08-11-2014, 07:57 AM
How Amazon’s tax structure gives it a ‘lethal advantage’ over Aussie retailers
PUBLISHED: 07 NOV 2014 12:45:31 | UPDATED: 07 NOV 2014 13:02:26
How Amazon’s tax structure gives it a ‘lethal advantage’ over Aussie retailers
Photo: David Paul Morris
NEIL CHENOWETH
Amazon.com’s first Australian accounts declare the online retail giant generated revenue last year of just $1.5 million.
But senior Australian publishing figures say the real figure for local turnover is around $250 million a year, or 166 times the sales figure reported by Amazon. That would make the American retailer one of the biggest players in the Australian book market, thanks to its huge advantage over local retailers.
Local booksellers say the US group’s Australian sales have had a lethal effect on them.
Leaked tax documents from accounting firm PwC in Luxembourg show how Amazon sidesteps the 30 per cent tax rates local players face.
The Luxembourg documents, obtained in a review led by the International Consortium of Investigative Journalists, contain some of the first hard numbers and details on how Amazon pays virtually no tax for its non-US earnings, including in Australia.
Last month, the European Commission announced an investigation into the secret 2003 advance tax agreement Amazon struck with Luxembourg that is the key to its global tax strategy.
The Luxembourg documents show not only the extent of the related-party transactions in Amazon’s Luxembourg companies but how Amazon has changed its tax strategy after investigation by French tax authorities and the US Internal Revenue Service. The change is so dramatic it raises questions whether the European Commission is targeting the right transactions.
In July 2013, Amazon Australia Services was registered with the Australian Securities and Investments Commission as a foreign company operating in Australia. It filed its first accounts on March 28, coinciding with a step-up in a Australian Tax Office investigation of US technology companies. Amazon Australia reported that from June 4 to December 31, 2013, its net sales were $1.5 million.
Why they were so low is unclear. Amazon considered it had no permanent base in Australia and only a tiny part of its Australian business was conducted in Australia, apparently related to deliveries.
After operating expenses of $1.2 million for technology, content and “fulfilment”, Amazon Australia Services paid a tax rate in the US of 36 per cent, or $96,000. The net profit was $170,000.
But it ended the year holding $1.9 million in cash. The money hadn’t gone anywhere, which suggests virtually all its operating costs were payments to other companies, to which it now owes debt.
GLOBAL MONEY HEADS TO LUXEMBOURG
It doesn’t mean those costs went to Amazon’s US subsidiaries. Almost all of its income outside the US ends up in a Luxembourg company, Amazon EU Sàrl, which was the beneficiary last year when Amazon notched up £4.3 billion ($7.9 billion) of sales in the UK and paid only £4.2 million in income tax.
Amazon EU’s 2009 accounts reported €5.5 billion ($8 billion) of income. The cost of Amazon’s products – the books, videos and other items that it sells – accounted for 75 per cent of net turnover.
Amazon’s shipping, marketing and other costs took another chunk. That left €913 million of profits. Yet Amazon EU only reported profit of €15 million. It paid €4 million tax.
Where did all the other money go?
A secret appendix to the annual report filed with the Luxembourg government shows the missing cash went in two related-party deals. Amazon EU paid €379 million in “service fee expense” and €519 million in royalties to Amazon Europe Holding Technologies.
It worked like this: Amazon Europe paid €105 million to Amazon Technologies Inc in Nevada to license the rights to Amazon’s intellectual property – the patents and software for the websites, including that button that buys a book with one click.
Amazon Europe onsold the rights to use this intellectual property to Amazon EU for €519 million – five times what it had paid the US company. Amazon Europe made an instant profit of €414 million, which would have been taxable, except that Amazon Europe is a limited partnership. It doesn’t pay tax in Luxembourg.
Amazon EU ended up paying 0.5 per cent tax. Amazon Europe’s money ended up tax-free in Gibraltar. This is the royalties loop, from Amazon EU to Amazon Europe, that is the focus of a European Commission investigation announced in Brussels on October 7.
