Big four audit firms behind global profit shifting

[greengiraffe]

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

[greengiraffe]

Proceed with care on profit-shifting crackdown, says top bean-counter
THE AUSTRALIAN NOVEMBER 12, 2014 12:00AM

Damon Kitney

Victorian Business Editor
Melbourne

ONE of the leaders of the Australian accounting profession and a highly respected adviser to corporate Australia has warned of dire consequences if any local or global crackdown on profit shifting by multinationals creates rules that drive investment out of the country.

Peter Nash, chairman of KPMG Australia and a member of the global and regional boards of the accounting giant, said reforming the tax system to deal with profit shifting was a “very complex issue” that could have serious unintended consequences if it was not done properly.

“We would not inadvertently want to create rules or barriers to investment in this country that see high-quality investment seek alternative destinations because our tax system is penal relative to other countries for investment,” Mr Nash told The Australian ahead of the G20 meeting in ­Brisbane this weekend. “That doesn’t mean you compromise the quality of your tax system. It is simply saying that the tax system is one of your economic levers for attracting investment and helping boost employment.

“In seeking a multilateral solution to the issue of profit shifting, every country, including Australia, need to be very conscious of the inadvertent outcomes that might occur.

“A multilateral solution is very difficult because many countries have an interest in protecting their tax base and attracting investment to their countries. So they will be naturally suspicious of a non-governmental body like the OECD imposing a set of rules that might alter their tax take.”

The Organisation for Economic Co-operation and Development’s blueprint to reduce tax avoidance by multinationals, known as Base Erosion and ­Profit Shifting, is expected to be signed off by G20 leaders in ­Brisbane.

The issue has been given added urgency by revelations last week from the International Consortium of Investigative Journalists that companies such as Pepsi, Ikea and FedEx allegedly channelled funds through Luxembourg to minimise their tax bills.

The revelations named hundreds of companies, including Australian firms such as the ­Future Fund, AMP, Macquarie Group and Lend Lease.

They were advised by PricewaterhouseCoopers, which has said that all advice complied with international laws and tax agreements.

Mr Nash said “by and large Australian corporates take their tax responsibilities very seriously” and noted that the Australian tax office had been “waving a red flag” on aggressive structures for several years.

He also said there was a problem of where to legislate for tax morality.

“The question of what is right and wrong from a tax morality sense is through the eye of the beholder. Lots of people have a different perspective on where that line falls,” he said.

Minter Ellison tax partner Bill Thompson said any move to implement a Kyoto-type protocol where all countries put through a uniform set of changes in their bilateral tax treaties would be “nightmarish”.

“A one-off change to these treaties could be quite difficult to negotiate,” he said.

The head of the B20 Business forum partnering the G20, Wesfarmers CEO Richard Goyder, last week warned against further complicating the tax system.

[greengiraffe]

EU’s Juncker defends Luxembourg record on tax evasion
DOW JONES NOVEMBER 13, 2014 7:28AM

JEAN-Claude Juncker, the new president of the European Commission, defended his record as prime minister of Luxembourg yesterday against mounting criticism that he helped the tiny nation become a haven for corporate tax evaders.

Mr Juncker’s remarks were his first public response since the International Consortium of Investigative Journalists published a trove of confidential tax rulings made by Luxembourg’s tax administration during his time as prime minister that helped the world’s largest companies slash their tax bills.

“There is nothing in my [record] suggesting my ambition was to organise tax evasion in Europe,” Mr Juncker told reporters during a brief news conference.

“I’m in favour of tax competition,” he said. “I’m against unfair tax competition.”

Mr Juncker was prime minister of the tiny grand duchy, squeezed between Germany, France and Belgium, from 1995 through 2013. During that time, Luxembourg became a global financial centre, as companies flocked to the country’s low tax rates.

The commission, the European Union’s executive arm, is now investigating whether his government violated EU rules by approving tax agreements with Amazon and Fiat that led to ultra-low tax bills for the companies.

Mr Juncker said that these tax bills were approved by the government’s tax administration, which is independent of the government’s political leadership.

“If this is leading to a situation of non-taxation then I would regret that,” he said.

