Amazon is facing a landmark court ruling in the US that could prise open its obscure tax structure in Luxembourg, after a high-stakes legal battle that has shed unprecedented light on the technology giant’s labyrinthine tax affairs.
The case, which is quietly coming to a head as Amazon’s Luxembourg arrangements face intense scrutiny from European authorities, has revealed new details of an elaborate avoidance scheme it devised and codenamed Project Goldcrest.
Newly emerged documents seen by the Guardian show precisely how Amazon embarked on a complex 28-step scheme, which took more than two years to complete, and fundamentally reordered its global business in Europe using a maze of offshore entities and intercompany agreements.
Amazon’s move to Luxembourg has been well documented, but the company has never publicly disclosed full details of Project Goldcrest, which it brazenly named after Luxembourg’s national bird. The tax arrangements came into effect in 2006 and largely remain in place today.
The case, which could force Amazon to pay more than $1.5bn (£1bn) in unpaid taxes, throws into sharp relief tensions between the US and Europe over how to tax multinationals that operate in both jurisdictions. On either side of the Atlantic, authorities are racing to recover vast sums from Amazon’s multibillion-dollar pool of untaxed income held in Luxembourg.
The US Internal Revenue Service has criticised Project Goldcrest for depriving it of tax, and attacked core features as predicated on “legally baseless” methods. The Seattle court in which the US taxman and the tech giant are squaring off is poised to rule in coming months on the dispute.
The new documents, retrieved from the case the internet company is waging against the IRS, show the complexity the company resorted to in order to make the scheme work and the involvement of executives at the highest levels of the company.
Amazon maintains that it operates a pan-European business from its Luxembourg base, where it has more than 1,000 employees. “Amazon pays all the taxes we are required to pay in every country where we operate,” a spokesman for the company said.
Before and after Project Goldcrest
The documents that have emerged from the court battle between Amazon and the IRS also raise fresh questions for Jean-Claude Juncker, president of the European commission, as Amazon agreed the favourable tax deal with Luxembourg in 2003 while he was the country’s prime minister.
Court records show that Amazon’s then top tax official, Robert Comfort, was in direct contact with Juncker’s finance ministry at crucial stages in 2003 before Amazon received approval for the so-called sweetheart deal.
Following the LuxLeaks revelations in 2014 concerning Luxembourg’s controversial tax deals with multinationals, Juncker distanced himself from controversial tax rulings of this kind, claiming that the finance ministry, which he ran until 2009, was not involved in the deals.
Antoine Deltour, the former PricewaterhouseCoopers auditor and the source behind the LuxLeaks scandal in 2014, says details of Project Goldcrest raise serious questions about the legality of a scheme of this kind owing to doubts over whether or not Amazon correctly states its taxable income in the US.
In an interview with the Guardian, Deltour said: “These findings reveal that not only the multinationals like Amazon abuse the legal insufficiency of the international tax system, but that some states actively help them to do so.”
Inside Project Goldcrest
Amazon’s motives behind Project Goldcrest were clear from the outset, according to the IRS. In a memorandum filed in the Seattle case, tax inspectors claim that when Amazon weighed up the costs and benefits of implementing the scheme, its finance staff “did not quantify any benefits other than avoided US corporate income taxes”.
The IRS has questioned the legality of methods used by Amazon to devise complex intercompany contracts that transferred intangible assets – vital software, trademarks, marketing assets such as branding for its website – to one of its Luxembourg companies, a so-called “pass-through” entity not taxed in the Grand Duchy.
Amazon has vigorously contested the IRS’s claims in the case, which could have significant financial implications for the company. Overall, the IRS has moved to recover $1.5bn in back taxes from the company, plus interest, dating back to 2005-06, when the company implemented Project Goldcrest.
The dispute centres around “transfer pricing”, which multinationals use to value the goods and services shifted around the group structure. Companies are required to establish a transfer price that is market based, as if it were selling the service to a separate company.
In the memorandum, the IRS contends that Amazon used “unrealistically low values” to transfer its assets from the US to Luxembourg, and its valuation of these assets was the “product of counterfactual and legally baseless assumptions”. The memorandum also attacks Amazon’s subsequent justification of its methods as “arbitrary” and “plainly an exercise in futility”.
One witness for the IRS, the Washington-based tax expert Daniel Frisch, said that crucial tax advice given to Amazon before the Luxembourg move contained “a number of fundamental flaws” that were “inconsistent with the arm’s length standard”. Amazon has contested Frisch’s findings.
The focus on transfer pricing on the US side mirrors suspicions in the European commission’s continuing investigation into Amazon’s tax deal with Luxembourg.
Whilee US tax inspectors believe intercompany payments between Amazon in Luxembourg and its US entities have been too low, European investigators suspect Amazon has inflated royalty payments from one of its Luxembourg entities to another, in return for using the IP. An arrangement such as this allows Amazon in effect to wipe out taxable profits.
Margrethe Vestager, the EU competition commissioner, is conducting an investigation, expected to report back in the coming months, that will determine whether the deal with Luxembourg amounted to illegal state aid.
In a statement, Amazon said: “Corporate tax is based on profits, not revenues, and our profits have remained low given our heavy investments and the fact that retail is a highly competitive, low-margin business. We’ve invested over €15bn in Europe since 2010 and last year alone created over 10,000 new jobs, bringing our direct employment in Europe to over 40,000 people.”
Changes to how Amazon is taxed?
Disclosure of Project Goldcrest comes amid heightened political sensitivity in Europe over the way technology giants minimise their tax bills by shifting valuable –but difficult to value – intellectual property into offshore havens such as Luxembourg and charge subsidiaries large fees for using it.
Last month, Google faced a backlash against a landmark tax settlement with the UK, widely condemned for being too lenient. Google, or Alphabet as its holding company is now known, operates a similar structure whereby subsidiaries pay intellectual property royalties to Bermuda.
Over the past 20 years Amazon has largely avoided US federal taxation by managing its books to avoid reporting any meaningful profits. Project Goldcrest has played a significant role in Amazon’s aggressive tax strategy, depriving governments on both sides of the Atlantic of large sums of tax since the project’s completion in 2006. Critics argue that Amazon’s aggressive tax planning has also bolstered its ability to undercut rivals on price.
“Think of small and medium-sized businesses that are being displaced by Amazon,” said Philippe Lamberts, a prominent Green party member of the European parliament from Belgium. Speaking to the Guardian, Lamberts highlighted what he saw as Amazon’s “determined will to construct the company in a way that optimises tax breaks”.
“It has nothing to do with creating advantages for society. It is exploiting the numerous gaps in the system, and that’s what makes it outrageous,” he added.
In recent weeks, the European commission has moved to crack down on elaborate avoidance schemes. In April, the commission will table proposals that would force the world’s largest multinational corporations to open up their tax arrangements with each European government to full public scrutiny.
Senior European officials have told the Guardian that proposed legislation would directly tackle the kind of arrangements put in place by Amazon.
But Lamberts said the commission’s proposals were lukewarm at best. “There are all sorts of things that they avoided doing, and to me this is telling. I really wonder whether they are serious,” he said in reference to the commission. “I believe much of what Amazon is doing will remain possible afterwards.”
Read documents in full (PDFs)
- IRS expert witness report
- Project Goldcrest facts
- Project Goldcrest transaction steps
- IRS trial memorandum
- IRS explanation of items
