Amazon avoids $1.5 billion tax bill: It is OK to run sales through Europe

Online shopping giant Amazon has avoided a $1.5 billion (£1.2 billion) tax bill by winning a legal dispute in a US. The court ruled that it is OK to have paid tax on European sales through a Luxembourg sub-company.

Judge Albert Lauber rejected many arguments presented by the Internal Revenue Service (IRS), bringing to an end a prolonged court battle.

Ruling in favor of Amazon, he said it was legal for Amazon to have funnelled its European sales through a low-tax sub-company in 2005 and 2006, instead of the US. In case they had lost, it could have faced a US tax bill as high as $1.5 billion and lower profits for future years.

According The Register, Amazon US sold the rights to parts of its technology and the trademark for that technology to its European subsidiaries. For that, they got a lump sum plus annual payments. So that, Amazon Europe operated independently and its revenues were out of reach from the IRS – the US government’s tax collectors. And the investigators from this institution were not happy with this arrangement.

This financial operation began in 2004, and was dubbed Project Goldcrest after the national bird of Luxembourg. The European company Amazon set up was not a shell company, the judgment states, since it played a significant role in creating new Amazon services in the Germany, France, UK, and Ireland.

The e-commerce giant – which, according to Forbes, is the world’s 12th most valuable brand – made $2.37 billion of profit last year. It is four times more what it made in the four previous years combined.

An analyst at Baird Equity Research, Colin Sebastian, told Reuters the ruling “should shield Amazon from potentially significant tax obligations to the IRS covering years beyond the ones covered in the lawsuit.”

Yet Amazon could still face additional tax bills in Europe if Brussels officials choose to take further action.

Luxembourg is known as one of the world’s biggest tax havens, offering heavy discounts on corporate taxes that have attracted global companies such as Pepsi and Apple. The Luxembourg structure, outlined by media including the Guardian newspaper in April, fulfils a corporate obligation to shareholders to maximize returns. There is no suggestion these companies has broken any laws. Amazon, which started out selling books and now, offers everything from clothes to electronic devices, paid an average 44 per cent tax on its U.S. earnings in the last five years.

During his Presidential campaign, Donald Trump criticized Amazon for not paying enough in tax. The online retailer’s chief executive, Jeff Bezos, responded angrily to the claims, triggering a social media battle.

This example shows the way companies reduce their taxes by bringing intellectual property to tax havens and charging affiliates big fees for using it. Politicians in rich countries start to target such practices, which have been used by other multinationals including Apple, Google and Microsoft. However, the Amazon victory will have a chilling effect on the IRS’ – and other countries’ tax authorities’ – plans to go after other overseas earnings.

U.S. Senator Carl Levin has called these tax-paying tactics as “gimmickry.” Michael McIntyre, a tax expert at Wayne State University in Michigan, said that while Amazon’s arrangement, and others like it, looked like commercial transactions, they actually only served to reduce taxes.

“The IRS shouldn’t be happy about this. It sounds like they’re not,” he said.

Amazon has not answered any questions about its tax “uncertainties” for this story, the latest in a Reuters series on corporate tax avoidance. In an official statement a spokesman told that “Amazon pays all applicable taxes in every jurisdiction that it operates within.”

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