“Based on a methodology set by tax ruling, Amazon EU Sàrl pays a tax-deductible royalty to a limited liability partnership established in Luxembourg,” the EC said in a statement.
“As a result, most European profits of Amazon are recorded in Luxembourg but are not taxed in Luxembourg.
“At this stage the commission considers that the amount of this royalty, which lowers the taxable profits of Amazon EU Sàrl each year, might not be in line with market conditions.”
The European Commission, the government of Europe, complained that Luxembourg has provided only limited information about its arrangements with Amazon.
The Luxembourg documents suggest that Amazon has already changed its tax arrangements as it has directed €55 billion of income through Luxembourg over the past six years.
Much has changed since 2009. First, Amazon found itself with a US tax problem. In 2011, Amazon Inc reported US tax authorities were demanding $US1.5 billion in federal tax and penalties covering 2005 to 2011 in connection with the royalties payments.
In 2012 the French government slapped a $US252 million tax bill on Amazon. The company is appealing both matters in court.
This year US media outlets reported Amazon Europe HT’s profits had halved by 2012. The general conclusion was that Amazon has toned down its aggressive transfer pricing strategy.
The change was certainly dramatic. Amazon Europe HT received less royalties from Amazon EU, while at the same time Amazon Europe HT began paying more to Amazon Technologies in Arizona. Amazon Europe HT’s profit plunged from €417 million in 2010 to only €85 million.
If there was a problem of not paying enough tax (and Amazon didn’t think there was) it had become bite-size.
But Amazon companies didn’t stop paying royalties. They just didn’t pay them to Amazon Europe HT.
The accounts show a huge rise in royalty payments from other Amazon subsidiaries to Amazon EU. In 2013 alone, Amazon EU banked €1.8 billion in royalties from other Amazon companies around the world.
Less than a third of this amount was paid on to Amazon Europe HT. In fact €1.28 billion of royalties stayed with Amazon EU.
And yet with all that extra income, Amazon EU ended up paying even less tax. It reported a €68 million loss in 2012. In 2013, instead of paying tax, it got a €5.5 million tax benefit.
It’s like a whodunnit. Where has all the money gone? The ICIJ documents may point to an answer: accounts for subsidiaries like Amazon Media EU Sarl, the Luxembourg company which sells e-books and MP3s on Amazon’s UK website, show ballooning payments as intercompany fees and costs.
So where did Amazon EU’s missing €1.2 billion of 2013 royalties go?
The payment has been matched with intercompany costs. It is not clear where but the rising royalties coincided with a growing investment in Amazon Data Services Ireland.
LUXEMBOURG, AMAZON: ‘WE AREN’T SPECIAL FRIENDS’
In effect, Amazon has pushed the royalties loop further down the chain, to Amazon EU and below, making it harder for the US and Europe to chase it.
The difficulty for the European Commission is that it might squeeze some disclosure out of Luxembourg over Amazon Europe, only to find the game has moved on.
In a statement this week, Amazon said it had not received any special tax treatment from Luxembourg.“We are subject to the same tax laws as other companies operating here,” it said.
Luxembourg‘s finance ministry said it was “satisfied that the allegations of state aid are unfounded and that . . . no special tax treatment or benefits have been granted to Amazon”.
Amazon has few friends among Australian booksellers.
“What is happening in books is no different to the impact of the net on many other areas of retailing,” says a senior Australian industry figure.
“But Amazon uses its market strength absolutely brutally. If the end result of what Amazon is doing was that we could no longer sustain authorship as a professional career, I don’t think they would lose a moment’s sleep.”
Australians who order Amazon products on the amazon.com.au site are informed that “any personal information provided to or gathered by Amazon.com.au is controlled by Amazon Australia Services Inc” of Seattle.
FROM ONE AMAZON SUBSIDIARY TO ANOTHER
NOW READ: ‘We’re still like a start-up’: inside the head of Amazon founder Jeff Bezos
Global tax crackdown could backfire
Editorial | How to avoid tax system mockery
International PwC tax schemes exposed
Why IKEA’s profits are mostly tax free
Search the #luxleaks database
BRW
BY NEIL CHENOWETH
Neil is a multiple Walkley Award winning investigative journalist.
