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In recent years, Europe’s competition commissioner Margrethe Vestager has been cracking down on sweetheart tax deals. One of the most prominent was the secret deal that Amazon made with Luxembourg. It allows the company to pay a substantially lower corporate tax rate than other businesses. The EU Commission found that this was illegal under EU State aid rules.

The precise amount

Amazon’s EU headquarters in Luxembourg has faced a major fine. A preliminary ruling was handed down by the European General Court on Wednesday. As a result of the ruling, the company must now calculate the precise amount of unpaid taxes in Luxembourg. However, the broader ripples from the ruling will take months or years to emerge.

Amazon is one of the world’s largest online retailers. While its European operations are managed by a non-resident partnership called Amazon EU Sarl, its US-based headquarters receive royalties and profits. The holding company also pays Amazon a royalty for licensing its intellectual property in Europe. The royalty is used to offset Amazon’s EU tax bill.

Independent businesses

However, the holding company’s payment to the operating company was too low, according to regulators. Royalties are supposed to be based on the economic reality of the transaction. They should be in line with the arrangements between independent businesses.

According to the EU’s competition chief, the tax benefits that Amazon received in Luxembourg were illegal under EU State aid rules. The commission’s investigation showed that Amazon was using a “tax ruling” issued by Luxembourg in 2003 to avoid paying the country’s corporate tax. That tax ruling encouraged the company to use an “unjustified” method to calculate its taxable profits in Luxembourg.

Holding company

The investigation focused on the details of the secret deal between Amazon and Luxembourg. While the investigation did not address the overall tax system in Luxembourg, it did question the way that the royalty payment from the operating company to the holding company was calculated.

This type of arrangement has led experts to question how profits are shifted to tax havens. For example, France has introduced a digital services tax to wring revenue from internet companies. Some have suggested that the profits that Amazon receives in other European countries are being transferred to Luxembourg in order to avoid taxes in France.

If the ruling is upheld, the EC will order Amazon to repay EUR250 million in illegal tax advantages it received in Luxembourg. It will probably appeal to the Court of Justice of the European Union. Although the results of the appeal will take years to settle, this is a major blow to the Internet giant.

Battle with Amazon

While the EC decision is not an end to the battle with Amazon, it will likely spark a new round of litigation. After all, the company has a history of using artificial tax arrangements. But it may be able to use tax credits to help cover future tax bills.

Meanwhile, the EU’s competition chief has vowed to clamp down on any other sweetheart tax deals that are being implemented by EU companies. This could include the tax deal that Apple has reached with Ireland.

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