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The European Court of Justice (ECJ) has upheld Amazon's appeal against the European Commission's (EC) ruling that an Amazon royalty pricing arrangement agreed with the Luxembourg tax authorities was overstated. The EC had held that the reduction in profits amounted to receiving the equivalent of €250 million of State Aid.

In T-816/17  Luxembourg v Commission and Amazon EU Sàrl and T-318/18 Amazon.com Inc. v Commission,  the ECJ held that the EC did not show sufficient proof that the tax burden of Amazon's Luxembourg subsidiary was unduly reduced. As a result, the decision of the EC and the order for Amazon to pay back €250 million in State Aid was annulled in its entirety.

  • Amazon set up in Europe using a limited partnership as the top European entity which held the European Intellectual Property and its Luxembourg corporate subsidary (LuxOpCo) which was the main European operating company.
  • Amazon approached the Luxembourg tax authorities for a tax ruling which included the pricing of a royalty agreement in 2003. The royalties were paid by LuxOpCo to the Luxembourg partnership. The ruling was obtained. 
  • In 2017, the EC issued a decision stating that by agreeing to the method and calculation of the pricing agreement, the corporate profits of LuxOpCo were artificially reduced. This gave the company an advantage and this was, essentially, State Aid. Between the years of 2006 and 2014, it amounted to approximately €250 million.
  • As part of the EC's decision, it performed its own transfer pricing (TP) analysis to counter Amazon's TP report, which formed the basis of the Luxembourg tax ruling.  The EC challenged:
    • The choice of tested party, based on functional analysis of the functions and risks performed by the parties in question.
    • The method used for calculating the pricing, again based on new functional analysis.

The ECJ considered the EC's decision that an advantage had been obtained under the rules of State Aid. The EC had to be able to show:

  • The advantage existed when compared to the taxable profits of the company under normal taxation.
  • If the advantage comes from transfer pricing, the errors in that pricing analysis can not allow for a reliable approximation of the arm's length position but instead must reduce the taxable profits when compared to the normal rules of taxation under market conditions.

The ECJ held that:

  • The functional analysis performed by the EC was incorrect and Amazon's choice of tested party was correct.
  • Due to the inaccurate conclusions of the functional analysis, the EC had chosen the wrong method for calculating the pricing.
  • Overall, the EC's analysis failed to prove that Amazon's pricing had led to an overstatement and the artificial reduction of the taxable profits as a consequence. 
  • Without being able to show that Amazon's own pricing was not arm's length, there could be no advantage.
  • The EC's decision should be annulled. Amazon do not have to pay back the €250 million to the Luxembourg authorities.

Comment: The European Commission have been looking to hold US tech giants to account in respect of what many see as artificially small tax liabilities in Europe. This EC decision came hot on the heels of its conclusion that Apple had been given illegal tax breaks by the Irish government. In both cases, it was not only the US group, but the local tax authority involved, that appealed to the ECJ. Ireland even intervened in the Amazon case, supporting Luxembourg. The ECJ clearly aren't so easily swayed, having annulled both decisions. We now await the EC's appeal in the Apple case.

Useful guides on this topic:

BEPS & Diverted Profits Tax (for SME owners)
What is BEPS? What is Diverted Profits Tax? Will either of these affect me or my SME clients?

Diverted Profits Tax
Large multinational enterprises (MNEs) that use arrangements between connected parties to divert profits away from the Uk and so avoid UK tax, will be subject to the Diverted Profits Tax.

Digital Services Tax
The Digital Services Tax is a temporary mechanism to tax online sales pending a global solution. How does it work? Who is caught? 

Goodwill and the intangibles regime
How does the Corporation Tax intangible regime work? What is the treatment of goodwill for Corporation Tax? Do companies account for goodwill differently?

External links

Cases T-816/17 and T-318/18: Press Release

Cases T-816/17 and T-318/18: Full judgement


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