EU can’t get a grip on tax-avoiding Amazon
How is it possible that the largest online store in the world hardly pays tax despite a phenomenal growth spurt due to the corona crisis?
On Friday, scientists from the City, University of London presented a study into Amazon’s tax strategy, one of the largest companies in the world with an annual turnover of 319 billion euros. The study – titled The Amazon Method – was carried out on behalf of the left-wing group in the European Parliament.
Studying Amazon has been a frustrating exercise for British scientists, it turns out. Because exactly how much tax Amazon pays is a carefully kept secret, according to the researchers. Amazon “deliberately presents data in an opaque manner to hide its aggressive tax strategy,” the researchers write. The data from Amazon’s subsidiaries is provided “inconsistently and confusingly”.
What does become clear: how Amazon avoids tax, a topic that runs like a thread through the history of the company. When CEO Jeff Bezos established the headquarters of his (then) book site in Seattle in 1994, he did so because of the favorable tax climate in Washington state. Now that Amazon has grown into an international company, Luxembourg is the main hub in Amazon’s tax planning.
It works as follows: by far the largest part of Amazon’s profit (20 billion euros in 2020) comes from the United States, on which the company paid a total of 2.3 billion euros in tax last year. But in Europe, where Amazon is rapidly setting up expensive new distribution centers, Amazon is suffering enormous losses despite record turnover: 1.2 billion euros last year. For example, Amazon’s investments in Europe – 78 billion euros since 2010, plus 135,000 jobs – are helping to reduce the tax bill at the same time.
Making a loss now will save Amazon money in the future: a discount on the tax. A method that benefits more multinationals
In addition, making a loss now will yield money next year: the 1.2 billion euros loss gave Amazon a future tax credit of 56 million euros. This system, a well-known phenomenon among multinationals called a ‘loss statement’, makes loss ‘a commercial asset’, explains professor of international and European tax law Maarten de Wilde of Erasmus University. “Losses are a tax credit that you use in the future.”
Tech companies pay little
In order to make this tax construction possible, Amazon concluded a deal in 2003 with tax haven Luxembourg – the location for the majority of European activities. It is the place where Amazon’s losses in Europe converge and part of Amazon’s intellectual property is invested.
In fact, for tech companies that make their money online, it doesn’t matter where they locate – which is why they choose countries with a favorable tax environment. These countries welcome these companies with open arms: Luxembourg got Amazon’s European headquarters with three thousand employees in return.
The European Commission concluded in 2018 that the current tax systems are not designed for tech companies that are active online and have little or no physical presence. The result is that an average tech company pays 9.5% tax, while that is 23 percent for ‘traditional’ multinationals.
All this leads to frustration at the European Parliament, which looks on helplessly as the tax authorities in individual European countries hardly profit from the billions in turnover within their national borders.
On Wednesday, European Commissioner Margrethe Vestager (Competition) suffered a painful defeat after the General Court of the EU decided that Amazon did not have to pay a European tax surcharge of 250 million euros. Vestager’s reasoning, who imposed the levy in 2017 because Amazon made “illegal” tax deals with Luxembourg, was dismissed by the judge. Last year, Vestager lost a similar case against Apple, which did not have to pay an Irish additional tax of 13 billion euros.
How do we solve this?
What can Europe do? A joint European approach remains notoriously complicated. EU countries are responsible for their own tax collection and new joint European agreements on taxation are impossible to achieve, because unanimity is required and countries with a favorable tax climate such as the Netherlands, Luxembourg and Ireland block it.
In the background is a thorny European discussion about new transparency rules for companies, which would oblige them to disclose their profits and the tax paid per EU country. Proponents hope that such mandatory transparency will shed light on shady structures. Until recently, the discussion about European legislation was deadlocked, but in February a breakthrough seemed possible – partly because Austria and the Netherlands changed their position and voted in favor of the proposal.
But now that the details have to be negotiated with the European Parliament, there still appears to be strong resistance. Countries that openly favored more transparency, such as France, are also trying to limit the scope of the final legislation. For example, by allowing companies to shield ‘sensitive’ data for longer. But above all by making the transparency obligation only apply to profits in EU countries, making it attractive for companies to relocate activities to countries outside Europe.
MEP and chairman of the tax committee Paul Tang (PvdA) is moderately hopeful about a firmer approach to tax avoidance, also because US President Joe Biden recently made an ambitious proposal for a minimum rate of 21 percent corporate income tax. Biden also wants large multinationals to pay taxes in markets where they operate and not just in the countries where they are based, in order to end construction through tax havens.
Which would help the discussion enormously, according to Tang: if everyone knew exactly how much tax Amazon pays. “If it becomes visible how little tax they pay in European countries, it will certainly have an impact,” he says. “Preferably also broken down to all countries outside Europe.”
Tax professor De Wilde also thinks that a solution starts with companies that communicate more honestly about exactly what they pay in tax. “We still don’t know exactly how it should be. Where should you pay tax? What is enough? What is too much?” says Wilde. “If you only have some chunks of information, it becomes very difficult to draw firm conclusions.”