EU Orders Recoup of $300 Million in Amazon Back Taxes -- 2nd Update

By Natalia Drozdiak and Sam Schechner Features Dow Jones Newswires

The European Union on Wednesday upped the stakes in its push to collect taxes from U.S. tech giants, pressing its cases against Amazon.com Inc. and Apple Inc.

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The European Commission, the bloc's antitrust regulator, ordered Luxembourg to recoup EUR250 million ($294 million) from Amazon in allegedly unpaid taxes over an eight-year period, which would be one of the largest-ever tax recoveries under EU state-aid rules.

The EU said Luxembourg had granted the e-commerce giant illegal state aid in the form of a 2003 sweetheart tax deal, which was prolonged in 2011, that illegally lowered Amazon's tax payments to the Grand Duchy, disadvantaging rivals that paid more.

The regulator also referred Ireland to the bloc's highest court, the European Court of Justice, for failing to implement its order last year that Dublin retrieve roughly EUR13 billion from Apple in uncollected taxes. The regulator had said Dublin's illegal tax benefits allowed Apple to avoid paying that money, which the government was supposed to recover by early January.

The decisions are part of a broader effort by the EU to wring more money out of technology giants in Europe through various means. In addition to the Apple decision, the EU is now considering potential legislative proposals to force large digital companies, such as Google Inc. and Facebook Inc., to pay more tax in Europe.

"Companies must pay their fair share of taxes," said EU antitrust chief Margrethe Vestager at a press conference. "Amazon was allowed to pay four times less tax than other local companies subject to the same national tax rules."

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"We believe that Amazon did not receive any special treatment from Luxembourg and that we paid tax in full accordance with both Luxembourg and international tax law," an Amazon spokesman said in response. Amazon added that it would consider an appeal.

Luxembourg said it took note of the decision, adding that Amazon hadn't been granted incompatible aid because it had been taxed in accordance with the tax rules applicable at the time.

Both Amazon and Luxembourg can appeal the decision.

Wednesday's decision concerns a structure Amazon set up in Europe between 2006 and mid-2014, part of a series of transactions known as Project Goldcrest.

Under the plan, the company funneled all of its e-commerce sales in the EU--totaling EUR61.59 billion between 2006 and 2013, according to Luxembourg corporate filings--through an operating company called Amazon EU Sarl. But that company paid a significant royalty every year to an untaxed Luxembourg-registered parent called Amazon Europe Holding Technologies SCS, reducing the operating company's taxable income.

According to company filings in Luxembourg, the untaxed parent took in EUR3.39 billion in income "related to royalties from affiliated undertakings," or "based on agreements with affiliated companies," and reported EUR1.71 billion in untaxed profit between 2006 and 2013.

The EU says Amazon had improperly inflated the royalty to eat up nearly all of the operating company's profit after expenses such as paying for its merchandise. Ms. Vestager said the parent company was "an empty shell" with no employees.

The amount of the tax the EU says is due in Luxembourg could change depending on the outcome of litigation in the U.S., Ms. Vestager said.

The U.S. Internal Revenue Service had sought as much as $1.5 billion in additional taxes from Amazon over the same set of transactions, which could reduce its liability in Europe, but a tax court in March sided with Amazon, ruling that the IRS had made arbitrary determinations and abused its discretion in several instances. Ms. Vestager said Wednesday that the IRS was planning to appeal.

An IRS spokesman declined to comment.

Some critics allege that the EU is picking on high-profile American companies given that a swath of multinationals around the world use similar tax structures to reduce their tax bills. Tech executives say that the frequency of similar tax arrangements undercuts the contention that these agreements are rare and therefore unfair to competitors.

The EU's antitrust regulator says it has scrutinized thousands of tax deals between governments and large multinationals and has opened formal investigations into a cluster of them. The highest-profile cases have centered on large U.S. tech giants, but they also include McDonald's Corp. and French energy company Engie SA.

In her announcement of the EU's decision to refer Ireland to court, Ms. Vestager said, "More than one year after the commission adopted this decision, Ireland has still not recovered the money, also not in part."

Both Ireland and Apple are appealing the EU's decision announced last year. The implementation of the decision has been partly held up as both Ireland and Apple negotiate over the terms of a deal to protect Dublin from any losses while it holds the company's dues in an escrow account while the appeal plays out.

"It is extremely regrettable that the commission has taken this action, especially in relation to a case with such a large scale recovery amount, " Ireland's Finance Ministry said in a statement. "Ireland has made significant progress on this complex issue and is close to the establishment of an escrow fund."

Apple said it is continuing to cooperate with Ireland on the tax-recovery process.

In addition to the EU's antitrust regulator's scrutiny of tax deals, France and Germany and other EU countries are pushing to change legislation. The countries want to better account for the revenue tech companies rake in from virtual operations, such as targeted advertising.

Richard Rubin in Washington contributed to this article.

Write to Natalia Drozdiak at natalia.drozdiak@wsj.com and Sam Schechner at sam.schechner@wsj.com

(END) Dow Jones Newswires

October 04, 2017 10:58 ET (14:58 GMT)