Amazon could be the next target of European tax authorities / A. Gordeev / Vedomosti

In August 2016, the European Commission ordered Apple to pay back €13 billion in illegal tax subsidies to Ireland, and has also targeted tax schemes by other multinationals such as Amazon and McDonald's. Brussels can check whether companies have received illegal financial aid from European governments that gives the recipients a competitive advantage.

It is not yet clear which company will get a tax bill next, or when it might happen. According to records kept by Amazon’s European headquarters in Luxembourg, the retailer paid its tax-exempt parent company €3.39 billion in royalties between 2006 and 2013. It is precisely such deals that are under scrutiny in Brussels as it seeks to close tax loopholes across the EU. If the European Commission finds that some of these payments should have been taxed, it could require Amazon to return the money to Luxembourg, which could amount to hundreds of millions of euros, experts say.

That amount of tax bill would be significant for Amazon, which reported a profit of just $596 million in 2015 on revenue of $107 billion, with a profit margin of just 0.56%.

Popular Royalty

The royalty scheme is not unusual. Many American tech companies structure their overseas operations in a similar way. In this way, they reduce their taxable profits in Europe, and in the US they may not pay taxes on these profits at all, if they do not return to the country.

Luxembourg authorities and Amazon deny that the company benefits from illegal tax incentives. The retailer “pays all required taxes” and profit margins remain low due to large investments in Europe, Amazon said. A European Commission spokesman declined to comment.

As part of a restructuring that began in 2004, Amazon created a subsidiary, Amazon Europe Holding Technologies, which has no employees and pays no taxes under Luxembourg law because it is wholly owned by U.S. companies. In turn, it owns Amazon EU, which operates in Europe through Amazon's online platforms. Each year, Amazon EU paid its parent company large royalties for the use of its technology and brand.

From 2006 to 2013, Amazon Europe Holding Technologies reported receiving €3.39 billion in royalties from affiliates or under agreements with affiliates. Sources say most of that came from payments from Amazon EU. During the same period, Amazon Europe Holding Technologies made €1.89 billion in profit and paid no income tax. Almost all of that money was later returned to Amazon EU in the form of a tax-free loan. Overall, Amazon EU reported a profit after tax of €33 million and revenue of €61.59 billion for the period. The company paid €24 million in income tax.

The European Commission has not disclosed how it calculated the claims in the Apple case. But if European officials find that Amazon EU should have paid taxes on the entire €1.89 billion, that would be about €550 million. Experts warn that the figure could end up being higher or lower if the Commission finds the royalty payments partially justified or uses a different calculation method.

Translated by Nadezhda Belichenko

Amazon could be next target of European tax authorities