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Clark Armitage Comments on the EU's Investigation of Amazon Tax Ruling for State Aid Breach

October 8, 2014, Worldwide Tax Daily

Caplin & Drysdale's J. Clark Armitage spoke with Worldwide Tax Daily concerning the European Commission's (EU) investigation into whether Amazon's Luxembourg subsidiary received a favorable transfer-pricing-related tax ruling that violates EU state aid rules. For the complete article, please visit Worldwide Tax Daily's website (subscription required).

Excerpt taken from the article "EU to Investigate Amazon Tax Ruling for State Aid Breach" by Stephanie Soong Johnston for Worldwide Tax Daily.

J. Clark Armitage of Caplin & Drysdale pointed out that although the news release indicates that the commission's investigation will not prejudge the outcome of the investigation, there are some comparisons to the state aid investigation into Apple in Ireland that suggest the commission will find the Amazon ruling to be problematic.

First, as in the Ireland Apple case, which focuses partly on a 1991 ruling that was applied by Apple for 15 years, the Luxembourg Amazon ruling appears to have an open-ended duration, as it is now in the 12th year of operation. "The EU found this to be suggestive of state aid in Apple Ireland because other countries typically issue advance pricing agreements for only three to five years," Armitage said.

Second, the Amazon Luxembourg ruling involves the application of tax rules that allow a nonresident Luxembourg company to avoid Luxembourg tax on certain partnership income -- a concept that is similar to a factor in the Apple Ireland case. Although the commission does not reveal where that partnership's income is taxed, it is presumably exempt or subject to tax in one or more low-tax countries, according to Armitage.

"The EU may be attacking the seemingly minor transfer pricing aspects of these transactions as a way to address its real concern with the more substantial tax benefits that come from these non-transfer-pricing regimes," he said.

Finally, as in the Apple Ireland case, there appears to be a lack of comparison with other resident companies, since the commission has not indicated whether it will ask Luxembourg about other similar royalty rulings. "The EU seems to be willing to make state aid determinations without having any basis for comparing the ruling in question to comparable rulings for other companies," Armitage said.


Armitage compared the commission's recent efforts to identify "sweetheart deals" between governments and large multinational companies with the U.S. Senate Finance Committee's 2004 investigation of the U.S. APA program. The committee's probe ended up petering out because it is difficult to challenge transfer pricing determinations after the fact because they often involve the evaluation of numerous facts and circumstances and subjective comparability analyses, Armitage said.

However, "the EU seems more willing than the Senate Finance Committee to allow its subjective views to trump those of the local tax administrations," he said.


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