Amazon: the obscure subsidiary at the heart of US and EU tax disputes

If you had to sum up Amazon’s core business in a single sentence, how would you put it? Is it a website where you can order almost anything? Or is it a quick and convenient delivery network allowing you to receive the goods you need promptly?

Clearly, it is both. But precisely how the group’s economic value is split between the two is now a vexed question at the heart of tax disputes on both sides of the Atlantic.

In Europe, regulators believe high royalty fees paid by Amazon’s European HQ – bills, that is, for use of web technology and the brand – have allowed too much taxable income to be spirited away. As a consequence, the value of the group’s European activities, its buying and warehousing operations, is not properly appreciated.

US tax officials take a different view. They insist that Amazon’s intellectual property – the rights to charge royalty fees for the use of brand and web technology – was grossly undervalued when it was sub-licensed outside America. As a result, they say, the value created by Amazon’s tech experts in Seattle is not properly appreciated.

In each case, European and US demands for increased tax payments, both of which are resisted by Amazon, are centred around one obscure subsidiary: Amazon Europe Technologies Holding (AETH).

This arcane unit (a non-resident Luxembourg partnership) is the linchpin in Amazon’s tax structure. It is to AETH that huge sums of European income are shifted, in the form of royalties.

The clever construction of the partnership, however, ensures that this income is not taxable under Luxembourg law at all. Nor is it taxable in the US or anywhere else. In effect, AETH income has slipped the net altogether.

Most big US multinationals have an obscure unit like AETH at the heart of their European tax affairs. Apple and Google have similar entities registered in Ireland; Starbucks has one in the Netherlands; McDonald’s in Luxembourg.

In each case, vast sums in royalty payments gush into these little-known subsidiaries, arriving directly or indirectly from operating businesses across Europe. As a result, the operating businesses report dramatically smaller profits, and pay much lower taxes locally.

But what happens to the royalty fees? In some cases they can be put to work again within the group, funding expansion. In others, however, royalty income floods in so fast that multinationals struggle to find a use for it.

In the case of Amazon – a group that is fast-expanding rather than highly profitable – its offshore cash pile is worth $1.5bn. It seems a lot of money, but is comparatively modest next to reserves amassed by the more mature and profitable tech giants.

Apple, for example, announced last month that its non-US cash reserves had reached $200bn (£139bn) – almost equivalent to the entire annual economic output of Ireland. Google, meanwhile, has an estimated $43bn (£30bn) parked offshore.

Everyone can agree the situation is unsatisfactory, but specific gripes – and proposed remedies – look very different to regulators, depending on which side of the Atlantic they sit.

US regulators see the sums mounting up in multinationals’ overseas coffers as profits that should be repatriated to America, taxed and distributed to shareholders or reinvested. Exactly how that should be done is between American corporations and Washington and of no concern, they would say, to regulators in Europe.

But Europeans are increasingly questioning how multinationals have come by these cash mountains. Have big businesses struck shady “sweetheart deals” with Europe’s smaller, more biddable member states in order to salt away more royalty income than they might otherwise have got away with? Can these deals be unpicked and challenged? Certainly, the European commission believes so, and it is already challenging tax rulings granted to Amazon, Apple and others.

Some European politicians now want the commission to add Google to its target list, following a controversial £130m settlement with UK tax authorities.

Tensions between Europe and the US on international tax issues are at a new high. Senior US Treasury officials flew to Brussels last month and complained publicly about the commission appearing “to be disproportionately targeting US companies”.

Days earlier, Apple’s chief executive, Tim Cook, had also been to lobby the European commission in person. He has recently shown himself more determined than ever to kick back against allegations of industrial-scale tax avoidance. In December, he described such accusations as “total political crap”.

Only last autumn, things looked very different. There was quiet optimism among regulators around the world that an unprecedented, coordinated push to update the international rules would soon curb many of the worst excesses of big business tax avoidance.

A two-year G20-led programme ended in agreement in October on wide-ranging international tax reforms. Thrashed out through the Organisation for Economic Cooperation and Development, these reforms now have the backing of 60 countries representing more than 90% of the world’s economy, including the US and EU member states.

But despite rare international consensus, many of the OECD reforms are yet to bite, and there are worrying signs that the goodwill vital to seeing them through could be crumbling.

Whether the OECD reforms prove to be the robust remedy required remains to be seen. But even before the measures have been fully introduced, there are growing signs that efforts to move in unison against tax avoidance could fall apart.

Powered by article was written by Simon Bowers, for on Thursday 18th February 2016 13.45 Europe/ © Guardian News and Media Limited 2010


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