Amazon’s victory in $ 303 million tax fight with the EU: explained (1)


Amazon.com Inc. has won the final stage in a legal battle with the EU over whether it received € 250 million ($ 303 million) in illegal subsidies from Luxembourg authorities through a tax ruling.

Wednesday judgment– issued by the second highest court in the European Union – is another loss to the European Commission’s efforts for years to crack down on past transfer pricing practices – how companies value intercompany transfers – multinational companies have used in Europe.

The Commission argued that favorable tax deals from some governments have given companies an unfair tax advantage in tax planning. Rule changes in the EU and around the world have ended many tax structures that state aid cases have grappled with.

The General Court of the European Union affirmed that the terms of a transfer pricing tax agreement between Amazon and Luxembourg were legal at the time of its publication, arguing that the Commission had not proved that the treatment of the The company constituted an illegal subsidy.

The Commission must prove that the result of a particular transfer pricing method creates a selective advantage for it to be a violation of State aid – not just that the method was incorrect, said the court.

Tax rulings allow authorities to approve a company’s tax arrangements in order to provide certainty to both the government and the business. But this practice has earned the Commission’s review with mixed results. Last year it lost in court a 2016 case involving € 13 billion in taxes which the Commission said Apple Inc. had underpaid to Ireland. The Commission is appealing the decision to the highest court in the EU.

Amazon’s decision on Wednesday could also be appealed by the Commission.

“We will carefully study the judgment and reflect on possible next steps,” said Margrethe Vestager, EU competition commissioner, in a statement.

What’s at stake?

The European Commission challenged a transfer pricing ruling that Luxembourg gave to Amazon that applied from 2006 to 2014, when the Commission opened an investigation in the decision.

Transfer pricing rules govern the prices that a multinational sets for transactions between its related entities, which companies can use to reduce taxes. Under transfer pricing rules, firms are required to price transactions with related parties as if they were unrelated entities – known as the arm’s length principle.

The Commission said in 2017 that Luxembourg offered Amazon illegal state aid by allowing the company to underpay € 250m in taxes by using the royalty payment to attribute EU profits to a company. entity that was not taxable in Luxembourg.

EU law prohibits Member States from granting certain types of selective advantages to one company, or group of companies, which are not available to others. These advantages may include the application of different tax treatment to one company compared to another by means of agreements that the tax administration enters into with a company to pre-approve how it structures its international taxes.

What did the European Commission support?

The case concerns two of the company’s entities in Luxembourg: an operating company which, according to the Commission, was the only one “actively taking decisions” related to the company’s retail activities; and a holding company which has granted the intellectual property rights to the operating company.

Amazon used royalty payments for intellectual property rights to shift profits to the holding company, which took advantage of inadequate tax laws at the time to avoid taxes, the commission said. The profits of the holding company were not taxable under Luxembourg law, which considered them foreign, while under US tax law at the time, the tax on these profits could be deferred indefinitely.

The holding company received royalties which were not taxed in Luxembourg because it was a fiscally transparent entity, and which were not taxed in the United States because there were no distributions in the United States, said Leopoldo Parada, lecturer in tax law at the University of Leeds.

Since then, anti-hybrid legislation in the EU and an overhaul of US tax rules have rendered such “inadequate” structures obsolete.

The Commission challenged the transfer pricing method used by Amazon and approved by Luxembourg under the judgment.

What did Amazon and Luxembourg support?

The Grand Duchy of Luxembourg and Amazon have challenged the Commission’s decision.

“Amazon firmly rejects the Decision’s assessment that this decision accepted too high a royalty, unduly reducing LuxOpCo’s tax base,” – that of the operating company – “and giving it a selective advantage”, Michel Petite , lawyer for Clifford Chance, said in the company March 2020 call before the European Court.

The Commission failed to establish that the tax ruling confers a benefit to the company and failed to take into account that the operating company paid an arm’s length price for the royalties, Amazon said in its appeal. Luxembourgish appeal also argued that the fees were set correctly.

The Commission’s analysis of the functions performed by operating and holding companies is based on “fundamental errors of law and fact” which invalidate “the Commission’s application of the transactional net margin method and main resultant benefit finding, ”Amazon said.

The company also argued that the Commission applied the 2017 OECD transfer pricing guidelines to a tax ruling issued in 2003.

The commission did not just err in applying guidelines that did not exist at the time of the decision, it also overstepped its limits, Luxembourg said in its appeal.

“The Commission has in fact exploited state aid rules to undertake covert tax harmonization on transfer pricing, thus infringing the exclusive competence of Member States in the area of ​​direct taxation,” Luxembourg said.

What did the court decide?

On Wednesday, the court sided with the company and Luxembourg, saying the Commission had failed to prove the tax ruling was an advantage for Amazon under EU aid law. State.

To find an advantage, the Commission must demonstrate that methodological errors in a tax ruling do not reach an arm’s length price and instead reduce a company’s taxable profit relative to the result under normal tax rules.

The Court said that the Commission’s analysis of transfer pricing was flawed in several areas: it misunderstood the functions of the holding company in exploiting its intangible assets – a key factor in determining the amount of profit to be made. assign to an entity. And that did not prove that the Luxembourg tax authorities should not have chosen the operating company as the tested party to assess the royalty payments.

The Commission did not prove that there was a benefit to using the transfer pricing method because it did not take into account the increase in the value of intangible assets, the court said.

The Commission’s claims about the mark-up owed to the holding company were also incorrect, the court said.

The Commission also failed to show that methodological errors meant that less profit was attributed to the operating company than there would be under normal market conditions – which would constitute an advantage, the company said. court.

The tax structure used in Luxembourg is no longer in place, Amazon said in a statement.

“We welcome the court’s ruling, which is in line with our long-standing position that we followed all applicable laws and that Amazon received no special treatment. We are pleased that the Court has made this clear and we can continue to focus on serving our clients across Europe, ”the company said.

Luxembourg said in a statement that it welcomed the judgment.

And after?

The Court did not challenge the Commission’s right to bring state aid action against tax rulings, but criticized the analysis it used to rule on the case.

Given the magnitude of these criticisms, it might be tempting for the Commission to decide to focus its resources on tackling other tax ruling cases, aware of the need for more in-depth economic analysis, rather than ‘go further in court, ”said Totis Kotsonis, partner and head of grants, purchasing, trade agreements and trade remedies at Pinsent Masons.

The fact that the commission lost on the facts of the case and not the law shows how difficult it is to win this type of litigation, said Tove Maria Ryding, head of tax justice policy and advocacy at the European Network on Debt and Development.

“The fact that the court rejected the Commission’s decision on Amazon is a stark reminder of the difficulty of using state aid rules to collect taxes,” she said. “We urgently need to start treating the underlying disease, which is a deeply outdated and inefficient corporate tax system.”

The cases are: T-318/18, Amazon EU and Amazon.com v Commission, T-816/17, Luxembourg v Commission, T-525/18.

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