Amazon – Multi-National Tax Strategy – Luxembourg – Ethical Evaluation

BUS520-B Week 2 Blog #1

Amazon – Multi-National Tax Strategy – Luxembourg – Ethical Evaluation

Amazon, Inc. (a US based company) is facing allegations from the European Union regarding the alleged receipt of illegal aid from the government in Luxembourg, in the form of a “cosmetic” tax arrangement (Fairless, 2015). The potential back-tax bill, if the case is found in favor EU, could be in the hundreds of millions of dollars.

The primary ethical issue to be considered in this case is whether the actions by Amazon constitute a case of premediated tax avoidance or was their intent to utilize the benefits of an advanced planning agreement in relation to transfer pricing. Legally transfer pricing is often used between subsidiaries or divisions whom act as separate entities and trade supplies or labor, these transfers are commonly done at market price to avoid one company losing money on the transaction (Investopedia).

Multi-National companies have been found to strategically utilize transfer pricing arrangements in order to move product to lower tax regions and avoid paying taxes on profit in high-tax jurisdictions. Is this legal? It appears to be so. Is this ethical? Not in my opinion, nor it appears the popular publics opinion.

Companies have a social (ethical) responsibility to pay corporate taxes, where they operate. Taxes go towards a countries infrastructure, their healthcare systems, education systems, transportation systems, etc. The presence of a corporation allows for jobs, the employees that work for a corporation reside in the country, thus they are directly affected by the lack of taxes that their employer pays to their government.

Additionally, in this case we need to look at the agreement between Amazon and Luxembourg. Was this a “sweetheart deal”, allowing for Amazon to receive state aid? State Aid is defined by the European Commission to be an advantage given on a selective basis to undertakings by national public authorities. By paying a fee to their Luxembourg subsidiary, that monies is exempt from corporate tax rates, which would otherwise have be 28%.

Accepting state aid allows for unfair competition gained by government support in the country of operation. This is illegal in Europe and the US. It is also unethical. It can hinder other companies in the same market from a chance to gain business, if they operate at lower margins, due to having to pay a corporate tax. Competition in a market is needed for sustainability and consumer choice. Monopolies are not legal, and with a government providing tax breaks to one entity, the entity could easily facilitate an industry take over. Reasonably this is not something that could happen overnight, but with a long term arrangement, it is feasible.

There are a few elements found in the review of the agreement that raises red flags in my opinion:

1.    The agreement was made in 2003 with no revisions or review since.

2.    The agreement was approved in 11 days by the authorities, this is an abnormally short time period to conduct the required lengthy and in depth review to determine feasibility.

3.    The royalty fee paid to the Luxembourg subsidiary is a flat fee, it is not based on sales or volume, and it is tagged as “intellectual property”.

These elements lead me to believe this is an unethical attempt at tax avoidance. Intellectual property does not have a “market price” average or indicator, no concrete product to justify the payment of. Is it feasible to believe that a logistics and warehousing company can produce over 500 million dollars in intellectual property per year? Close to $5 billion dollars over the last 10 years?

There has not yet been a resolution to this case, it is still under investigation. Amazon is denying any wrongdoing or unfair advantage gained by their agreement. I would like to see Amazon take the ethical route and begin to pay the proper corporate taxes in the country they are based. A company should provide support and give back to the local community, as that entity is taking advantage of the countries offerings, whether directly or indirectly.

Source:

Fairless, Tom (2015, Jan 16). EU Details Tax Case Against Amazon. The Wall Street Journal Retrieved from: http://www.wsj.com/articles/eu-details-tax-case-against-amazon-1421395136

References:

Transfer Pricing. (n.d.). In Investopedia. Retrieved from http://www.investopedia.com/terms/t/transferprice.asp

State Aid. (n.d.). In European Commission. Retrieved from: http://ec.europa.eu/competition/state_aid/overview/index_en.html