Luxembourg needed just 11 working days to approve a probably illegal tax deal allowing Amazon.com to allocate a large part of its European Union profits to one of its companies that does not have to pay tax, the European Commission said.
The Commission published a 23-page document on Friday revealing details of an in-depth investigation it started in October into a tax deal struck between Amazon and Luxembourg. The deal stems from 2003 and was, at least in June 2014, still in place.
The Commission's preliminary investigation showed that Amazon received illegal state aid, gaining an unfair economic advantage over other companies by paying less tax. In the document, the Commission explains how Amazon set up a structure of several companies to avoid paying corporate taxes in the EU.
The structure includes a company called Amazon EU, also known as LuxOpCo, a Luxembourg-based subsidiary that records most of Amazon's European profit. It functions as Amazon's head office for Europe and is the principal operator of the retail and business services offered through Amazon's European websites.
LuxOpCo in turn is owned by another Amazon subsidiary, a limited liability company called Amazon Europe Technologies Holding SCS, also known as Lux SCS, which is set up in such a way that it is not subject to Luxembourg corporate income tax and net wealth tax.
In the tax structure set up in Luxembourg, LuxOpCo pays a tax-deductible royalty to Lux SCS, which means that as a result, most European profits are recorded in Luxembourg but not taxed there.
In 2013, LuxOpCo's net turnover amounted to €13.6 billion. In that year Amazon recorded worldwide net sales of $74.5 billion and a post-tax net profit of $274 million.
The royalty payment which has been lowering the taxable profits of Amazon in the EU for over ten years is probably not in line with state aid rules, the Commission said.
It seems to have been exceptionally easy for Amazon to get its tax ruling request accepted by the Luxembourg authorities, the Commission said, noting that it took just about two weeks from the receipt of the first letter. This is a "very short period" in which a transfer pricing report had to be submitted and assessed, it said.
However, while the Commission requested that the Luxembourg authorities share all tax rulings granted to the Amazon group, Luxembourg failed to submit any transfer pricing report prepared by Amazon. A copy of such a report was supposedly attached to a letter sent by Amazon to the tax authorities in Luxembourg in October 2013, but it was not submitted by Luxembourg to the Commission. In fact, the Commission doubts if such a report even exists.
"In the absence of a transfer pricing report, the Commission has doubts whether the Luxembourg tax authorities properly confirmed by the contested tax ruling that the transfer pricing arrangement presented in Amazon's ruling request reflected what a prudent independent operator acting under normal market conditions would have accepted," it said.
Luxembourg's Ministry of Finance said in a response that it "is confident that the allegations of State aid in this case are unsubstantiated and that it will be able to convince the Commission in due time of the legitimacy of the tax ruling and that no selective advantage has been granted."
Next, the Commission will publish the document in the Official Journal of the European Union which will probably take a couple of weeks, after which interested parties have a month to submit their views to the Commission.
The Amazon probe is part of a wider crackdown on tax deals in Europe. Similar investigations were started into a deal Apple struck with the Irish government as well as into deals made by Fiat in Luxembourg and Starbucks in the Netherlands.
There are no deadlines to conclude these cases but the Commission wants to present first results by the second quarter of this year.
Loek is Amsterdam Correspondent and covers online privacy, intellectual property, online payment issues as well as EU technology policy and regulation for the IDG News Service. Follow him on Twitter at @loekessers or email tips and comments to firstname.lastname@example.org