Last updated: October 2015
Amazon and Tax – what exactly is going on?
In May, Amazon declared that it would no longer book its EU sales in Luxembourg. Some tax campaigners declared victory, while others counselled caution.
Mayday 2015 was the day that Amazon started paying its taxes, right? Maybe, or maybe not.
What happened in May was that Amazon started to book its sales in the UK, Germany, France and Italy in local branches whereas, up to that point, it had booked them through a Luxembourg subsidiary called Amazon EU Sarl. Luxembourg is a tax haven so this sounded like very good news to a lot of tax campaigners.
But there is a problem. Amazon EU Sarl never made much of a profit. So it looks likely that the local branches won’t make much of one either. And tax is paid on profit, not turnover. No profit means no tax.
Many people believe that the reason for the lack of profit is that the money was shifted to another Luxembourg-based subsidiary: Amazon Europe Holding Technologies SCS (AEHT), which charged Amazon EU Sarl large fees for the use of Amazon patents.
Amazon has not moved AEHT. And there is no obvious reason why booking sales at local branches should mean that AEHT stops charging for the patents. So it looks like the profits may well end up in AEHT, in Luxembourg, just as they (presumably) did before.
No Man’s Land
The reason that shifting profits into AEHT is a particularly good tax dodge is that it is occupies a special no-man’s-land between Luxembourg and the US’s tax systems. It is a partnership, but its partners are located in the US. It doesn’t pay tax in Luxembourg because, according to the law there, only the partners themselves can be taxed. But the US doesn’t tax it either because it is overseas.
The royalties AEHT charges for patents were sanctioned in a 2003 private tax ruling by the Luxembourg authorities.
Since October 2014 the whole arrangement is being investigated by the European Commission. In January 2015 the commission disclosed a preliminary finding that it probably constitutes “illegal state aid” as it confers a “selective tax advantage” on Amazon, breaching EU free trade rules that forbid governments from helping specific companies. But action on the case has been delayed, and it is now unclear when a ruling will appear.
The figures certainly look suspicious: €12 billion of European sales were booked by Amazon EU Sarl in 2012. And yet, after all of this frantic activity, it made an overall loss of €68 million. AEHT, on the other hand, made a healthy profit of €117 million. And that was a lean year; in 2014, and every year between 2008 and 2011, AEHT made profits of between €302 and €442 million.
The Case of the Missing Profits
Amazon claims that all the talk of tax avoidance is nonsense. It says that it is just, in general, not making a profit right now. And to make the story more confusing, at a global level this is true. It reported a global loss of $241 million in 2014. (It divides its accounts into ‘North America’ and ‘International’, with the ‘International’ bit, which includes Europe, being the bit making the loss.)
There are a lot of articles in the media discussing why Amazon is not making a profit and why its shareholders are letting it get away with it. Some suggest that Amazon has now proven itself to investors, and they are allowing it to make a loss for a bit in order to gain market dominance, confident they will see profits again in the future. Other commentators have suggested that Amazon is deliberately delaying profit in order to avoid paying taxes.
Whatever the answer is, it doesn’t involve Amazon being unable to make money. Investors are eagerly pouring money into it, and it is anything but a failing company.
What about non-repatriated US profits?
The reason that Amazon doesn’t have to pay US taxes on AEHT’s profits, even though it is a US company, is that currently US companies don’t have to pay US taxes on profits that they make overseas until they are “repatriated” back to the USA.
This rule has encouraged many companies to leave profits in overseas tax havens indefinitely and has deprived the USA of a lot of revenue. Obama has thus started talking about addressing it, with his main suggestions being for a one-time 14% tax on the estimated $2.1 trillion piled up abroad, a 19% tax on future foreign profits, and the abolition of additional taxes when profits are brought home.
Some people have suggested that Amazon has started to get scared, and this is why it made its Mayday change. But as stated, that change was not to AEHT.
It is also worth noting that Amazon declares $2.5 billion in its annual report as being reinvested indefinitely outside the US to avoid tax on repatriated profits. That is not nothing, but it is not a lot compared to others like Apple, which has $69.7 billion, Exxon, which has $51 billion and General Electric, which has $119 billion.
One thing seems clear: Amazon still, as yet, isn’t paying much tax in the UK and quite a number of other countries. To what extent this is for ‘legitimate’ reasons – it is reinvesting its profits – or less ‘legitimate’ ones – it is shifting its profits around to hide them – the overall result remains the same: the tax is not forthcoming.
That means that Amazon is taking what rightly belongs to all of us: our portion of the collective wealth of our civilisation, created by multiple generations – not to mention forcing the rest of us to pay for its share of all of the public services required to keep a modern society running.
If Amazon wants to persuade people that it is not doing anything dodgy, there is a solution, which is to institute proper country-by-country reporting, as advocated by the Fair Tax Mark, the OECD and others. Then we will all be able to get a clear picture on the state of their tax affairs. In the meantime, we have to assume that Amazon is still shirking its tax responsibilities.