MARGRETHE VESTAGER’S assault on technology firms she deems to have improperly massaged down their tax bills continued this week with a tilt at Amazon. The internet retailer faces a bill of €250m ($293m) for back taxes over what the European Union’s competition commissioner considers to have been an illegal sweetheart deal with Luxembourg.

The order requiring the Grand Duchy to recover the money follows a well-publicised three-year investigation. It is the latest in a series of tax-avoidance cases brought by the European Commission against multinationals, most of them American. Last year, Ireland was ordered to recover €13bn from Apple—smashing all past records for EU corporate-tax cases.

As with Apple, the commission concluded that Amazon received illegal state aid—in the retailer’s case between 2006 and 2014—through a tax-cutting arrangement that was unavailable to its rivals. This came in the form of a ruling from Luxembourg’s tax authority, known as a “comfort letter”.

Amazon accordingly moved intellectual property of various types into a Luxembourg partnership that served as an intermediary between Amazon’s European operations—whose headquarters was a separate Luxembourg entity—and its American parent. As a partnership, the go-between was not subject to tax under Luxembourg law (the statutory corporate rate is 29.22%). The European operating company was.

The operating company was required to pay to the partnership substantial royalties for, among other things, the right to use the Amazon name, thereby shifting lots of profit to the untaxed entity. The commission argues that the level of royalty payments was inflated and did not reflect economic reality. It says the arrangement allowed Amazon to avoid tax on three-quarters of all profits on its sales in the EU (which the company does not disclose).

Both Luxembourg and Amazon deny wrongdoing. Luxembourg’s authorities have said before that Amazon chose to put its main European operations in the tiny landlocked country for a variety of reasons, tax not being the main one. They have also pointed out that its operations in Luxembourg are hardly empty shell companies: the company employs over 1,500 people there (though the IP-holding partnership, which no longer exists, had no employees or offices). Amazon says it did not receive special treatment and is considering an appeal.

This week’s order could stoke transatlantic tensions. After the Apple ruling last year, American politicians queued up to echo the sentiments of Tim Cook, the firm’s boss, who derided Ms Vestager’s action as “total political crap”. Many of them saw Brussels’s tax probes as being driven by tech-envy, not sound economics. Washington hinted at retaliation, though nothing specific has been tabled.

The commission’s critics have a point. The details of the case are complex, and tax experts will disagree about the legality of the arrangements under the spotlight, just as they did with Apple. Few would deny that the frayed patchwork of international corporate-tax rules need reforming; one proposal, espoused by President Emmanuel Macron of France and supported by several other EU countries, would see multinationals taxed on revenues in particular territories instead of on profits. However, punishing a company for a 14-year-old ruling from a national government, happily accepted by both sides at the time, looks harsh. The uncertainty it stokes may also dampen foreign investors’ interest in Europe.

Ms Vestager’s ruling will add to the discomfort felt by Jean-Claude Juncker, the commission’s president, who was prime minister of Luxembourg when the tax arrangement in question was hammered out. Mr Juncker has been widely pilloried for having run a government that sucked tax revenue from neighbouring countries through behind-closed-doors deals with big companies. He has been on the back foot since the “LuxLeaks” revelations in 2014, which exposed hundreds of cushy deals with multinationals. In the wake of that data breach, Luxembourg and other EU member states agreed to start systematically providing each other with detailed information about such arrangements.

American firms should brace for further scrutiny of past tax deals. The commission is also looking into the tax affairs of McDonald’s and FiatChrysler in Luxembourg, and those of Starbucks in the Netherlands. The only non-American firm known to be in its sights on tax is Engie, a French utility. The Apple case is likely to produce plenty more drama, too. The company and Ireland are both appealing. The commission, meanwhile, is taking Ireland to the European Court of Justice over its failure to collect the €13bn that it has been told it is owed but clearly does not want.

Source: economist
After a bite of Apple, Margrethe Vestager targets another tech giant