(Bloomberg) — The European Union stepped up criticism of Luxembourg’s sweetheart tax deals, saying the country hastily approved a “cosmetic” agreement with Amazon.com Inc. in 11 days, allowing the company to shift profits to a tax-free unit.
The EU told Luxembourg officials that the deal, based on a “cosmetic arrangement,” gives the Internet retailer an unfair advantage over competitors and could lead to the repayment of any back taxes that are considered illegal state aid. The comments were in a letter sent in October, and released today, that outlined the EU’s reasons for starting an investigation.
The ruling was done “in an unusually short time,” said Richard Murphy, director of Tax Research LLP in the U.K. “This suggests that appropriate due diligence wasn’t done and that this was more akin to rubber stamping.”
Amazon is the No. 1 online retailer in Europe as well as North America, according to the Internet Retailer Top 500 Europe and Top 500 Guide, which ranks retailers in North America by their online sales. Most European profits of Amazon are recorded in Luxembourg but are not taxed there as a result of a 2003 tax ruling, which is still in force today and applies to a subsidiary in the country, the EU said when it started the investigation last fall.
The probe is one of several the EU is conducting into tax deals national governments struck with companies, including an Irish pact with Apple Inc., Netherlands’ treatment of Starbucks Corp. and another Luxembourgish compact with Fiat Finance & Trade. The scrutiny has cast a shadow over the first months of former Luxembourg Prime Minister Jean-Claude Juncker’s tenure as president of the European Commission.
Among its units in the country, Amazon set up one as a Luxembourg limited liability partnership that licenses the group’s intellectual property rights to another subsidiary in return for a tax deductible royalty payment. Under this set-up, royalties the unit gets from the licensing deal “will in principle not be taxed in Luxembourg,” the commission said.
“The key question is, did Luxembourg agree too readily to the payment of royalties to an operation which was not taxed and conferred a significant advantage to Amazon,” said Murphy. “The EU should win because it does appear to be an outright case that insufficient questions were being asked.”
Seattle-based Amazon, which posted a net loss of $437 million in the third quarter last year, said that it has received no special treatment from the government.
“We are subject to the same tax laws as other companies operating here,” Drew Herdener, a spokesman for the company in Luxembourg, said in an e-mailed statement.
The EU regulator is “really trying to show factually that this ruling marks a difference between the normal tax practices for any other company in Luxembourg and the one that Amazon was subject to,” said Mario Mariniello, research fellow at the Bruegel think tank in Brussels. If Luxembourg can “come up with a very good justification, then the case is not going to be pursued against them.”
The EU’s state-aid probe into agreements with Amazon and the disclosure of thousands of pages of secret tax deals with companies from around the world have shaken Luxembourg, whose population of about 550,000 enjoys the highest income per capita of any EU nation. Prime Minister Xavier Bettel has vowed to rein in sweetheart tax deals to clean up its “damaged image.”
Luxembourg is “fully cooperating” with the commission, the country’s finance ministry said in a statement today.
“Luxembourg 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,” the ministry said.
Juncker, who was Luxembourg’s prime minister for almost 19 years until late 2013, has said that he had no involvement in the deals. He took over as head of the EU’s executive arm on Nov. 1.
Juncker has distanced himself from the probes into the tax deals, which were started before he took office. He’s stated that Margrethe Vestager, the competition commissioner, is in charge of the cases.
Luxembourg last month abandoned its court challenge against the EU’s demand for details of discounted tax deals with multinational companies after the EU extended its quest for such documents to the entire bloc.