Amazon Wins EU Tax Haven Case

For now, at least, it can shift millions of its earnings to Luxembourg.

The Verge (“Amazon’s $300 million tax bill rejected by EU judges“):

Judges from the European Union’s second-highest court have rejected a €250 million ($300 million) tax bill lodged against Amazon in 2017 as part the bloc’s ongoing fight against US tech giants.

The case was one of a number spearheaded by Margrethe Vestager, the European Commissioner for Competition, in which sweetheart tax deals given to powerful corporations were framed as a form of illegal state subsidy. The most notable of these was a 2016 case in which Apple was ordered to pay Ireland €13 billion ($14.9 billion) in back taxes. This decision was annulled in 2020 by the same court involved in today’s ruling.

The Amazon case can be traced back to 2006, when the e-commerce giant established a labyrinthine tax structure in Europe that allowed it to funnel revenue from all EU sales through a subsidiary based in Luxembourg. Internally, Amazon referred to this as Project Goldcrest, named after Luxembourg’s national bird.

In 2017, the European Commission ruled that this structure was illegal and had allowed Amazon to avoid around €250 million in taxes. “Luxembourg gave illegal tax benefits to Amazon,” said Vestager at the time. “As a result, almost three quarters of Amazon’s profits were not taxed. In other words, Amazon was allowed to pay four times less tax than other local companies subject to the same national tax rules.”

In Amazon’s most recent financial filings it recorded revenue of €44 billion ($53 billion) passing through its Luxembourg subsidiary. But this subsidiary, which has 5,262 employees, also registered €1.2 billion in losses, and so paid zero corporation tax.

In the ruling this morning announced by the General Court of the European Union, judges found that the Commission “did not prove to the requisite legal standard that there was an undue reduction to the tax burden” of Amazon’s Luxembourg subsidiary. The ruling is a significant win for Amazon and a blow for EU politicians hoping to rein in US tech giants.

Although the 2017 ruling has now been annulled, today’s decision can still be appealed to the EU’s highest court, the European Court of Justice. The Apple case overturned in 2020 has already been appealed in this fashion and is awaiting a further ruling.

After details of Project Goldcrest were first revealed, the US Internal Revenue Service (IRS) also filed its own case against Amazon, seeking up to $1.5 billion in back taxes. A federal court judge rejected this case in 2017, saying the figure claimed by the IRS was “arbitrary, capricious, and unreasonable.”

I’m of two minds on this. On the one hand, corporations and people will naturally pay as little tax as they can legally get away with and, to the extent that Amazon cleverly structured their tax burden the maximize profits for shareholders, they’re fulfilling their fiduciary responsibilities. On the other, to the extent that we want to tax corporations as entities rather than their owners and employees, this race to the bottom is good for no one.

My longstanding instinct is that we simply shouldn’t tax businesses, large or small, as businesses. Doing so naturally requires a complicated assessment of profits and losses and practically invites gaming the system. It’s much easier to tax personal income or, even better, purchases.

But, given that practically every developed country attempts to tax business as business, the only way to do that effectively is to have a universal rate and set of rules. The OECD countries have been trying for more than a decade to do just that, with little success. Partly, because the project itself is hard:

In a globalised and digital economy, multinationals operate through centrally managed business models, and their global profits are largely the result of their global operations. Yet current international tax rules, developed nearly a century ago, treat subsidiaries of multinationals as legally independent firms which trade between each other using “arm’s length” or normal commercial prices to transfer goods and services.

But such prices are not always easy to find. Many markets are thin and dominated by the same multinationals, who then exploit this system to minimise their tax liability by shifting profits to jurisdictions with low or zero tax rates. This undermines the tax base of countries where real activities occur and, therefore, where the profits have been generated. These rules are also skewed in favour of rich countries because they help multinationals’ home countries get the biggest share of tax from global profits. This “transfer pricing” is exacerbated by tax competition to the point that the global average statutory corporate tax rate has fallen by more than half in three decades.

But mostly because there is a wide diversity of philosophical view on how to fix and even whether to fix it:

Comprehensive reforms have been hindered by dominant OECD member governments, which come to negotiations with the misplaced perception that national interest is served by protecting multinationals headquartered in their own countries. This has prevailed over genuine, global public interest.

The US has been part of that problem, although there are signs that the Biden Administration may pursue a different policy. Right now, though, as Tommaso Faccio and Jayati Ghosh argue, while a slow consensus is forming, the US is a major obstacle,

The negotiating process has nonetheless reached agreement that multinationals should be considered unitary businesses. This means that their worldwide profits should be taxed in line with their real activities in each country and allocated to different jurisdictions, based on a formula according to the key factors that generate profit: employment, sales and assets. Many states in the United States use a similar “formulary apportionment” system to determine their taxable shares of US corporate profits. In 2016, the EU Commission put forward a similar proposal for an EU Common Consolidated Corporate Tax Base, but it has not yet been approved by the European Council.

Formulary apportionment would remove the current artificial incentive for multinationals to shift reported income to low-tax locations. Tax liabilities, instead, would be allocated by measures of their real economic activity in each location. But the proposal currently being negotiated involves applying this to only a small share of a firm’s global profits (so-called “residual” rather than “routine” profits) and is mainly directed at mostly US-based highly digitalised multinationals.

