Amazon’s Tax Evasion Game

The rise of Amazon has been phenomenal to say the least. Amazon has virtually changed the way people all over the world shop. 20 years ago, shopping at brick and mortar stores was the norm. However, now most of the sales happen online. This is partly because of the operational ingenuity of Amazon. There is no doubting the fact that the Amazon model is very well developed. They can offer the lowest prices all over the world. Simultaneously they offer the fastest delivery and the best service even though the prices have been kept abysmally low. A big part of this can be attributed to Amazon’s tax structure.

In this article we will understand the tax structures that have helped Amazon gain a sustainable competitive advantage over its competitors.

The Loophole Impact

In the United States, there have been several agitations against Amazon’s alleged use of tax loopholes. This particularly belongs to the tax rule regarding sales tax on online purchases. Competitors have alleged that Amazon has abused this rule to save taxes. If proven, this will be termed unfair and illegal and Amazon will have to pay back taxes as well as penalties. However, even before the court verdict is out, some states have closed these loopholes voluntarily. It is indeed notable that mere closing on one loophole has led to Amazon’s sale dropping by as much as 10% in these states. Amazon’s post-tax profits in these states have seen a 23% drop.

It is no secret that closing tax loopholes hurts Amazon’s business. As Amazon suffers potential losses, the other retailers gain. This is particularly true in the case of tax paying brick and mortar retailers who have no mechanism to avoid tax. When business is redirected to brock and mortar retailers, more employment is generated and the state benefits as a whole.

Closing down these loopholes also provides states with revenue. This can be seen in the case of California which witnessed an increment of a quarter billion in revenue after the loopholes were closed.

The Luxemburg Case

The European subsidiary of Amazon has also faced similar charges of tax evasion. Amazon has businesses in many countries like France, UK, Germany, Spain etc. Each of these companies is a subsidiary company of Amazon Europe which is headquartered in Luxemburg.

Hence, when Amazon ships to a consumer in France, the French subsidiary of Amazon is merely a logistics service provider. If a transaction of 100 euros has taken place, Amazon France will retain a mere 10 euros. The balance 90 euros will be sent to the company in Luxemburg. Hence, even though the company in Luxemburg is operationally not important, it still collects more than three quarters of the revenue that Amazon generated in Europe. This is truly amazing given the fact that Amazon’s office in Luxemburg does not have any employees. They are merely using the Luxemburg address to gain a tax advantage.

Intercompany transactions are allowed between businesses. However, in case of Amazon, the amounts being transferred to Luxemburg are humungous and cannot be justified.

Saving Big Bucks in Luxemburg

The European subsidiary of Amazon has been paying an effective tax rate of 6%. This is stunning given that other corporations in the same region pay over 30% of their profits in taxes. Amazon is evading taxes because two thirds of its income is being transferred to Luxemburg. The entity formed in Luxemburg is a tax transparent entity. This means that the company does not have to pay any of its profits to the government in the form of taxes.

This is illegal on many counts.

  1. Firstly, under the rules of EU, countries are not allowed to provide preferential tax treatment to certain companies. This is the reason why many governments have sued Amazon and European courts have ordered Amazon to pay 226 million euros in the form of back taxes and penalties.

  2. Secondly, Amazon has been ordered to dismantle its network of companies across Europe. A simpler business structure needs to be put in place. Amazon is facing similar issues in the United States as well. In all likelihood, it may have to pay a massive sum in the form of back taxes in the United States as well.

Amazon is likely to lose its tax advantages in the near future but it seems like it has already made the most of the opportunity.

Amazon minus the Tax Advantage

Amazon has already grown into a behemoth. Losing its tax advantage will certainly affect the stupendous rate at which Amazon was growing. However, that happens with all companies as they grow in size and become more mature. Amazon’s loss will certainly be good news for many brick and mortar retailers and governments. However, the digital mavericks are likely to have a trick or two up their sleeve. Jeff Bezos is known for his extreme customer focus and ingenuity. There are possibly many more loopholes that Amazon may be preparing to exploit to continue its winning streak.

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