LUXEMBOURG, Dec 6 (Reuters) - In 2005, Amazon rented a historic five-story 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 channeling sales through its units there, the world's biggest online retailer could minimize corporate taxes.
Amazon's Luxembourg arrangements have deprived European governments of hundreds of millions of dollars in tax, as reported in European newspapers. But a Reuters examination of accounts filed by 25 Amazon units in six countries shows how they also allowed the company to avoid paying more tax in the United States, where the company is based.
Amazon revealed last year that the U.S. 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.
In effect, 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. This special report tells the story of how Amazon set up the shield, and how it works.
The case highlights the way multinationals reduce their taxes by parking intellectual property in tax havens and charging affiliates big fees for using it. Politicians in rich countries are beginning to target such practices, which have been used by other multinationals including Google and Microsoft.
For Amazon's tax-free money-making machine to work, it had to show it had more than a nameplate in Luxembourg.
To benefit from favorable taxation, the Grand Duchy says firms "must ensure that they give adequate substance to their presence in the country in terms of both logistics and staff." At the end of 2005, Amazon had just a dozen staff there. If tax departments around the continent were to recognize the arrangement, Amazon needed a meaningful corporate presence.
In February 2006, it transferred ownership of its UK, German and French businesses to Amazon EU S.a.r.l., and ownership of its UK and French web domains to Amazon Europe Holding Technologies. It also moved some U.S. executives to Luxembourg, hired more locals and began to call Amazon EU its European headquarters.
Filings show that in December 2006, the group relocated its Luxembourg operating units into the rented building on Plaetis Steet, a stone's throw from the English and Irish bars that prompt the city-state's tourist office to describe the Grund and neighboring Clausen as the "Headquarters of Luxembourg's night life."
At home in the United States, though, the Internal Revenue Service seems unconvinced.
Amazon disclosed in April 2011 that the IRS wanted $1.5 billion in unpaid taxes and fines. It has declined to say exactly what transactions the charge relates to but said it was linked to "transfer pricing with our foreign subsidiaries" over a seven-year period from 2005.
"We disagree with the proposed adjustments and intend to vigorously contest them," Amazon said at the time. "If we are not able to resolve these proposed adjustments ... we plan to pursue all available administrative and, if necessary, judicial remedies."
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