Tech and (Illegal) Tax Advantages: Lessons from Amazon's EU Fine

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By Sid Rao
| Legal News

Trade War

In early October 2017, after a nearly three-year investigation, the European Union (EU) Commission ordered Amazon to pay back taxes of approximately three hundred million dollars (€250m, or $294m) to Luxembourg. In the wake of a €13 billion fine issued against Apple last year (as part of the same investigation) and a €2.7 billion fine issued against Google earlier this year, it can be argued that these instances evidence a pattern of heightened EU regulatory scrutiny over American technology companies.

Member State Tax “Incentives” and the EU Commission

Amazon relied on a tax ruling issued by Luxembourg in 2003, prolonged in 2011. This ruling allowed Amazon to shift profits in Luxembourg to a holding company not subject to tax via royalty payments. In essence, Amazon created an entity called Amazon Europe Holding Technologies (“Holding Technologies”). Holding Technologies had no employees or offices and conducted no business. However, it did hold rights to certain intellectual property and received royalty payments from Amazon’s other Luxembourg entity, which employs approximately 1,500 people. Holding Technologies is a limited partnership and therefore not subject to Luxembourg tax. Thus, according to Commissioner Margrethe Vestager, “almost three quarters of Amazon's profits were not taxed . . . [and] Amazon was allowed to pay four times less tax than other local companies subject to the same national tax rules.”

The issue before the Commissioner was whether these tax rulings by Luxembourg constituted “state aid” that distorted competition by favoring some businesses. Such state aid is disallowed under Article 107(1) of the Treaty on the Functioning of the European Union, as selective tax advantages of this nature threaten the integrity of the EU Single Market. These rules are intended to prevent Member State competition that could undermine the larger federalist structure of the EU.

The Amazon tax decision here is part of a larger EU Commission investigation into tax practices of Member States. Another key example is the case of Ireland and its treatment of Apple’s taxes. In both the Amazon and the Apple situations, the individual Member States used favorable tax measures as an incentive to attract business to the country, thus pitting the interests of the Member State against the interests of Brussels. As such, the Amazon decision highlights the risks of ignoring the interests of Brussels when providing legal counsel on European corporate issues.

Crackdown on American Technology Companies

In the post-Brexit EU political landscape, Brussels and EU Commissioners face calls to strike a tougher stance on corporate tax and are more likely to take a harsh approach to the regulating of large business undertakings. In this environment, American technology companies are obvious targets. A further trend that suggests a riskier environment for American technology companies includes passage of the General Data Protection Regulation (“GDPR”) – an EU regulation that intends to strengthen and unify data protection for all individuals within the EU.

One view is that these fines and increased regulatory scrutiny are trade war dressed up as law, or in Apple CEO Tim Cook’s words “political crap.” However, the reality is complicated by the European perception that American corporate culture is callously indifferent to European regulations. Such conflicts are epitomized in the epic legal battle between Austrian activist Max Schrems and Facebook over data protection that led to the complete reworking of cross border data regulation between America and Europe, and then subsequently to the passage of the GDPR.

Takeaway

Given this reality, technology and other companies doing business in Europe should note these decisions as cautionary tales. Savvy counsel should be aware of the potential conflicts between EU and Member State level bodies and would be well-advised to take a second look at Member State Guidance where it may conflict with larger principles of EU law.

 

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