@NeilChenoweth
PUBLISHED: 07 NOV 2014 12:45:31 | UPDATED: 07 NOV 2014 13:02:26
How Amazon’s tax structure gives it a ‘lethal advantage’ over Aussie retailers
Photo: David Paul Morris
NEIL CHENOWETH
Amazon.com’s first Australian accounts declare the online retail giant generated revenue last year of just $1.5 million.
But senior Australian publishing figures say the real figure for local turnover is around $250 million a year, or 166 times the sales figure reported by Amazon. That would make the American retailer one of the biggest players in the Australian book market, thanks to its huge advantage over local retailers.
Local booksellers say the US group’s Australian sales have had a lethal effect on them.
Leaked tax documents from accounting firm PwC in Luxembourg show how Amazon sidesteps the 30 per cent tax rates local players face.
The Luxembourg documents, obtained in a review led by the International Consortium of Investigative Journalists, contain some of the first hard numbers and details on how Amazon pays virtually no tax for its non-US earnings, including in Australia.
Last month, the European Commission announced an investigation into the secret 2003 advance tax agreement Amazon struck with Luxembourg that is the key to its global tax strategy.
The Luxembourg documents show not only the extent of the related-party transactions in Amazon’s Luxembourg companies but how Amazon has changed its tax strategy after investigation by French tax authorities and the US Internal Revenue Service. The change is so dramatic it raises questions whether the European Commission is targeting the right transactions.
In July 2013, Amazon Australia Services was registered with the Australian Securities and Investments Commission as a foreign company operating in Australia. It filed its first accounts on March 28, coinciding with a step-up in a Australian Tax Office investigation of US technology companies. Amazon Australia reported that from June 4 to December 31, 2013, its net sales were $1.5 million.
Why they were so low is unclear. Amazon considered it had no permanent base in Australia and only a tiny part of its Australian business was conducted in Australia, apparently related to deliveries.
After operating expenses of $1.2 million for technology, content and “fulfilment”, Amazon Australia Services paid a tax rate in the US of 36 per cent, or $96,000. The net profit was $170,000.
But it ended the year holding $1.9 million in cash. The money hadn’t gone anywhere, which suggests virtually all its operating costs were payments to other companies, to which it now owes debt.
GLOBAL MONEY HEADS TO LUXEMBOURG
It doesn’t mean those costs went to Amazon’s US subsidiaries. Almost all of its income outside the US ends up in a Luxembourg company, Amazon EU Sàrl, which was the beneficiary last year when Amazon notched up £4.3 billion ($7.9 billion) of sales in the UK and paid only £4.2 million in income tax.
Amazon EU’s 2009 accounts reported €5.5 billion ($8 billion) of income. The cost of Amazon’s products – the books, videos and other items that it sells – accounted for 75 per cent of net turnover.
Amazon’s shipping, marketing and other costs took another chunk. That left €913 million of profits. Yet Amazon EU only reported profit of €15 million. It paid €4 million tax.
Where did all the other money go?
A secret appendix to the annual report filed with the Luxembourg government shows the missing cash went in two related-party deals. Amazon EU paid €379 million in “service fee expense” and €519 million in royalties to Amazon Europe Holding Technologies.
It worked like this: Amazon Europe paid €105 million to Amazon Technologies Inc in Nevada to license the rights to Amazon’s intellectual property – the patents and software for the websites, including that button that buys a book with one click.
Amazon Europe onsold the rights to use this intellectual property to Amazon EU for €519 million – five times what it had paid the US company. Amazon Europe made an instant profit of €414 million, which would have been taxable, except that Amazon Europe is a limited partnership. It doesn’t pay tax in Luxembourg.
Amazon EU ended up paying 0.5 per cent tax. Amazon Europe’s money ended up tax-free in Gibraltar. This is the royalties loop, from Amazon EU to Amazon Europe, that is the focus of a European Commission investigation announced in Brussels on October 7.
“Based on a methodology set by tax ruling, Amazon EU Sàrl pays a tax-deductible royalty to a limited liability partnership established in Luxembourg,” the EC said in a statement.
