The Tax Strategy of Amazon.com in Europe

The Tax Strategy of Amazon.com in Europe

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Amazon was founded in 1994 with Jeff Bezos, a former employee of a wall-street investment firm, to sell books online. The company then grow to sell other kinds of goods from clothes to electronic goods, including producing its own line of consumer electronic products Kindle e-book reader.
The company started to expand and by 1998 it enter European market by buying online retailers in the UK and Germany and changed their name to Amazon.co.uk and amazon.de. Two years later, it set up a French website amazon.fr.
At first all of its units mostly operate independently, including product purchasing process, meaning that the units’ profit can be taxed by the local authorities but 1999, the UK unit changed its principal activity to “the provision of services to other group undertakings” from “marketing and selling of books via the internet.”

This, in the author’s view, is crucial from the tax perspective. Amazon basically changed its UK unit from a Permanent Establishment (PE) ( a fixed place of business through which the business of an enterprise is wholly or partly carried on), which required to pay income taxes, to a non-permanent establishment that doesn't oblige to pay taxes.
According to OECD, PE includes a place of management, a branch, an office, a factory, a workshop, and a mine, an oil or gas well, a quarry or any other place of extraction of natural resources.
However, if the company have an office in the UK but carrying on any other activity of a preparatory or auxiliary character such as storage, maintenance of stock of goods and collecting information then it will not be considered as PE and therefore will not be taxed.
UK potential customers would then do business with Amazon unit registered in Delaware, US. Such practices also happened in Germany and France that basically transformed the units into a storage, distribution and customer support units.
The move was aimed to channeled the profit overseas back at home in order to offset large loss from investment and business development it made in the US as the company never made any profit until 2003.
Furthermore, in 2003, the company changed the strategy again as its US unit starting to make a profit and because it was made it possible to be taxed for its global revenue in the US then eventually it will increase Amazon’s tax bill. Coincidentally, US’s corporate income tax rate is very high compare to some of the European countries and the company could use part of the money it has to pay for the tax bill to reinvested into new business or investment.

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The company set up a business unit in Luxembourg, a small country in the Europe with population of 500,000 people, but offers a lot of business advantages and is considered a tax-haven country. The country has a corporate income tax rate of 29 percent, but could give an exemption of up to 80 percent if a company earns profit through intellectual property.
For Amazon, it means cutting their European market tax at below 6 percent and it could go down to close to zero tax rate using other methods.
It's also a member of the European Union (EU) and the country play an important role in the Union so the businesses there can operate across the UE member states without any significant obstacles.
Amazon registered its Luxembourg unit under the name Amazon Services Europe SARL (ASE) in 2003. in 2004, the company established another Luxembourg firm called Amazon Europe Holding Technologies SCS (AEHT), a limited partnership that is exempt from income tax.
The main purpose of the firm, which is considered as a special purpose vehicle, was to hold shares in Amazon group companies and "to acquire ... any intellectual property rights, patents, and trademarks licenses and generally to hold, to license the right to use it solely to one of its direct or indirect wholly owned subsidiaries.”
The company then established another Luxembourg-based company called Amazon EU SARL (AE) with the main purpose is to handle sell, rent and distribute product and services via Amazon European websites. This particular company is basically become the main supplier and distributor for all Amazon’s customers in Europe.
Thus, the company will basically earn huge profit in UK, Germany and France without even paying the income taxes there and it will only pay very small effective taxes rate in Luxembourg but the company didn’t stop there as it needed to shift the AE’s profit via royalties or license fee into its parent AEHT, which is exempt from income tax.
In order to so, AEHT needed to be able have part or all of Amazon’s patent and trademark licenses, which is owned by another Amazon unit a Nevada-based Amazon Technologies Inc. By 2005, Amazon did an inter-company deal to enable AEHT to charge license fees to its European units.
In early 2006, Amazon transferred the ownership of its UK, German and French businesses to AEU while ownership of its UK and French web domains to AEHT.
The tax strategy completed. Starting 2005, AEHT started paying money to Amazon Technologies of up to €230 million each year while it received €583 million every year from European affiliates. Thus, roughly calculated, AEHT hold €353 million per year untaxed since 2005 or more than €3 billion by 2013.

