European Commission Issues New Letter on Luxembourg APA with Amazon

Jan 22, 2015

Last Friday, the European Commission released a 23-page letter describing its concerns that Luxembourg’s 2003 transfer pricing arrangement with Amazon was in violation of rules on state aid. Amazon is one of many global corporations with its European headquarters in Luxembourg, largely due to the country’s favorable tax environment.

The letter states that in the EC’s view, the Luxembourg tax authorities approved an advance pricing arrangement or “APA” that allowed Amazon’s European entity to lower the company’s overall tax burden in a way that was inconsistent with the arm’s length standard. Specifically, the EC charged that this tax arrangement allowed Amazon to structure its transactions so that substantial profits flowed to an untaxed entity in Luxembourg.

The European Commission states several objections. First, the letter states (on page 16) that Luxembourg did not submit a requested transfer pricing report from Amazon relating to the agreement, and that the economic analysis Luxembourg had received from Amazon may not “constitute a transfer pricing report with a comparability analysis.” The EC expressed doubts about the Luxembourg tax authority’s assessment, as the APA was approved in just 11 days. The Commission also raises concerns about Amazon’s transfer pricing method, which it says does not correspond to any of the methods listed in the OECD guidelines. Further, the EC has a number of concerns about the arm’s length nature of the royalty payments made between Amazon entities in Europe and the fact that Luxembourg has not updated its APA with Amazon since 2003, which it states is much longer than typical current agreements in the EU.

Amazon is not alone—other companies whose arrangements are being scrutinized by the EC include Google and Apple. Though the EC’s review is at an early stage, the Commission’s conclusions could have substantial effects on the transfer pricing and tax practices of global companies operating in Europe.

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