[greengiraffe]

Tax avoidance ‘is theft’, Joe Hockey says ahead of G20
PUBLISHED: 6 HOURS 49 MINUTES AGO | UPDATE: 3 HOURS 53 MINUTES AGO

Tax avoidance ‘is theft’, Joe Hockey says ahead of G20
Treasurer Joe Hockey says the Group of 20 leaders summit will focus on ensuring that “companies pay tax where they earn profits, that individuals pay tax where they should be paying tax.” Photo; Glenn Hunt
JACOB GREBER
Wesfarmers’ Richard Goyder lashes ‘exotic’ tax structures
Tony Abbott calls for global action on profit shifting
More G20 stories

Treasurer Joe Hockey has called multinational companies who avoid paying tax “thieves” whose actions worsen inequality and make it harder for governments to fix poverty.

Mr Hockey told reporters in Brisbane on Thursday that this weekend’s Group of 20 leaders summit would focus on ensuring that “companies pay tax where they earn profits, that individuals pay tax where they should be paying tax.”

“It’s hugely important for the globe that companies pay tax on their profits. It is theft when someone does not pay the tax due to the nation.

“It undermines the ability of that nation to be able to deliver the sorts of services that are essential to alleviate poverty.”

Mr Hockey also vowed the meeting would not be distracted from its core goal of finding fresh sources of global economic growth.

Under Australia’s insistence – as host of this year’s G20 – the group’s agenda has been dominated all year by economic issues such as a 2 per cent growth target, as well as reducing tax minimisation and boosting financial system stability.

Critics of the forum have called for other issues to be included such as climate change and Ebola.

Mr Hockey said while those issues would be discussed they were not the primary focus.

“The whole agenda is focused on jobs and growth,” he said. “People have been critical of the G20 in the past for not delivering tangible outcomes.

“There will be no single issue that will distract leaders or anyone else fro the task of developing growth and jobs.”

[greengiraffe]

G20 to launch ‘aggressive’ attack on tax avoidance among multinationals

THE AUSTRALIAN NOVEMBER 14, 2014 9:28AM

Rosie Lewis

Reporter
Canberra
THE world’s biggest economies are set to launch a “very aggressive” crackdown on tax avoidance this weekend, with the United States throwing its support behind the plan.

Treasurer Joe Hockey said the US had signed up to the plan as part of the G20 summit to tackle tax evasion among the largest multinational companies, including in Australia, which would help uncover how they derive their income and what tax is still owed.

“I believe we have got the United States signed up,” he said on ABC radio. “They were cautious at first but obviously the United States itself has been missing out on revenue from a number of these large multinationals.

“With everyone committed to a plan and everyone committed to the outcomes of the plan, I am confident that we’re going to start seeing some very aggressive approaches towards the largest multinationals.”

Start of sidebar. Skip to end of sidebar.

MORETax evasion anger clouds summit mood
MOREG20 focus on growth
End of sidebar. Return to start of sidebar.

Mr Hockey said the Australian Taxation Office had already begun investigating 100 multinational companies “quite aggressively”.

Brisbane G20 2014- live coverage

INTERACTIVE: G20 explained

​Australian companies includ​ing​ Allco Finance, AMP Capital​ ​and Macquarie Group​ have been named in Luxembourg tax documents released ​​​by the International Consortium of Investigative Journalists in recent weeks, but Mr Hockey did not name individual companies in his radio interview. ​

The tough approach comes after a global furore over tax evasion threatened to overshadow the G20, with former Luxembourg prime minister Jean-Claude Juncker — one of the leaders at the summit — at the centre of dodgy tax deals.

Mr Juncker, who became president of the European Commission this month, came under pressure amid claims more than 300 global companies were granted deals to help them avoid paying tax during his 18 years in office.

Mr Juncker has denied any wrongdoing.

Mr Hockey said he hoped to get any owing tax from the companies without “naming and shaming” them.

“The starting point is to find out whether they’re failing to pay the appropriate level of tax and the second part is to get tax out of them if they’re not paying the appropriate level of tax,” he said.

“I’m not going to suggest there is a silver bullet here but we are doing everything we can to put collective pressure on countries that facilitate tax evasion or extremely aggressive tax minimisation.

“Sometimes there is a temptation for other economies to set up initiatives, even big economies to set up initiatives that compete with some of the tax havens. That is unacceptable, because then it’s a race to the bottom.”