Oct. 7 (Bloomberg) — Amazon.com Inc. faces an in-depth European Union probe into a 2003 fiscal deal with Luxembourg over suspicions the world’s second biggest online retailer unfairly shifted profits to lower its taxes.

Most European profits of Amazon are recorded in Luxembourg but are not taxed there as a result of a ruling, which is still in force today and applies to a subsidiary in the country, the EU said in a statement.

“What is unusual is that the tax ruling contains a cap on the tax base,” EU competition chief Joaquin Almunia told reporters. “In other words, Luxembourg’s tax authorities agreed to limit the proportion of Amazon’s turnover that is being taxed in Luxembourg” regardless of the company’s profit.

The EU inquiry into Amazon comes amid a global crackdown on corporate tax-avoidance as governments struggle to increase revenue and reduce deficits. It expands a probe into Apple Inc. in Ireland, Starbucks Corp. in the Netherlands and Fiat Finance & Trade in Luxembourg.

The Luxembourg ruling allows Amazon EU Sarl to pay a tax- deductible royalty to a limited liability partnership established in the country that isn’t subject to corporate taxation, the EU said. This “exaggerated” royalty-payment may amount to an unfair advantage, Almunia said.

‘No Special Treatment’

Amazon “received no special tax treatment from Luxembourg,” spokesman Drew Herdener said in an e-mail. “We are subject to the same tax laws as other companies operating here.”

Seattle-based Amazon, the world’s No. 2 online retailer by market capitalization after Alibaba Group Holding Ltd., has built a reputation for selling goods at low prices and delivering them quickly and inexpensively, with tiny margins.

Prices for intra-group transactions have to be estimated based on market prices, otherwise groups of companies could lower their taxable profit, the EU said today. Firms that buy and sell goods or services from the market would be at a disadvantage.

The EU is “using publicity to put political pressure on companies and the countries concerned” to get in line with international tax standards, said Sol Picciotto, an emeritus professor of law at Lancaster University in the U.K..

“It’s all part of the broader changing of the rules,” he said, citing the recent recommendations by the Organization for Economic Cooperation and Development to overhaul the international corporate tax system.

‘Unsubstantiated’ Claims

Luxembourg hasn’t provided any detail about any expiry date for that tax ruling, according to a person familiar with the case. The Brussels-based commission has the power to ban and order recovery of selective public subsidies, including tax advantages, that distort competition.

“Luxembourg is confident that the allegations of state aid in this case are unsubstantiated,” the country’s finance ministry said in an e-mailed statement.

EU officials consider the cap on Amazon’s fiscal base helps limit the company’s overall tax bill to less than one percent of the retailer’s European income, the Financial Times reported earlier, citing people briefed on the case.

“The commission has got to show that transfer pricing rules were misapplied,” Picciotto said “But since the transfer pricing rules give a lot of leeway, the states could have a valid argument that, within the leeway, their decisions were ok.”

Microsoft to McDonald’s

The EU is also looking into Luxembourg’s tax deals with Microsoft Corp. and McDonald’s Corp., people familiar with the matter said in July.

Tax probes including delving into Apple’s agreements with Ireland are a priority, according to the woman set to take over from Almunia as the European Union’s competition chief.

Margrethe Vestager, a former Danish economy minister, said last week that it’s important big companies pay a fair share of taxes and that small firms aren’t left to carry the burden.

The commission has said tax avoidance and evasion in the EU cost about 1 trillion euros ($1.3 trillion) a year.

Apple and Irish authorities have criticized a preliminary EU finding that the country gave favorable tax treatment in return for job creation. Gibraltar said last week that Almunia showed Spanish bias for probing the territory’s tax system.

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