EU Plays hardball with transfer pricing probes into Amazon, Apple, Starbucks and Fiat
posted Nov 25, 2014 by Paul Oliveira, CPA
Amazon is the most recent corporate giant to join the list of companies facing European Commission probes into tax arrangements with European Union (EU) member states.
The inquiry into Amazon is to determine whether Luxembourg gave the company illegal preferential tax treatment, violating European Union competition regulations.
This latest inquiry follows similar investigations into tax arrangements between Apple Inc. and Ireland, Starbucks Corp. and the Netherlands, and Fiat S.p.A. and Luxembourg.
A country’s use of attractively low tax rates to lure businesses is not illegal under EU rules, but making special corporate tax deals that are not available to all companies could amount to illegal state aid.
The Amazon investigation centers on a 2003 agreement with local authorities that reportedly has let the company cap the amount of tax it paid, regardless of its European profits.
Avoiding taxes with transfer pricing deals
The Commission contends that Amazon is able to use transfer pricing deals in which most of the company’s European revenue is sent to a Luxembourg-based subsidiary. That subsidiary then pays royalties to a separate Amazon unit, which effectively reduces the profit the company generates from its European operations and cuts its tax bill, according to European authorities.
Transfer pricing relates to the prices set for goods sold or services provided by one member of a related group to another. Advance pricing arrangements (APAs) determine, before any intragroup transaction takes place, an appropriate set of criteria for setting the prices for those transactions.
In the meantime, the Commission has said it is investigating Ireland’s transfer pricing practices as well as those of other EU member states, including the Netherlands. Any APA or similar arrangement within the EU could potentially be subject to review and lead to increased tax liabilities for the relevant taxpayers for periods as far back as 10 years.
The Commission said it will investigate whether Ireland followed transfer pricing guidelines promulgated by the Organization for Economic Cooperation and Development in reaching transfer pricing agreements with Apple.
Apple’s tax dealings with Ireland have generated considerable attention, including a Senate investigation in the United States. But in Luxembourg, the tax investigations could potentially have a much bigger effect due to the large number of multinationals with operations in that small country.
The Commission has said no conclusions have been drawn in the three cases.
The calculations under the microscope
In June, the Commission confirmed what is widely regarded as a new hardball phase in its efforts to clamp down on corporate tax avoidance geared to transfer pricing arrangements. It has listed the following specifics related to the tax rulings in the three countries being investigated:
Ireland. The calculation of the taxable profit allocated to the Irish branches of Apple Sales International and of Apple Operations Europe;
The Netherlands. The calculation of the taxable basis for manufacturing activities of Starbucks Manufacturing EMEA BV; and
Luxembourg. The calculation of the taxable basis for the financing activities of Fiat Finance and Trade Ltd.
The Irish government has reiterated that the Commission’s concerns are based on misunderstandings and that Apple did not receive selective treatment.
Luxembourg has also rejected claims that it has provided illegal tax benefits to companies such as Fiat or Amazon. The Commission’s probe into Luxembourg may pose a dilemma for the next Commission president, Jean-Claude Juncker, who was that country’s finance minister when the tax arrangements with the Fiat finance arm and Amazon were negotiated.
Taking the long view
The Commission has stated that the fight against tax evasion should be one of the main priorities of the EU’s Directorate-General for Competition. This increased attention likely means additional challenges for multinationals with a presence in the EU.
Multinational corporations that have entered into APAs or other similar arrangements with EU member states should review their positions, including any negotiations currently in progress, and discuss the issues with their legal advisors.
For more information contact a member of our International Tax Services Group.