The European Commission (Commission) continues its battle against alleged tax avoidance and has recently concluded that Luxembourg has been granting an undue tax benefit to Amazon in the total amount of EUR 250 million.
This tax benefit was awarded through a highly beneficial tax ruling and constitutes unlawful State aid, according to the Commission – which means that Amazon will have to pay it back, with interest. Since Serbian tax authorities have the power to issue binding advance tax opinions—and given that multinationals commonly exploit this option without any consideration of State aid rules—the Commission’s Decision1 in the Amazon case should raise some eyebrows.
A tax ruling is a tax administration’s decision/declaration on how it is going to interpret the tax laws in a set of predefined circumstances. They are binding and are meant to be used to improve legal certainty. However, multinationals often seek tax rulings in several jurisdictions and then choose to conduct their business operations in a country that offers them the most beneficial interpretation of tax laws. With the goal of attracting investments, local tax administrations sometimes choose to interpret regulations in favor of these multinational companies.
Also, top-notch tax consultants and lawyers can (mis)use their knowledge of international taxation and persuade local tax administrations to take stances that favor their clients. For example, this is sometimes done by cherry-picking arguments from OECD guidelines. In developing countries, such as Serbia, tax administrations lack the capacity needed to tackle complex issues such as international profit shifting, which makes them susceptible to this kind of persuasion.
In the Amazon case, there are two companies situated in Luxembourg – (i) Amazon EU that has over 500 employees and operates throughout Europe, and (ii) Amazon Europe Holding Technologies (Holding Company) that has no employees and is a shell company. Due to its legal form and ownership structure, income taxes related to the Holding Company are paid in the US, not in Luxembourg. Under the rules set out in the US tax code, all of US tax liabilities related to the Holding Company have been deferred – which is all highly beneficial for the Amazon group.
The Holding Company holds certain intellectual property rights and has granted an exclusive license to Amazon EU to use these rights for – as per the Commission’s assessment – an unjustifiably high royalty fee. Local tax administration has issued a tax ruling that endorses this business model, enabling Amazon group to avoid taxation on three quarters of the profits it made from all sales in the EU.
However, since both companies belong to the same company group, the royalty fee for the license should have been in line with the economic reality, i.e. with the “at an arm’s length” principle. Under a general rule, the amount of royalty fee that exceeds the “at an arm’s length” price should be treated as a non-deductible expense for tax purposes. Practically, Amazon EU’s taxable profits should have been increased for the difference between unjustifiably high fee actually paid and a fee that would be paid in line with the economic reality – and that would all lead to Amazon EU paying more corporate taxes to Luxembourg, since reduction in (deductible) expenses leads to higher taxable profits.
The Commission has concluded that the above-mentioned tax ruling granted a selective economic advantage to Amazon unlawfully reducing its Luxembourg’s tax revenues and thus, allowing it to pay fewer taxes than other taxpayers under the same national rules. In other words: the royalty fee should be lower and the Holding Company should have made less profit. Controversially, Amazon EU should have made more profit and should have paid more corporate taxes to Luxembourg. Amazon is hence obligated to pay the unpaid taxes amounting to EUR 250 million increased by the related interest.
Under Serbian law, the tax administration has the power to issue binding advance tax opinions2, and multinationals commonly seek these tax opinions with the goal of reducing their tax liabilities in Serbia. For instance, some multinationals use this method to avoid corporate taxation of their permanent establishments in Serbia by acquiring the tax administration’s confirmation stating there is no permanent establishment at all – which might be the most efficient way to shift taxable profits to a more favorable tax jurisdiction.
Although these advance tax opinions are not tax rulings per se, given the Commission’s practice, they should be treated as such for State aid purposes. Namely, Irish tax law encompasses similar advance opinions and the Commission has, in the landmark Apple case3, expressly stated: “Ireland refers to ‘advance opinions’ instead of ‘tax rulings’ in its submissions. … Substantively, the two notions are the same.” It should be noted, Stabilization and Association Agreement between Serbia and the EU includes a provision that obliges Serbia to apply criteria arising from the application of the competition rules applicable in the EU, as well as the interpretative instruments adopted by the EU institutions.
In the light of recent developments, there is a real risk that any unlawful advantage conferred on a company by the means of a favorable tax opinion might be treated as State aid and could be subject to recovery. Hence, one of the lessons from the Amazon ruling should be to include State aid lawyers in tax structuring and planning or, even better, to hire consultants/lawyers with a firm grasp of both State aid and tax rules.
Authors: Marija Papić and Dušan Romčević, Gecić Law
This article was previously published by Thomson Reuters/Practical Law and available on our website with the permission of the publisher
