Why Amazon won with Brussels on the tax side
The European Court overturned the Commission's decision that Luxembourg favored Amazon by giving it advantageous tax treatment. The analysis of the tax consultant Tommaso Di Tanno for Lavoce.info
The European Court annulled the decision of the EU Commission according to which Luxembourg favored Amazon by reserving (from 2006 to 2014) a tax treatment such as to constitute "state aid".
The story deserves a minimal description, followed by a thoughtful evaluation.
The facts. Starting from 2006 Amazon launches a new operational structure in the Community, based on the existence of two Luxembourg companies. The first (Lux 1) is a limited partnership – that is, a totally transparent company and as such producing non-taxable income in itself, but only in the head of its shareholders – owned by US entities. The second (Lux 2) is an ordinary limited liability company, fully taxable and wholly owned by Lux 1. The operational roles of the two are outlined as follows: Lux 1 enters into agreements with American companies of the group such for which it has technologies, data on customers and brands. For the concession, he pays a predetermined amount and undertakes to bear the (variable) costs of updating and developing these elements. It then grants Lux 2 the right to exploit those resources against a royalty. Lux 2, in turn, grants these technologies to operating subsidiaries of the group located in the various European markets (those present in Germany, France, United Kingdom, Spain and Italy are indicated).
Well before launching this structure, Amazon asks the Luxembourg authorities to confirm on the one hand the non-taxability in the country of the proceeds received by Lux 1 in the consideration that it is a transparent company (they pay the shareholders – under the conditions that they compete on the basis of the Treaty against double taxation between the US and Luxembourg – but not society). On the other hand, that the method of calculating the royalty due from Lux 2 to Lux 1 is correct.
This last element is decisive because the amount of the royalty payable by Lux 2 to Lux 1 constitutes, for Lux 2, the cost to be offset against the proceeds of the royalties that it itself receives from the European companies of the group (a charge, moreover, fully deductible from the income of the latter). The higher the cost Lux 2 bears towards Lux 1, the lower its taxable income in Luxembourg. In the same sense, the greater the amount of the royalty received by Lux 1, the greater the amount freely transferred from Luxembourg (and therefore from the European Union) to the USA without community charges. The royalty calculation method is identified in the Transactional Net Margin Method (Tnmm), a method well known in international practice as a tool for determining the market value of a certain transaction. Tax provisions – and in particular those relating to relations between subjects belonging to different tax systems – normally provide that intra-group relations are valued for tax purposes on the basis of the value that would have been paid between independent subjects (that is, regardless of the prices actually charged and a virtual tax value is applied). There are various methodologies to determine the market value of a certain transaction and one is certainly the Tnmm: but all these methods are based on the identification of a theoretical neutral counterparty, on the identification of a comparable transaction and on the calculation of an acceptable profit that takes into account, in some way, the costs of creating the object sold or the service provided. And it is on the alteration of these elements that the European Commission had based its objections, arguing that their identification had been conducted too unilaterally, so as to exaggerate the role of Lux 1 and water down that of Lux 2. With the consequence of overestimate the amount due from Lux 2 to Lux 1.
The consequences
The European Court confines itself to finding that the Commission has not proved what has been stated, saying, in essence, that Amazon made a correct use of the TNM. The clarity of the statement can be debated, but the Court's reconstruction does not seem clearly unfounded.
The truth is that there are no incontrovertible arguments in this matter. First, because it is in fact impossible to find completely comparable situations. Each group organizes its functions (and allocates its costs accordingly) on the basis of subjective circumstances, perhaps even with attention to tax implications. The support given by each member of the group depends on the market context at a certain time, with the contingent considerations that follow (including: market conquered or to be conquered). Paradoxically, it is easier to ascertain its value in a complicated but transparent market such as the financial one – where there are a plurality of operators able to offer the same service or product – rather than in a completely opaque market (because there are no interchangeable alternatives) such as it is that of technologies or information exchange. Who, in fact, can establish an "objective" value of a technology? And who can determine its "reasonable" profitability? How stable are these values over time?
Perhaps it is better to acknowledge that there are no "objective" results in this matter, but that they must simply be negotiated to guarantee revenue also to the country hosting the technology, it being clear that the balance of power will count here. The fair market value , in short, is an illusion.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/perche-amazon-ha-vinto-con-bruxelles-sul-fisco/ on Sat, 22 May 2021 15:00:41 +0000.