How can Amazon pay no tax while enjoying record pandemic revenues?

Europe Letter: Web of subsidiaries makes question hard to answer, which is the point

How is it possible for a company to report record revenues of €43.8 billion, but a loss of €1.2 billion that means it does not have to pay any tax?

This is the question that regulators, politicians and tax investigators are asking after Amazon’s main European unit filed the striking results for its 2020 year, which was overall a record-breaking success for the company globally as the pandemic fuelled a shift to online shopping.

A complex web of international subsidiaries makes it difficult to answer.

Dozens of separate but linked entities registered in different jurisdictions around the world make up what we know as "Amazon". Its overarching, publicly listed company Amazon. com Inc files financial reports yearly in the United States, but these do not have to provide a full breakdown of all of its European operations.


Revenue streams can be difficult to untangle. For example, Amazon's US accounts reported $17.5 billion in sales in the United Kingdom in 2019. But its main British subsidiary, Amazon UK Services Ltd, reported revenues of a much lower figure of £2.9 billion. On this, it paid just £14.46 million in corporation tax – a figure the company said had been reduced by government incentives linked to its investment in infrastructure.

Some of the difference in income is likely to be down to revenue channelled through its main European subsidiary, the Luxembourg-registered Amazon EU Sarl, which handles sales for the UK, France, Germany, Italy, the Netherlands, Poland, Spain and Sweden and clocked the €43.8 billion figure last year.

As a private limited company, Amazon EU Sarl does not have to publish extensive public accounts. Its 2020 filing in Luxembourg was just 23 pages long, and presented revenues and costs under a limited number of broad headings, without offering a breakdown of operations by country.

There are many other Amazon subsidiaries in Europe, ranging from its different national operations, to other Luxembourg-based units such as Amazon Europe Core Sarl and Amazon Web Services EMEA Sarl, an IT services company.

Moving profits

Having a network of international subsidiaries can provide multinationals with multiple routes to reduce the tax they pay. Profits can be moved around from one entity to another to take advantage of varying tax rules in different jurisdictions.

For example, an entity based in a Country A with a corporation tax rate of 35 per cent could pay another entity located in Country B with a 12.5 per cent corporation tax rate for services, or for the use of intellectual property such as a brand name. Alternatively, one entity could charge another interest for a loan. Accrue enough expenses to outweigh revenues, and no tax is due.

A presence in different jurisdictions can offer companies opportunities to accrue advantages such as tax credits, which can sometimes be used to write off future tax due. Amazon EU Sarl’s €1.2 billion loss accrued it €56 million in tax credits that can be used this way in the future, adding to an accumulation of €2.7 billion in losses carried forward.

US law can allow for subsidiaries of US multinationals to accumulate stockpiles of profits abroad, in a treasure chest that goes untaxed until it is “repatriated” to the United States. This does not ever have to happen, and the pots of cash can be used by the companies for investment in the future.

Bug or feature?

It’s something of a feature of some of Amazon’s overseas subsidiaries that they tend to be loss-making year after year. In the case of Amazon EU Sarl, an Amazon spokesman said the €1.2 billion loss was due to investments made in Europe, particularly in infrastructure, and because of the low margins inherent in retail.

Amazon EU Sarl’s accounts show expenses of €31.8 billion from “raw material and consumables”, €12.4 billion from “other external expenses”, and €230 million from “other operating expenses”.

“Other external expenses” include “provision of services from affiliated undertakings”, while “other operating expenses” are “primarily related to licence agreements and royalties with affiliated undertakings”, according to the accounts.

In 2017 the European Commission ordered Luxembourg to recoup €250 million in taxes from Amazon, accusing the Grand Duchy of allowing the company to inflate tax-deductible royalty payments for intellectual property to a unit that wasn't subject to corporate tax. Amazon and Luxembourg have appealed against it and, as in the Ireland-Apple case, the sum is sitting in an escrow account.

One thing is for certain: Amazon's eye-catching results come at a highly sensitive time, as momentum builds for an international deal on digital taxation, and as moves gather pace in the European Union to force multinationals to report their operations and revenues country by country – something that would provide greater clarity in this case, but which Ireland has long opposed.