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EU: Amazon's tax 'advantage' in Luxembourg hurts Europe

The preliminary results of a European Union investigation sound like tax trouble is brewing for Amazon.

Amazon may be in hot water in Europe. Declan McCullagh/CNET

The preliminary results of an investigation into tax arrangements between Amazon and Luxembourg don't look promising for the company.

The European Commission, the European Union's executive arm, released on Friday a document detailing a tax arrangement between Amazon and Luxembourg that the Commission has been investigating over the last several months. The document (PDF) -- which until now had been shared only with Amazon and Luxembourg back in October -- asserts that the tax deal between Luxembourg and Amazon allows the company to sidestep tax liability in other European countries and thus gain a competitive advantage in the marketplace.

Amazon disagrees. "Amazon has received no special tax treatment from Luxembourg," an Amazon spokesman in Luxembourg said Friday. "We are subject to the same tax laws as other companies operating here."

At the crux of the investigation are tax-related policies undertaken by major companies. Last fall, the Commission announced it was investigating four companies -- Amazon, Apple, Starbucks, and Fiat -- to determine whether they had transferred profits generated throughout the EU to countries where tax policies were more advantageous.

"It is well known that some multinationals are using tax planning reduce their global tax burden, eroding tax bases in EU Member States," the European Commission wrote in a statement in October on the arrangement between Amazon and Luxembourg. "We are looking at whether selective tax advantages have been granted to a particular company."

The Commission asserted in October that Amazon's European subsidiary was shifting most of its profit to Luxembourg. By doing so, the Commission said, Amazon reduced its tax liability elsewhere and could have saved billions of dollars over the last decade.

In the document published Friday, the Commission said that a tax ruling that Luxembourg made in November 2003 paved the way for the country to calculate Amazon's tax liability in a way that wouldn't comply with international guidelines. The tax savings, therefore, represent state aid, the Commission said in the document, which outlined its reasons to begin an in-depth investigation.

"The Commission is of the opinion that through the contested tax ruling the Luxembourgish authorities confer an advantage on Amazon," the Commission wrote in the document. "That advantage is obtained every year and on-going,when the annual tax liability is agreed upon by the tax authorities in view of that ruling."

The EU's investigation into Luxembourg and Amazon represents an interesting method for generating more tax revenue. For years, the EU has been taking aim at major corporations, including major technology companies, like Apple and Google, for safeguarding their profits in countries that have policies allowing for lower taxation. The EU does not have the legal ability to dictate tax policies in countries across its market, but the issue of state aid can be addressed by the Commisssion, providing an end-run that could help it recapture lost tax revenue from major corporations.

Countries that have allegedly lost tax revenue have been quick to criticize corporate tax-savings. In 2013, UK Parliament Member Margaret Hodge was one of the more outspoken Amazon critics, saying consumers shouldn't buy products from the company.

"Amazon is one of the global companies that aggressively avoids paying tax on the profits that they earn from the business they undertake in the UK," Hodge told Ethical Consumer magazine, which was running a campaign to boycott Amazon. "Not only is this morally wrong but it disadvantages every business from the local community-based bookshop to bigger, British-based companies like John Lewis and therefore endangers British businesses and British jobs."

Critics have also taken aim at Apple and other technology companies for their own methods of tax-savings. In the Commission's current investigation into Apple's alleged tax harbors, the organization is determining whether the company has in fact saved billions of dollars in taxes by shifting its profits to its Ireland-based subsidiary. Despite that country's 12.5 percent corporate tax rate, Apple pays less than 2 percent.

Officials in Luxembourg did not immediately respond to a request for comment.

Update, 9:01 a.m. PT to include Amazon's statement.