Amazon's billion-dollar tax shield

Last Updated: Sat, Dec 08, 2012 18:54 hrs

pAmazon&rsquos Luxembourg arrangements have deprived European govts of hundreds of millions of dollars in taxesppIn 2005 Amazon rented a historic five-storey building in Luxembourgs Grund quarter right at the bottom of a steep rock-walled valley below the old townppBy setting up in Luxembourg and channelling sales through its units there the worlds biggest online retailer could minimise corporate taxesppIt was a move with big financial consequencesppAmazon&rsquos Luxembourg arrangements have deprived European governments of hundreds of millions of dollars in tax that it might otherwise have owed as reported in European newspapers But a Reuters examination of accounts filed by 25 Amazon units in six countries shows how they also allowed the company to avoid paying more tax in the United States where the company is basedppIn effect Amazon used inter-company payments to form a tax shield for the group behind which it has accumulated 2 billion to help finance its expansionppAmazon revealed last year that the US Internal Revenue Service IRS wants 15 billion in back taxes The claim which Amazon said it would &ldquovigorously contest&rdquo is linked to its foreign subsidiaries and payments made between themppThe issue highlights the way multinationals reduce their taxes by parking intellectual property in tax havens and charging affiliates big fees for using it Politicians in rich countries are beginning to target such practices which have been used by other multinationals including Google and MicrosoftppUS Senator Carl Levin has called the tactics &ldquogimmickry&rdquo Michael McIntyre a tax expert at Wayne State University in Michigan said that while Amazons arrangement and others like it looked like commercial transactions they actually only served to reduce taxespp&ldquoThe IRS shouldnt be happy about this&rdquo he said &ldquoIt sounds like they&rsquore not&rdquoppAmazon declined to answer questions about its tax affairs for this story the latest in a Reuters series on corporate tax avoidance In an emailed statement a spokesman said that &ldquoAmazon pays all applicable taxes in every jurisdiction that it operates within&rdquoppThe group has come under scrutiny from tax departments in at least six countries over the past six years Tax authorities in the United States UK Germany France and Luxembourg declined to comment citing rules on taxpayer confidentialityppThe Luxembourg structure outlined by media including the Guardian newspaper in April fulfils a corporate obligation to shareholders to maximize returns There is no suggestion the company has broken any laws Amazon which started out selling books and now offers everything from tools to toys paid an average 44 per cent tax on its US earnings in the last five yearsppThis is an examination of how Amazon set up its tax shield and how it worksppAmazons first foray abroad came in 1998 when it bought online retailers in Britain and Germany and rebranded them Amazoncouk and Amazonde In 2000 it launched a French website AmazonfrppAt first it did little to integrate these foreign units former senior executives say Even product purchasing &mdash where Amazon would later squeeze huge savings by negotiating hard with suppliers - was handled independently in different marketspp&ldquoThere were no real operational synergies in our early years The units operated largely independently&rdquo said Todd Edebohls current CEO of recruitment website Inside Jobs and Amazon&rsquos Director of Business Development and Sales between 1999 and 2007ppBut in late 1999 accounts for the UK business show the UK unit&rsquos principal activity changed from &ldquomarketing and selling of books via the Internet&rdquo to &ldquothe provision of services to other group undertakings&rdquoppPeople shopping on Amazoncouk would now do business with a US unit registered in Delaware There were similar changes at the German business in effect the fast-growing European units had become fulfillment operations just to distribute packages and offer customer support Amazon&rsquos accounts show the bulk of its overseas revenues were now attributed to the US parentppThat shift helped with a problem it faced at homeppFounded in 1995 and listed two years later the company lost money every year until 2003 This was standard practice for a dotcom startup Amazon focused on market share rather than profitppBut by the end of 1999 Amazons accumulated losses were so large - more than 1 billion - that its own accountants would not let the firm recognise them as a tax asset because it was unclear it could ever make enough profit to use them up Bringing foreign profits home allowed Amazon to set them against US losses so the company did not have to pay tax on overseas profits according to Stephen Shay a professor of tax law at Harvard UniversityppstrongSERVICES NOT BOOKSstrong That changed in 2003 when Amazon started making a lot more profit in the United States There was a chance the foreign earnings would now increase its global tax bill according to Shay because US corporate tax rates were higher than in other markets such as BritainppAmazon turned to the tiny country of Luxembourg The Grand Duchy has a population of 500000 - half the size of Rhode Island - and offers a variety of advantages Its a member of the European Union so businesses based there can sell across EU borders with less red tape Then theres the tax rateppLuxembourg has a headline charge on corporate income of 29 percent but under certain circumstances it will exempt income a company earns through intellectual property by up to 80 percent a government spokesperson said This cuts the effective tax rate to below 6 percent Tax advisers and academics say rates close to zero can be achieved using other methodsppIn June 2003 Amazon registered Amazon Services Europe SARL in Luxembourg establishing an office in a drab grey concrete building overlooking the central bus depot The initials stand for Societe a Responsabilite Limitee - a limited company liable for taxppA month later it told clients in the UK its terms were changing Contracts with third-party retailers who used Amazon to sell their products would no longer be handled in the United States but with the Luxembourg unitppIn June 2004 Amazon established another Luxembourg entity - Amazon Europe