That even the EU (now minus the UK, which is closely aligned with the US on the matter) can’t agree on this shows how hard the problem is. But Faccio and Ghosh want to go much further:

This is not sufficient to address the problem.

Instead, we need a more ambitious and comprehensive reform that replicates the US system at the international level, without distinction between digital and non-digital businesses. This would help to establish a more level playing field, reduce distortions, limit opportunities for tax avoidance, and provide certainty to multinationals and investors. To put an end to harmful tax competition between countries, this system should be supported by a global minimum tax on multinationals so as to reduce the incentive for multinationals to shift profits to tax havens.

Until recently, negotiations on a global minimum tax were benchmarked by the existing US minimum tax on US corporations’ foreign earnings (known as “GILTI”), which has a rate of 10.5%. As a result, public discourse centred around a possible minimum tax rate of around 12.5% (incidentally, the corporate tax rate in Ireland, one of the EU’s own tax havens). Such a low minimum tax rate could in fact over time become the global ceiling, in which case the laudable initiative to oblige multinationals to bear their fair share of taxes would end up doing the opposite.

Honestly, actually getting 10.5% to 12.5% effective taxation, and having it flow to where it’s earned, would be far preferable to the current situation, where corporations spend millions on accountants and lawyers to hide their earnings, inflate their losses, and shift what modest burden they owe to the lowest bidder.

FILED UNDER: Law and the Courts, Taxes
James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. HarvardLaw92 says:

    where corporations spend millions on accountants and lawyers to hide their earnings

    😐 😐 😐

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  2. Kathy says:

    My longstanding instinct is that we simply shouldn’t tax businesses, large or small, as businesses. Doing so naturally requires a complicated assessment of profits and losses and practically invites gaming the system. It’s much easier to tax personal income or, even better, purchases.

    There’s a big problem there. the big shareholders and high corporate officials could be paid little in salary and/or stock options, and instead have their expenses covered by the business, which pays no taxes.

    Say Jeff Bezos gets a measly $50,000 a year, but lives in company housing, has a company fleet of cars, company personnel to serve at home, pays his bills with the company credit card, flies the company’s jet, etc. etc.

    So you’d have to tweak the tax code, classify such things as income, and make Bezos pay, which he won’t be able to on a mere $50,000 in cash per year, and would probably wind up taxing such benefits as regular employees get.

    No tax system will ever exist that has no loopholes or can’t be gamed or exploited in some way. Perhaps in a totalitarian system where the government simply takes what it wants from whom it wants, but not otherwise. But these things can be minimized, if the tax code changes to counter such moves.

    There needs to be a cultural change, too, turning against the accumulation of capital, and above all of paying one’s fair share in taxes, rather than as little as possible.

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  3. James Joyner says:

    @Kathy:

    Say Jeff Bezos gets a measly $50,000 a year, but lives in company housing, has a company fleet of cars, company personnel to serve at home, pays his bills with the company credit card, flies the company’s jet, etc. etc.

    So you’d have to tweak the tax code, classify such things as income, and make Bezos pay, which he won’t be able to on a mere $50,000 in cash per year, and would probably wind up taxing such benefits as regular employees get.

    My understanding is that we already tax a lot of that sort of thing. But, yes, the problem with an income tax is that it incentivizes minimiizng income in the form of things not taxes. I’d prefer to tax consumption, perhaps exclusive of certain essentials.

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  4. Kathy says:

    @James Joyner:

    There’s some merit to taxing consumption, but much of the burden falls to those lower on the income scale, who dedicate a greater portion of their incomes to consumption.

    Mexico has a VAT of 16% (11% in northern border regions), which applies to everything except food and medicine (it does apply to prepared food at restaurants, as that is classified as a service). It even applies to interests owed in loans, including credit cards.

    The food and medicine exemption helps the lower income rungs. But they pay this rate for rent, transportation, clothing, phone service, entertainment, etc.

    It would be nice to adjust this to income, but way too complicated.

    As usual, there are no easy answers.

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  5. James Joyner says:

    @Kathy: We could probably exempt the first $X of rent and other essentials. Or just have a UBI.

  6. Gustopher says:

    It’s much easier to tax personal income or, even better, purchases.

    Applying the sales tax to stock purchases would definitely change things.

    Anyway, not taxing corporations would leave very strong incentives for the corporation to collect wealth. I’m not sure what the consequences of larger and larger chunks of the planets wealth sitting around in the wallets of imaginary people.

    2
  7. Joe says:

    @Kathy: I am confident any of those perks not tied closely to a business purpose
    are treated as taxable income to Bezos.

    1
  8. Stormy Dragon says:

    My longstanding instinct is that we simply shouldn’t tax businesses, large or small, as businesses. Doing so naturally requires a complicated assessment of profits and losses and practically invites gaming the system. It’s much easier to tax personal income or, even better, purchases.

    If we were going to set up a system where corporations aren’t taxed and replaced it with an offsetting increase on their wealthiest shareholders (including treating capital gains as income), I might be amenable to this argument. But in practice the people cutting corporate taxes also want to cut individual income taxes as well, so when corporate taxes get cut we end up not taxing either.

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  9. Andy says:

    I agree that taxing businesses is neither fair nor effective. It has some of the same problems as attempts at campaign finance reform – it’s like trying to crush jello in your hand – no matter what you do, most of it is going to leak out.