amazon’s
retail business throughout Europe. In 2014, it had over 500 employees, who
selected the goods for sale on Amazon’s websites in Europe, bought them from
manufacturers, and managed the online sale and the delivery of products to the
customer. Amazon set up their sales operations in Europe in such a way that
customers buying products on any of Amazon’s websites in Europe were
contractually buying products from the operating company in Luxembourg. This
way, Amazon recorded all European sales, and the profits stemming from these
sales, in Luxembourg.

Amazon Europe Holding Technologies (the ‘holding
company’) is a limited partnership with no employees, no offices and no
business activities. The holding company acts as an intermediary between the
operating company and Amazon in the US. It holds certain intellectual property
rights for Europe under a so-called ‘cost-sharing agreement’ with Amazon in the
US. The holding company itself makes no active use of this intellectual
property. It merely grants an exclusive license to this intellectual property
to the operating company, which uses it to run Amazon’s European retail

Under the cost-sharing agreement the holding company makes
annual payments to Amazon in the USA to contribute to the costs of developing
the intellectual property. The appropriate level of these payments has recently
been determined by a US tax court.

Under Luxembourg’s general tax laws, the operating company
is subject to corporate taxation in Luxembourg, whilst the holding company is
not because of its legal form, a limited partnership. Profits recorded by the
holding company are only taxed at the level of the partners and not at the
level of the holding company itself. The holding company’s partners were
located in the USA and have so far deferred their tax liability.

Amazon implemented this structure, endorsed by the tax
ruling under investigation, between May 2006 and June 2014. In June 2014,
Amazon changed the way it operates in Europe. This new structure is outside the
scope of the Commission State aid investigation.