Holding Technologies - whose purpose was to hold shares in Amazon group companies and "to acquire any intellectual property rights patents and trademarks licenses and generally to hold to license the right to use it solely to one of its direct or indirect wholly owned subsidiaries"ppThis group was set up as a "Societe en Commandite Simple" or SCS a type of limited partnership that a Luxembourg government spokesman said is exempt from income taxes It has not had any operational staff or premises its registered address being the offices of a trust services company in an upmarket residential area west of Luxembourgs old townppA month later this company established a third Luxembourg company Amazon EU SARL whose principal purpose was to "sell auction rent or otherwise distribute products or services of all types" via Amazon websitesppThis taxable unit was to become on paper at least the supplier of all goods and services to Amazons European customersppstrongFROM NEVADA TO LUXEMBOURGstrongbr To be tax efficient though Amazon needed to shift the profit this unit would make into its untaxed parent The easiest way to do this was for Amazon EU SARL to pay Amazon Europe Holding Technologies a fee to license the Amazon technology it would use to sell thingsppThere was just one problem Amazon Europe Holding Technologies had no technology to license Amazons patents - including the Amazon brand and its &lsquo1-click ordering software - were held by Amazon Technologies Inc a unit registered in Nevada Patent and Trademark Office records showppIn early 2005 Amazon did an inter-company deal that solved this problemppExact details of the arrangement have never been made public and Amazon declined to clarify them Chief Financial Officer Tom Szkutak told analysts on a conference call a few weeks afterwards that the deal to create the Luxembourg operation involved shifting "certain operating assets" offshore and that it would boost the groups 2005 tax bill by 58 million but "beneficially impact our effective tax rate over time"ppAmazons Luxembourg arrangements have helped it pay an average tax rate of 53 percent on overseas income over the past five years less than a quarter of the average rate across its major foreign marketsppCompany accounts show that since 2005 Amazon Europe Holding Technologies started to make payments to Amazon Technologies Inc in Nevada of up to 230 million euros 300 million each year At the same time it received up to 583 million euros each year from its European affiliatesppThe difference stayed in LuxembourgppHad Amazon remitted all that to the United States and then paid the headline US corporate income tax rate on it the firm would have incurred taxes of more than 700 million But it has not and the deal has allowed Amazons Luxembourg unit to accrue tax-free cash worth more than 2 billionppHistorically such inter-company payments might have been treated as a taxable dividend under US tax law but a provision introduced in 1997 known as &lsquocheck-the-box allowed companies to have them disregarded by the IRS Senator Levin a Democrat is among many US politicians who want this loophole rescindedppstrong"HEADQUARTERS OF NIGHT LIFE"strongbr For Amazons tax-free money-making machine to work it had to show it had more than a nameplate in LuxembourgppTo benefit from favorable taxation the Grand Duchy says firms "must ensure that they give adequate substance to their presence in the country in terms of both logistics and staff" At the end of 2005 Amazon had just a dozen staff there If tax departments around the continent were to recognize the arrangement Amazon needed a meaningful corporate presenceppIn February 2006 it transferred ownership of its UK German and French businesses to Amazon EU SARL and ownership of its UK and French web domains to Amazon Europe Holding Technologies It also moved some US executives to Luxembourg hired more locals and began to call Amazon EU its European headquartersppFilings show that in December 2006 the group relocated its Luxembourg operating units into the rented building on Plaetis Steet a stones throw from the English and Irish bars that lead the city-states tourist office to describe the Grund and neighboring Clausen as the "Headquarters of Luxembourgs night life"ppstrongCASH PILE BUILDSstrongbr As the cash built up in Amazon Europe Holding Technologies the firm started to lend to Amazon EU SARL Besides funding international expansion this has generated up to 45 million euros a year in interest since 2005 - all untaxedppToday Amazon calls its 300-person Luxembourg operation the nerve-centre of an operation which employs tens of thousands of people across the continent It expanded into a new building opened by Luxembourgs Finance Minister Luc Frieden in Octoberpp"All the strategic functions for our business in Europe are based in Luxembourg" Amazons head of public policy Andrew Cecil told UK parliamentarians in NovemberppAt home in the United States though the Internal Revenue Service seems unconvincedppAmazon disclosed in October 2011 that the IRS wanted 15 billion in unpaid taxes It has declined to say exactly what transactions the charge relates to but said it was linked to "transfer pricing with our foreign subsidiaries" over a seven-year period from 2005pp"We disagree with the proposed adjustments and intend to vigorously contest them" Amazon said at the time "If we are not able to resolve these proposed adjustments we plan to pursue all available administrative and if necessary judicial remedies"ppShay the Harvard professor who contributed to a recent Congressional committee investigating tax avoidance said the fact the Luxembourg unit charged a much higher price than it paid for the right to license Amazon intellectual property could open the company to an investigation into whether it is engaging in abusive transfer pricingpp"The price originally paid to the US for the rights is something the IRS should want to look at" he saidppTransfer pricing is the way corporations trade goods or services between their units Many multinationals use itppThe Organisation for Economic Co-operation and Development which lays down the rules on transfer pricing stipulates that it should not be used to shift profits from high tax jurisdictions to low tax jurisdictionsppThe IRS declined to commentp

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