In 2005, Amazon rented a historic five-storey building in Luxembourg’s Grund quarter, right at the bottom of a steep rock-walled valley below the old town.
By setting up in Luxembourg, and channelling sales through its units there, the world’s biggest online retailer could minimise corporate taxes. It was a move with big financial consequences.
Amazon’s Luxembourg arrangements have deprived European governments of hundreds of millions of dollars in tax that it might otherwise have owed. An examination of accounts filed by 25 Amazon units in six countries shows how they also allowed the firm to avoid paying more tax in the US, where it is based.
Amazon used inter-company payments to form a tax shield for the group, behind which it has accumulated $2 billion to help finance its expansion.
Amazon revealed last year that the US Internal Revenue Service (IRS) wants $1.5 billion in back taxes. The claim, which Amazon said it would “vigorously contest”, is linked to its foreign subsidiaries and payments made between them.
Amazon declined to answer questions about its tax affairs for this story. In an email a spokesman said that “Amazon pays all applicable taxes in every jurisdiction that it operates within”.
The group has come under scrutiny from tax departments in at least six countries over the past six years. The Luxembourg structure fulfils a corporate obligation to shareholders to maximise returns. There is no suggestion the firm has broken any laws; Amazon paid an average 44% tax on its US earnings in the last five years.
This is an examination of how Amazon set up its tax shield, and how it works.
Amazon’s first foray abroad came in 1998, when it bought online retailers in Britain and Germany and rebranded them Amazon.co.uk and Amazon.de. In 2000, it launched a French website, Amazon.fr.
At first it did little to integrate these foreign units, former senior executives say.
Even product purchasing — where Amazon would later squeeze huge savings by negotiating hard with suppliers — was handled independently in different markets. But in late 1999, accounts for the UK business show, the UK unit’s principal activity changed from “marketing and selling of books via internet” to “the provision of services to other group undertakings.”
Founded in 1995 and listed two years later, the company lost money every year until 2003. This was standard practice for a dotcom startup: Amazon focused on market share rather than profit.
But by the end of 1999 Amazon’s accumulated losses