It means Amazon have a large cash that can be used to reinvested into new businesses or investment that can generate more value to investors as well as more employment opportunities instead of paying taxes to the governments.
AEHT then started to led to its affiliate AE outside funding for its expansion. The loans generated up to €45 million per year since 2005, which was all untaxed, according to Reuters calculation.
If Amazon send all of its profit back to the US then it will have to pay a huge amount of money to the US tax authorities. The company paid an average of 44 percent income tax on its U.S. earnings between 2008 to 2012.
US Internal Revenue Service (IRS) usually would be able to treat the inter-company payment as a taxable dividend but a provision introduced in 1997 known as check-the-box allowed companies to have them disregarded.
However, IRS pressing on and by 2011 Amazon told its shareholders that the US tax authority is asking Amazon to pay a $1.5 billion in back tax relating to transfer pricing with the companies’ foreign subsidiaries dating back since 2005 when it opened its units in Luxembourg. Amazon disagree with the charge and intend to vigorously contest the charge.
Transfer pricing is a common thing happened in the international businesses. A lot of MNCs use the practice. It’s a huge practice that according to the World Trade Organisation (WTO) represented around 30 percent of the world’s total trading. To put into another perspective, around 60 percent of the global trading are done by MNCs.
In December 2012, the company have petitioned the U.S. Tax Court to resolve the matter. The company also face another examination or investigation by the French Tax Administration (FTA) relating allocation of income between foreign jurisdictions between 2006 to 2010. FTA proposed to get additional tax payment of around $250 million, including interest and penalties. The company also disagree with the assessment and intent to challenge it.
The company also acknowledge that it may also be subject to examination by several foreign jurisdictions such as China, Germany, and UK starting 2003. So far, there is no prove that Amazon has broken any laws in any of above mentioned countries.
Nevertheless, outside its legally tax avoidance practice, Amazon provided employment opportunities for EU citizens that are facing deep public spending cuts due to lack of economic growth, meaning it help the government to absorb jobless people.
In the UK alone, Amazon owns 8 warehouses that give jobs to around 20,000 people. In Luxembourg, it grow its staff from less than 20 people in 2005 to 300 people by 2013 and called it as the Amazon’s European headquarter.




Bibliography

Books

Miller, A and Oatts, L, ‘Principles of International Taxation’, (2012), Bloomsbury Professional,

Rohatgi, Roy, ‘Basic International taxation: Practice/Volume 2, (2007), London, BNA International

Journals

Tobin, G and Walsh, K, “What Makes a Country a Tax Haven? An assessment of International Standards shows why Ireland Is Not a Tax Haven,” (2013), The Economic and Social Review Vol. 44 No.3, 401

Publications

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Gomes, T, ‘Roadmap to Tax Risk Management’, McDermott Will & Emery LLP, 2013, Houston, http://www.mwe.com/files/Publication/dd8e1153-774d-4061-9bb9-e9106df94fe8/Presentation/PublicationAttachment/e36c0692-3538-4b61-915f-f4d339d139c2/MWE-Gomes-RiskMgmt.pdf accessed 20 January 2014

Hickman A, Neighbour J, and Whipp M, BEPS is now!, KPMG, 2013, London http://www.kpmg.co.uk/email/09Sep13/287016/KPMG_BNA_article_BEPS-is-now_September2013.pdf accessed 20 January 2014

OECD (2012), Model Tax Convention on Income and Capital 2010, OECD Publishing, http://www.keepeek.com/Digital-Asset-Management/oecd/taxation/model-tax-convention-on-income-and-on-capital-2010_9789264175181-en#page40

OECD (2013), Addressing Base Erosion and Profit Shifting, OECD Publishing. http://dx.doi.org/10.1787/9789264192744-en

OECD (2013), Action Plan on Base Erosion and Profit Shifting, OECD Publishing. http://dx.doi.org/10.1787/9789264202719-en

OECD (2013), OECD initiative on Base Erosion and Profit Sharing (BEPS), Tax Policy Bulletin, www.pwc.com/taxpolicy

OECD Launches New Effort to Undermine Tax Competition, Cato Institute, Tax & Budget Bulletin, (2013), http://www.cato.org/sites/cato.org/files/pubs/pdf/tbb_68.pdf accessed 20 January 2014


OECD (2013), Compilation of Comments Received in Response to Request for Input on Tax Challenges of the Digital Economy, OECD Publishing, http://www.oecd.org/ctp/comments-received-tax-challenges-digital-economy.pdf accessed 20 January 2014

OECD (2013), Declaration on Base Erosion and Profit Sharing, OECD Publishing, http://www.oecd.org/tax/C-MIN(2013)22-FINAL-ENG.pdf accessed 20 January 2014

OECD (2012), Hybrid Mismatch Arrangements: Tax Policy and Compliance Issues, OECD Publishing, http://www.oecd.org/ctp/exchange-of-tax-information/HYBRIDS_ENG_Final_October2012.pdf

OECD (2013), “Measuring the Internet Economy: Contribution to the Research Agenda”, OECD Digital Economy Papers, No. 226, OECD Publishing. http://dx.doi.org/10.1787/5k43gjg6r8jf-en

OECD (2013), “Empowering and Protecting Consumers in the Internet Economy”, OECD Digital Economy Papers, No. 216, OECD Publishing. http://dx.doi.org/10.1787/5k4c6tbcvvq2-en

Articles

Bergin, T, ‘Special Report: How Google UK clouds its tax liabilities’, Reuters News (London, 1 May 2013), http://www.reuters.com/article/2013/05/01/us-tax-uk-google-specialreport-idUSBRE94005P20130501 accessed 20 January 2014

___ ____, ‘Special Report: How Starbuck avoids UK taxes’, Reuters News (London, 15 October 2012), http://uk.reuters.com/article/2012/10/15/us-britain-starbucks-tax-idUKBRE89E0EX20121015 accessed 20 January 2014.

___ ____, “Special Report: Amazon’s billion dollar tax shield’, Reuters News (London, 6 December 2012), http://uk.reuters.com/article/2012/12/06/us-tax-amazon-idUSBRE8B50AR20121206 accessed 20 January 2014.

Websites

Timeline History amazon.com, http://amazongenius.com/timeline-history-amazon-com/ accessed 20 January 2013
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