Amazon's billion-dollar tax shield (4)

Problem solved

In early 2005, Amazon did an inter-company deal that solved this problem.

Details of the arrangement have never been made public.

Amazon's Luxembourg arrangements have helped it pay an average tax rate of just 5.3 percent on overseas income over the past five years.

Company accounts show that since 2005, Amazon Europe Holding Technologies started to make payments to Amazon Technologies Inc in Nevada of up to 230 million euros (US$300 million) a year. At the same time it received up to 583 million euros a year from its European affiliates. The difference stayed in Luxembourg.

Had Amazon remitted all that to the US and then paid the headline US corporate income tax rate on it, the firm would have incurred taxes of more than US$700 million. But it has not and the deal has allowed Amazon's Luxembourg unit to accrue tax-free cash worth more than US$2 billion.

For Amazon's tax-free money-making machine to work, it had to show it had more than a nameplate in Luxembourg.

In February 2006, it transferred ownership of its UK, German and French businesses to Amazon EU SARL, and ownership of its UK and French web domains to Amazon Europe Holding Technologies.

It also moved some US executives to Luxembourg, hired more locals and began to call Amazon EU its European headquarters.

As the cash built up in Amazon Europe Holding Technologies, the firm started to lend to Amazon EU SARL. Besides funding international expansion, this has generated up to 45 million euros a year in interest since 2005 - all untaxed.

Today, Amazon calls its 300-person Luxembourg operation the nerve-center of an operation which employs tens of thousands of people across the continent.

Transfer pricing is the way corporations trade goods or services between their units. Many multinationals use it.

The Organization for Economic Cooperation and Development, which lays down the rules on transfer pricing, stipulates that it should not be used to shift profits from high tax jurisdictions to low tax jurisdictions.

The IRS declined to comment.

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