The European Commission has published information about the ongoing investigation into transfer pricing arrangements on corporate taxation of Amazon in Luxembourg. The European Commission, which rules on competition and subsidies in the European Union, announced in October that it had opened an investigation into a tax ruling struck in 2003.

The inverstigation will examine whether the decision by Luxembourg's tax authorities with regard to the corporate income tax to be paid by Amazon in Luxembourg comply with the EU rules on state aid.

Last October, the Commission Vice President in charge of competition policy Joaquín Almunia had said: "National authorities must not allow selected companies to understate their taxable profits by using favourable calculation methods. It is only fair that subsidiaries of multinational companies pay their share of taxes and do not receive preferential treatment which could amount to hidden subsidies. This investigation concerning tax arrangements for Amazon in Luxembourg adds to our other in-depth investigations launched in June. I welcome that cooperation with Luxembourg has improved significantly."

Tax rulings are comfort letters used to confirm transfer pricing arrangements, i.e. the prices for goods sold or services provided by one subsidiary of a corporate group to another subsidiary of the same group. This influences the allocation of the group's taxable profit between its subsidiaries located in different countries. As such, tax rulings are not problematic.

However, tax rulings on transfer pricing arrangements may involve state aid within the meaning of EU rules if they are used to provide selective advantages to a specific company or group of companies. Indeed, prices for intra-group transactions have to be correctly estimated based on market prices. If this is not the case groups of companies could have the possibility to underestimate their taxable profit, whereas other companies which buy and sell goods or services from the market rather than within the group would be disadvantaged. This may constitute state aid within the meaning of EU rules.

The tax ruling in favour of Amazon under investigation dates back to 2003 and is still in force. It applies to Amazon's subsidiary Amazon EU Sàrl, which is based in Luxembourg and records most of Amazon's European profits. Based on a methodology set by the tax ruling, Amazon EU Sàrl pays a tax deductible royalty to a limited liability partnership established in Luxembourg but which is not subject to corporate taxation in Luxembourg. As a result, most European profits of Amazon are recorded in Luxembourg but are not taxed in Luxembourg.

The Commission has concerns that the ruling could underestimate the taxable profits of Amazon EU Sàrl, and thereby grant an economic advantage to Amazon by allowing the group to pay less tax than other companies whose profits are allocated in line with market terms.

The Commission is also investigating the tax arrangements of Italian carmaker Fiat in Luxembourg, Apple in Ireland and Starbucks in the Netherlands.

Current Competition Commissioner Margrethe Vestager has said she wants to reach decisions in the four cases by the second quarter.