EU Commission invites comments on Luxembourg's alleged state aid to Amazon

The EU Commission collects comments on the case of alleged state aid to e-commerce giant Amazon by Luxembourg. The Invitation to submit comments has been published today in the EU Official Journal:
(Text with EEA relevance)
(2015/C 044/02)
By means of the letter dated 07.10.2014 reproduced in the authentic language on the pages following this summary, the Commission notified Luxembourg of its decision to initiate the procedure laid down in Article 108(2) of the Treaty on the Functioning of the European Union concerning the abovementioned aid.
Interested parties may submit their comments on the aid in respect of which the Commission is initiating the procedure within one month of the date of publication of this summary and the following letter, to:

European Commission
Directorate-General for Competition
State Aid Registry
1049 Bruxelles/Brussel
BELGIQUE/BELGIË
Fax + 32 22961242
E-mail: stateaidgreffe@ec.europa.eu
These comments will be communicated to Luxembourg. Confidential treatment of the identity of the interested party submitting the comments may be requested in writing, stating the reasons for the request.
PROCEDURE
On 24 June 2014, the Commission sent an information request to the Luxembourg authorities with detailed questions on the tax treatment of Amazon, asking inter alia for all tax rulings in force.
DESCRIPTION OF THE MEASURES IN RESPECT OF WHICH THE COMMISSION IS INITIATING THE PROCEDURE
In 2003, the Luxembourg tax authorities approved a transfer pricing arrangement proposed by Amazon.
ASSESSMENT OF THE MEASURES
The ruling establishes a method to calculate the taxable profit of Amazon EU Sarl. This method is not supported by a sufficient functional analysis. The accepted method allows Amazon EU Sarl to pay a tax deductible royalty for the use of intellectual property, which is not defined in the ruling and the information provided by Amazon to the Luxembourg tax authorities. In fact, at this stage the amounts of royalty paid seem too large. The remuneration attributed to Amazon EU Sarl for tax purposes is calculated based on the ruling and seems relatively low compared to the functions performed by Amazon EU Sarl. In fact, Amazon EU Sarl seems to perform complex strategic functions for the entire European market and seems to bear significant business and operational risk. The method accepted in the ruling for the remuneration of these functions also factors in a cap, expressed as a percentage of total EU revenues. This cap is explained neither in the ruling nor in the request by Amazon and does not seem in line with the arm’s length principle.
At this stage, the Commission has reasons to consider that the tax ruling granted to Amazon constitutes State aid pursuant to Article 107 (1) of the Treaty. Accordingly, at this stage, the Commission has doubts that Amazon is paying a sufficient amount of taxes in Luxembourg. The rulings are imputable to Luxembourg and would constitute a use of State resources in terms of foregone tax revenues. In line with the case-law of the Court of Justice of the European Union (Joined Cases C-182/03 and C-217/03 Forum 187), tax rulings can provide an advantage to the undertaking to which they are granted if those rulings approve of a pricing arrangement which departs from conditions which would have been set between independent market operators (the arm’s length principle).
The Commission examined whether the pricing arrangements in the tax ruling concluded between the Luxembourgish tax authorities and Amazon depart from conditions which would have been set between independent market operators. It considers, at this stage, that the calculation of the taxable basis of Amazon EU Sarl is too low compared to an arm’s length remuneration. First, the method for the calculation of the tax base does not seem to correspond to any of the methods contained in the OECD guidelines. Moreover, the tax base resulting from the application of the agreed transfer pricing method seems too low in view of the functions performed and risked assumed by Amazon EU Sarl, as in fact Amazon EU Sarl functions as the head office of Amazon for Europe as the principal operator of Amazon’s European websites, performs treasury management functions and holds all the other European Amazon subsidiaries.
Given that such aid would be new aid and that none of the derogations provided for in Article 107(2) and (3) apply, the Commission decided to open a formal investigation procedure.
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