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Amazon's Europe changes to boost tax bill, add secrecy

Published 05/26/2015, 11:30 AM
Updated 05/26/2015, 11:34 AM
© Reuters. PThe logo of Amazon Europe Holding Technologies is seen in Luxembourg

© Reuters. PThe logo of Amazon Europe Holding Technologies is seen in Luxembourg

By Tom Bergin

LONDON (Reuters) - Amazon (NASDAQ:AMZN)'s decision to change its tax-efficient European business structure could raise its tax bill by as much as $100 million a year but authorities will have to fight for additional money and any payments will be hidden from public view.

Amazon has become one of the highest profile targets of an international drive against tax avoidance that has gained pace in Europe in recent years.

The company has historically paid little tax in Europe because its clients did business online with Luxembourg-based companies, the biggest of which is Amazon EU Sarl. Consequently, authorities across the continent could not use its sales revenues as a basis for assessing tax.

That's why Amazon's main German operating unit paid just 11.9 million euros ($16 million) in tax in 2014, despite the group recording $11.9 billion in sales to German customers last year.

But Amazon said at the weekend that from May 1, it had started to book sales in the UK, Germany, Italy and Spain via local branches of Amazon EU Sarl.

Under international tax rules, this means Amazon EU Sarl will now have to pay tax in those countries on the share of its profits generated by the branches.

The problem for European tax authorities is that Amazon EU Sarl makes modest profits. Indeed, last year it reported a loss of around 10 million euros on turnover of over 15 billion euros, filings show.

That's partly down to tight margins but also because Amazon EU Sarl pays large fees to its parent, a tax exempt Luxembourg partnership called Amazon Europe Holding Technologies SCS, for the right to use Amazon patents.

This arrangement, which is being investigated by the European Commission, allowed Amazon Europe Holding Technologies SCS, to make profits of 346 million euros in 2014, filings show. It paid no tax on this money.

Under the new structure, Amazon EU Sarl is obliged to pay tax on profits generated by sales in the UK and Germany, but Amazon Europe Holding Technologies is not.

"Amazon will have to pay more tax ... (but) I think the amount of additional tax paid will be very small," said Chas Roy-Chowdhury, Head of Taxation at accounting group ACCA.

However, under the new system, tax authorities in Britain, Germany, Italy and Spain will, for the first time, have the right to challenge the reasonableness of the payments between Amazon EU Sarl and Amazon Europe Holding Technologies.

"I expect they will challenge that," Roy-Chowdhury said.

If national tax authorities were successful in challenging the inter-company arrangements, they could bring hundreds of millions of euros back into the tax net, and potentially raise an additional $100 million in tax, according to Reuters calculations based on reported profits and prevailing tax rates.

Amazon declined to comment on the level of its tax bill but a spokesman said:

"Corporate tax is based on profits, not revenues. E-commerce is a low-margin business and highly competitive, and Amazon continues to invest heavily around the world, which means our profits are low."

DIVERTED PROFITS TAX

Amazon said it regularly reviews its structures "to ensure that we are able to best serve our customer" and that it commenced the move to opening branches two years ago.

Roy-Chowdhury said the change may have been influenced by the British government's decision to introduce a new ‘diverted profits tax' (DPT) this year. Amazon had UK sales of $8 billion in 2014, filings show.

The DPT aims to tax profits that companies shift out of Britain by channeling their sales through low tax jurisdictions.

The UK Treasury declined to comment on Amazon's shift.

Tax campaigner Richard Murphy said the Europe-wide nature of Amazon's move meant it was likely motivated by the European Commission's investigation into Amazon's agreements with the Luxembourg tax authority.

The Commission, the executive arm of the European Union, is looking into whether the deals signed off by the Luxembourg authority were unreasonably favorable to the U.S. group and given to attract jobs to Luxembourg.

Murphy said other companies involved in EU probes, including Apple Inc (NASDAQ:AAPL), may also feel under pressure to change their arrangements.

Another company whose tax deals are the subject of an EU probe, Starbucks Corp (NASDAQ:SBUX), announced last year that it was overhauling its European structure.

If Amazon's move means it does start to pay more tax, it will no longer be possible to see where this is being paid.

That's because Amazon has chosen to establish branches rather than new subsidiaries. The latter must file accounts which would show sales, profits and tax payments by country. Branches don't have to publish these figures.

"Overseas companies are never required to file UK establishment (branch) accounts with Companies House," a spokeswoman for Companies House, the UK corporate register said.

