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 Amazon <AMZN.O> minimizes its tax bill by having the U.S. unit which
owns its technology licenses lease the rights to re-license the
technology to a tax-exempt partnership based in Luxembourg.
This partnership then resells the software rights to other
affiliates for a much higher price, corporate and court filings
show.
Such arrangements have drawn fire from politicians on both sides of
the Atlantic as well as citizens struggling with higher personal
taxes and cutbacks in state services imposed to pay for the
financial crisis.
The Group of 20 leading economies has vowed to crack down on
corporate tax avoidance and the practice of shifting profits into
low or no tax jurisdictions.
Amazon has been a frequent subject of politicians' criticism in
Europe over the way it channels all European revenues to Luxembourg
where profits can be earned tax free.
However, since 2012, when a dispute between the company and the UK
tax authority was disclosed in court filings, the amount of profit
reported by the group's Luxembourg-based tax-exempt partnership,
Amazon Europe Holding Technologies SCS, has halved.
The company declined to comment on Friday but has previously said it
follows the tax rules in all the countries where it operates.
The U.S. tax authority, the Internal Revenue Service (IRS) declined
to comment, citing federal privacy rules that prohibit it from
discussing individual taxpayers.
Most companies seek to pay no more tax than they have to because
managers have a fiduciary duty to investors to maximize long-term
profits.
Amazon and the IRS have been in dispute for years about Amazon
Europe Holding. The unit pays U.S. affiliates to use existing
software and shares the U.S. affiliates' cost of funding new
technology, in return for the right to re-license this technology to
affiliates in Europe.
According to a filing with the U.S. Tax Court in December 2012, the
IRS has argued that Amazon Europe Holding should have paid much more
to the U.S. affiliates, A9.com Inc and Amazon Technologies Inc., for
the rights it received.
If Amazon Europe Holding had paid more, this would have increased
Amazon group's U.S. taxable income. The IRS said Amazon Europe
should have paid the U.S. arm an additional $110 million in
cost-sharing payments in 2006 alone.
Amazon took a legal challenge against the IRS claims, saying its
2005-to-2011 payments were appropriate, the December 2012 court
filing said.
Nonetheless, from 2012, Amazon Europe Holding increased the amount
it paid its U.S. affiliates substantially.
In 2012, it paid them 408 million euros, up from 229 million euros
in 2011. In 2013, it paid 420 million, accounts filed in Luxembourg
this week showed.
Amazon declined to say why the payments had risen. Lawyers and
accountants say the IRS has been tightening the rules covering
inter-company cost-sharing agreements since December 2008.
Last year, it finalized new rules curtailing the discount rates
companies could use when deciding the prices for inter-company
cost-sharing deals.
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"Amazon's decision is probably a result of negotiation with the IRS.
I don't think that's something they would have chosen to do," said
Richard Murphy, a tax adviser-turned-campaigner.
The higher payments mean profits at Amazon Europe Holding have
fallen sharply, even as its income has risen.
Profits of 157 million euros last year were up from 118 million
in 2012, but these results compare to profits of 302 million to 442
million between 2008 and 2011. No tax was paid on that income,
accounts show.
Cost-sharing agreements are widely used by U.S. companies including
Google and Microsoft. Yet the contracts are not published and deals
usually involve subsidiaries in the Caribbean or Singapore, where
companies are not obliged to file accounts.
Despite the higher payments its European operation is making to U.S.
affiliates, Amazon's European business continues to thrive, with
profit margins around 50 percent higher than at its U.S. operation.
Revenues at Amazon's three main European operating units were 15.8
billion euros last year, up 18 percent. This includes sales by
Amazon EU Sarl, which retails books and consumer goods, Amazon Media
EU Sarl, which sells music downloads and Amazon Services Europe Sarl
which sells auction services to third-party retailers. All are based
in Luxembourg.
The three companies declared profit of less than 53 million euros.
They are liable to Luxembourg corporate income tax and had a
combined charge of 11 million euros in 2013, accounts filed this
week show.
By having these three units pay large fees to Amazon Europe Holding,
which is tax exempt, Amazon minimizes its total tax bill.
Including Amazon Europe Holding, the main Luxembourg-based
subsidiaries reported profits of 209 million euros, meaning a profit
margin of 1.3 percent on European sales. The group's margin is 0.7
percent, according to Amazon's annual report.
The actual European result could even be slightly higher, as it
excludes profits from subsidiaries across Europe, which have not yet
filed accounts for 2013.
The main operating units in Britain, Germany and France reported
combined profits of around 33 million euros in 2012.
The low profits at these subsidiaries which employ most of the staff
and assets, reflect the fact they are funded by fees from the
Luxembourg companies. These fees are just about enough to cover
operating costs and report a small profit, which in turns means
minimal taxes are due.
(Reporting by Tom Bergin; editing by Jason Neely)
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