“As a result, most European profits of Amazon are recorded in Luxembourg but are not taxed in Luxembourg.
“At this stage the commission considers that the amount of this royalty, which lowers the taxable profits of Amazon EU Sàrl each year, might not be in line with market conditions.”
The European Commission, the government of Europe, complained that Luxembourg has provided only limited information about its arrangements with Amazon.
The Luxembourg documents suggest that Amazon has already changed its tax arrangements as it has directed €55 billion of income through Luxembourg over the past six years.
Much has changed since 2009. First, Amazon found itself with a US tax problem. In 2011, Amazon Inc reported US tax authorities were demanding $US1.5 billion in federal tax and penalties covering 2005 to 2011 in connection with the royalties payments.
In 2012 the French government slapped a $US252 million tax bill on Amazon. The company is appealing both matters in court.
This year US media outlets reported Amazon Europe HT’s profits had halved by 2012. The general conclusion was that Amazon has toned down its aggressive transfer pricing strategy.
The change was certainly dramatic. Amazon Europe HT received less royalties from Amazon EU, while at the same time Amazon Europe HT began paying more to Amazon Technologies in Arizona. Amazon Europe HT’s profit plunged from €417 million in 2010 to only €85 million.
If there was a problem of not paying enough tax (and Amazon didn’t think there was) it had become bite-size.
But Amazon companies didn’t stop paying royalties. They just didn’t pay them to Amazon Europe HT.
The accounts show a huge rise in royalty payments from other Amazon subsidiaries to Amazon EU. In 2013 alone, Amazon EU banked €1.8 billion in royalties from other Amazon companies around the world.
Less than a third of this amount was paid on to Amazon Europe HT. In fact €1.28 billion of royalties stayed with Amazon EU.
And yet with all that extra income, Amazon EU ended up paying even less tax. It reported a €68 million loss in 2012. In 2013, instead of paying tax, it got a €5.5 million tax benefit.
It’s like a whodunnit. Where has all the money gone? The ICIJ documents may point to an answer: accounts for subsidiaries like Amazon Media EU Sarl, the Luxembourg company which sells e-books and MP3s on Amazon’s UK website, show ballooning payments as intercompany fees and costs.
So where did Amazon EU’s missing €1.2 billion of 2013 royalties go?
The payment has been matched with intercompany costs. It is not clear where but the rising royalties coincided with a growing investment in Amazon Data Services Ireland.
LUXEMBOURG, AMAZON: ‘WE AREN’T SPECIAL FRIENDS’
In effect, Amazon has pushed the royalties loop further down the chain, to Amazon EU and below, making it harder for the US and Europe to chase it.
The difficulty for the European Commission is that it might squeeze some disclosure out of Luxembourg over Amazon Europe, only to find the game has moved on.
In a statement this week, Amazon said it had not received any special tax treatment from Luxembourg.“We are subject to the same tax laws as other companies operating here,” it said.
Luxembourg‘s finance ministry said it was “satisfied that the allegations of state aid are unfounded and that . . . no special tax treatment or benefits have been granted to Amazon”.
Amazon has few friends among Australian booksellers.
“What is happening in books is no different to the impact of the net on many other areas of retailing,” says a senior Australian industry figure.
“But Amazon uses its market strength absolutely brutally. If the end result of what Amazon is doing was that we could no longer sustain authorship as a professional career, I don’t think they would lose a moment’s sleep.”
Australians who order Amazon products on the amazon.com.au site are informed that “any personal information provided to or gathered by Amazon.com.au is controlled by Amazon Australia Services Inc” of Seattle.
FROM ONE AMAZON SUBSIDIARY TO ANOTHER
NOW READ: ‘We’re still like a start-up’: inside the head of Amazon founder Jeff Bezos
Global tax crackdown could backfire
Editorial | How to avoid tax system mockery
International PwC tax schemes exposed
Why IKEA’s profits are mostly tax free
Search the #luxleaks database
BRW
BY NEIL CHENOWETH
Neil is a multiple Walkley Award winning investigative journalist.
@NeilChenoweth