By Tom Bergin

LONDON (Reuters) - Amazon's decision to change its tax-efficient European business structure could raise its tax bill by as much as $100 million a year but authorities will have to fight for additional money and any payments will be hidden from public view.

Amazon has become one of the highest profile targets of an international drive against tax avoidance that has gained pace in Europe in recent years.

The company has historically paid little tax in Europe because its clients did business online with Luxembourg-based companies, the biggest of which is Amazon EU Sarl. Consequently, authorities across the continent could not use its sales revenues as a basis for assessing tax.

That's why Amazon's main German operating unit paid just 11.9 million euros ($16 million) in tax in 2014, despite the group recording $11.9 billion in sales to German customers last year.

But Amazon said at the weekend that from May 1, it had started to book sales in the UK, Germany, Italy and Spain via local branches of Amazon EU Sarl.

Under international tax rules, this means Amazon EU Sarl will now have to pay tax in those countries on the share of its profits generated by the branches.

The problem for European tax authorities is that Amazon EU Sarl makes modest profits. Indeed, last year it reported a loss of around 10 million euros on turnover of over 15 billion euros, filings show.

That's partly down to tight margins but also because Amazon EU Sarl pays large fees to its parent, a tax exempt Luxembourg partnership called Amazon Europe Holding Technologies SCS, for the right to use Amazon patents.

This arrangement, which is being investigated by the European Commission, allowed Amazon Europe Holding Technologies SCS, to make profits of 346 million euros in 2014, filings show. It paid no tax on this money.

Under the new structure, Amazon EU Sarl is obliged to pay tax on profits generated by sales in the UK and Germany, but Amazon Europe Holding Technologies is not.

"Amazon will have to pay more tax ... (but) I think the amount of additional tax paid will be very small," said Chas Roy-Chowdhury, Head of Taxation at accounting group ACCA.

However, under the new system, tax authorities in Britain, Germany, Italy and Spain will, for the first time, have the right to challenge the reasonableness of the payments between Amazon EU Sarl and Amazon Europe Holding Technologies.

"I expect they will challenge that," Roy-Chowdhury said.

If national tax authorities were successful in challenging the inter-company arrangements, they could bring hundreds of millions of euros back into the tax net, and potentially raise an additional $100 million in tax, according to Reuters calculations based on reported profits and prevailing tax rates.

Amazon declined to comment on the level of its tax bill but a spokesman said:

"Corporate tax is based on profits, not revenues. E-commerce is a low-margin business and highly competitive, and Amazon continues to invest heavily around the world, which means our profits are low."

DIVERTED PROFITS TAX

Amazon said it regularly reviews its structures "to ensure that we are able to best serve our customer" and that it commenced the move to opening branches two years ago.

Roy-Chowdhury said the change may have been influenced by the British government's decision to introduce a new ‘diverted profits tax' (DPT) this year. Amazon had UK sales of $8 billion in 2014, filings show.

The DPT aims to tax profits that companies shift out of Britain by channeling their sales through low tax jurisdictions.

The UK Treasury declined to comment on Amazon's shift.

Tax campaigner Richard Murphy said the Europe-wide nature of Amazon's move meant it was likely motivated by the European Commission's investigation into Amazon's agreements with the Luxembourg tax authority.

The Commission, the executive arm of the European Union, is looking into whether the deals signed off by the Luxembourg authority were unreasonably favorable to the U.S. group and given to attract jobs to Luxembourg.

Murphy said other companies involved in EU probes, including Apple Inc, may also feel under pressure to change their arrangements.

Another company whose tax deals are the subject of an EU probe, Starbucks Corp, announced last year that it was overhauling its European structure.

If Amazon's move means it does start to pay more tax, it will no longer be possible to see where this is being paid.

That's because Amazon has chosen to establish branches rather than new subsidiaries. The latter must file accounts which would show sales, profits and tax payments by country. Branches don't have to publish these figures.

"Overseas companies are never required to file UK establishment (branch) accounts with Companies House," a spokeswoman for Companies House, the UK corporate register said.

Rather, a foreign company with the UK branch simply has to file its own accounts at the register. These do not usually show sales, profits and taxes for each country where there is a branch.

"It's harder to get any information about a branch ... it's a bit more of an opaque structure," said Daniel Reid, partner at tax advisers DRG.

A German accountant who asked not to be named said similar rules applied in Germany.

Amazon declined to say if it selected branches rather than subsidiaries for privacy reasons.

© Reuters. PThe logo of Amazon Europe Holding Technologies is seen in Luxembourg

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