Amazon Delivers Attack on EU in Clash Over Contested Tax Bill

(Bloomberg) --

Amazon.com Inc. accused European Union competition chief Margrethe Vestager's team of ignoring evidence and being careless in their zeal to outlaw controversial tax arrangements of the world's largest online retailer.

The attack from Amazon came at the start of a court hearing on the U.S. tech giant's fight against a 250 million-euro ($280 million) tax bill imposed after regulators said agreements with Luxembourg dating back to 2003 amounted to illegal state aid.

The EU's “desire to show” that a tax pact in 2003 gave Amazon an advantage “has led it astray” from its duty as an impartial regulator, Michel Petite, a lawyer for Amazon, told judges at the EU General Court, located a few miles from the company's European base.

The Amazon court clash is one part of the European Commission's crackdown on allegedly unfair tax deals that some of the world's biggest and most powerful companies have struck with EU nations. These include an order for Ireland to claw back a massive 13 billion euros from Apple Inc.

The European Commission in 2017 decided Luxembourg had allowed Amazon to cut its taxable profits “to a quarter of what they were in reality,” in violation of EU state-aid rules.

‘Fierce Battle'

At issue in the Amazon case is “a fierce battle over the question of whether the royalties that Amazon's Luxembourg tax-paying operating company paid to its Luxembourg non-tax paying holding company, did in fact reflect economic reality,” said Totis Kotsonis, a competition lawyer with Eversheds Sutherland in London, who isn't involved in the case.

The case examines whether “in any event, group companies should be deemed to be in a comparable factual and legal position as stand-alone companies,” he said.

With a staff of more than 2,200 people, Amazon is among Luxembourg's top 15 employers. Luxembourg is accusing the EU regulator of having “exploited” state-aid rules “to undertake covert fiscal harmonization on transfer pricing” and violated the nation's exclusive powers to decide on tax matters, according to a summary of its main appeals points.

Transfer pricing is an accounting method that represents the price that one part of a company charges another for goods and services provided.

The commission's state-aid investigators have since 2013 tried to unearth what they deem to be the most problematic examples of otherwise legal individual tax agreements -- or tax rulings -- doled out to companies. They said that Amazon's tax rulings endorsed inflated tax-deductible royalty payments for intellectual property to a unit that wasn't subject to corporate tax.

Economic Reality

The commission claims the arrangement “significantly” reduced taxable profits and “did not reflect economic reality.” The structure was in place from May 2006 to June 2014, the commission said. The company then changed to a new structure that is outside the scope of the commission's state aid investigation.

If the court upholds the EU's decision it would make the Amazon unit handling intellectual property “unable to cover the costs even of acquiring” the technology, Amazon's lawyer, Petite, added.

Luxembourg's finance ministry said at the time of the EU decision that the facts go back to 2006 and that since then “the international and the Luxembourg legal frameworks have substantially evolved.”

‘Completely Mistaken'

While for Luxembourg's lawyer, Denis Waelbroeck, the commission is “completely mistaken” with its findings, the EU authority's lawyer Paul-John Loewenthal said the decision “demonstrates in a detailed and convincing manner that Luxembourg granted state aid to Amazon.”

“Neither Luxembourg, nor Amazon have succeeded in refuting the commission's decision that the tax ruling gave an advantage,” he told judges at Thursday's hearing.

In September, Luxembourg lost a separate appeal before the same EU judges who will decide on the Amazon case. While the tribunal ruled in favor of Starbucks Corp. over its tax set-up in the Netherlands, it rejected the challenges by Luxembourg and Fiat Chrysler Automobiles NV. Fiat has filed an appeal at the EU's top court, with the backing of Ireland, but without Luxembourg.

The cases are: T-318/18, Amazon EU and Amazon.com v. Commission, T-816/17, Luxembourg v. Commission.

--With assistance from Aoife White.

To contact the reporter on this story: Stephanie Bodoni in Luxembourg at sbodoni@bloomberg.net

To contact the editors responsible for this story: Peter Chapman at pchapman10@bloomberg.net, Amy Thomson

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