Amazon is now booking sales through a number of branches in Europe. Jonathan Cooklin and David Wilson (Davis Polk) consider what led to the change and the likely impact.
Before clicking ‘buy now’, we are still advised that our internet purchases are ‘sold by Amazon EU S.a.r.L.’. Eagle eyed readers of amazon.co.uk’s latest conditions of sale and use will, however, spot a new reference to a UK branch of that company, located at 60 Holborn Viaduct. Amazon has reportedly confirmed that this reflects a shift to booking sales through new branches which have been set up in the UK, Germany, Spain and Italy.
Amazon says that the process of establishing branches began more than two years ago, which would long pre-date the diverted profits tax. More likely it is part of a broader reaction to public opinion and the BEPS project, in particular the work on the avoidance of permanent establishment status, and the focus on the transfer pricing of Amazon’s arrangements with its local ‘fulfilment centres’ (these are the huge warehouse operations which enable speedy delivery – and which, whilst operated through locally resident companies, have recorded only very modest profits).
Minds will no doubt have been focused by the $250m assessment on Amazon by the French tax authorities (Amazon says that it is also working on opening a branch for France), and the European Commission’s state aid investigation into Luxembourg tax rulings. Perhaps Amazon’s grilling by Margaret Hodge had some effect. Recent VAT changes may also have been a factor. Since 1 January 2015, business to consumer supplies of telecoms, broadcasting and electronic services have been treated as made in the place where the consumer belongs, with the effect that sales of MP3s and e-books to UK customers from Luxembourg no longer benefit from Luxembourg’s old VAT rates of 15% and 3%, respectively.
Amazon has emphasised that e-commerce is a low-margin business, and the global business continues to make losses. The size of Amazon’s UK tax bill is likely to depend upon the amounts of the royalty payments which it is assumed will be attributed to the UK branch of Amazon EU S.a.r.L. Bear in mind that Amazon’s Luxembourg advance pricing agreement, approving large royalty payments from that company to Amazon Europe Holding Technologies SCS, is the focus of the ongoing state aid investigation. A consequence of Amazon’s new branch structure seems to be a shift in the competence for overseeing the transfer pricing of these royalty arrangements from the Luxembourg tax authorities to those in the UK, Germany, Spain and Italy.
Will the new arrangements apply to transactions described as ‘fulfilled by Amazon’, whereby goods are stored in and dispatched from Amazon’s UK ‘fulfillment centres’, but are, in fact, owned by other companies? (An item recently purchased by one of the authors and delivered the next day was, it transpired, actually sold by a company based in Greece.) It is also not clear whether a similar branch structure will operate for digital sales, which are effected through a separate Luxembourg entity, Amazon Media EU S.a.r.L.
The truth, of course, is that it is unlikely we will ever know how much UK tax is paid under the new arrangements, as the choice of a branch structure, rather than using local subsidiaries, means that separate entity accounts will not be published. One wonders whether this might, over time, add to the existing pressure for the publication of country by country reporting information.
Amazon is now booking sales through a number of branches in Europe. Jonathan Cooklin and David Wilson (Davis Polk) consider what led to the change and the likely impact.
Before clicking ‘buy now’, we are still advised that our internet purchases are ‘sold by Amazon EU S.a.r.L.’. Eagle eyed readers of amazon.co.uk’s latest conditions of sale and use will, however, spot a new reference to a UK branch of that company, located at 60 Holborn Viaduct. Amazon has reportedly confirmed that this reflects a shift to booking sales through new branches which have been set up in the UK, Germany, Spain and Italy.
Amazon says that the process of establishing branches began more than two years ago, which would long pre-date the diverted profits tax. More likely it is part of a broader reaction to public opinion and the BEPS project, in particular the work on the avoidance of permanent establishment status, and the focus on the transfer pricing of Amazon’s arrangements with its local ‘fulfilment centres’ (these are the huge warehouse operations which enable speedy delivery – and which, whilst operated through locally resident companies, have recorded only very modest profits).
Minds will no doubt have been focused by the $250m assessment on Amazon by the French tax authorities (Amazon says that it is also working on opening a branch for France), and the European Commission’s state aid investigation into Luxembourg tax rulings. Perhaps Amazon’s grilling by Margaret Hodge had some effect. Recent VAT changes may also have been a factor. Since 1 January 2015, business to consumer supplies of telecoms, broadcasting and electronic services have been treated as made in the place where the consumer belongs, with the effect that sales of MP3s and e-books to UK customers from Luxembourg no longer benefit from Luxembourg’s old VAT rates of 15% and 3%, respectively.
Amazon has emphasised that e-commerce is a low-margin business, and the global business continues to make losses. The size of Amazon’s UK tax bill is likely to depend upon the amounts of the royalty payments which it is assumed will be attributed to the UK branch of Amazon EU S.a.r.L. Bear in mind that Amazon’s Luxembourg advance pricing agreement, approving large royalty payments from that company to Amazon Europe Holding Technologies SCS, is the focus of the ongoing state aid investigation. A consequence of Amazon’s new branch structure seems to be a shift in the competence for overseeing the transfer pricing of these royalty arrangements from the Luxembourg tax authorities to those in the UK, Germany, Spain and Italy.
Will the new arrangements apply to transactions described as ‘fulfilled by Amazon’, whereby goods are stored in and dispatched from Amazon’s UK ‘fulfillment centres’, but are, in fact, owned by other companies? (An item recently purchased by one of the authors and delivered the next day was, it transpired, actually sold by a company based in Greece.) It is also not clear whether a similar branch structure will operate for digital sales, which are effected through a separate Luxembourg entity, Amazon Media EU S.a.r.L.
The truth, of course, is that it is unlikely we will ever know how much UK tax is paid under the new arrangements, as the choice of a branch structure, rather than using local subsidiaries, means that separate entity accounts will not be published. One wonders whether this might, over time, add to the existing pressure for the publication of country by country reporting information.
