How Amazon Saved Billions in Taxes

Amazon
Amazon.com's logo at Amazon Japan's office building in Tokyo, Japan, August 8, 2016. Amazon is outsmarting its competition with bots. Kim Kyung-Hoon/Reuters

In the early 2000s, Amazon embarked on a yearslong mission to save billions by setting up operations in Luxembourg to radically reshape its tax structure. Using a complex patchwork of subsidiaries, the online shopping behemoth managed to shift vast quantities of its profit through a sophisticated mechanism that took external consultants and in-house tax specialists—who reported directly to Amazon CEO Jeff Bezos—years to dream up.

The story of Amazon’s tax avoidance has all but slipped through the cracks, amid flashier headlines about delivery drones and flying tourists to space. But now that a landmark court case between the Inland Revenue Service and Amazon could result in a $1.5 billion fine for Amazon, the company’s secret business success is out. Amazon is also at the heart of a state aid investigation in the EU, where the European Commission, the region’s executive branch, suspects Luxembourg of having granted unfair tax advantages to the company. A similar investigation into Ireland’s treatment of Apple this week resulted in the commission ordering Apple to pay 13 billion euros ($14.5 billion) in back taxes.

Previous investigations (see here and here) of Amazon’s tax avoidance, based on a cache of documents from a tax court in Seattle, expose Project Goldcrest—a scheme the company has used to avoid paying huge amounts of taxes in Europe and the U.S. 

In July, Newsweek also uncovered secret meetings between Jean-Claude Juncker, the president of the European Commission and former prime minister of Luxembourg, and top Amazon tax officials between September 9 and 12, 2003. Juncker had previously denied he had anything to do with granting Amazon its sweetheart tax deal in Luxembourg when he was prime minister of the country.

The documents below, obtained and made public by Newsweek, reveal the details of Project Goldcrest and nod to claims in both the U.S. and Europe that Amazon’s success is due in large part to fiscal advantages it manufactured for itself in Luxembourg.

Here is a full archive of the documents.

On November 9, 2012, the IRS informed Amazon it owed $234 million in additional taxes to the government for 2005 and 2006. Amazon contested the assertion and took the case to the tax court in Seattle.

Amazon took drastic measures to reshape its business in a way that would reduce its taxable income. The document "Goldcrest Transaction Steps" shows how Amazon transferred assets like trademarks and intellectual property through a subsidiary in Luxembourg. "Goldcrest Facts" shows how lucrative subsidiaries such as AEHT help Amazon function in a way that lowers its tax bill.

The "Frisch Report," a study that the IRS commissioned for its case against Amazon, shows how Amazon calculated the amount it paid for transferring its IP to Luxembourg. Paying distorted amounts can cloud income attributable to inter-company transactions and result in tax avoidance with respect to these transactions.

Amazon's senior officials are notoriously secretive, and Bezos is rarely cited or interviewed in the media. The company, which is in the process of building three spherical office structures set to contain hundreds of plant species in downtown Seattle at the cost of roughly $4 billion, prefers to keep its employees tucked away and out of the limelight.

But the court documents reveal the dark side of its business model—one that depends more on closed-door meetings and loopholes in tax legislation than glitzy megaprojects.

See the amended "Opening Brief" from the IRS in which the U.S. tax authority outlines how Amazon went about implementing Project Goldcrest, its contested tax regime in Luxembourg. As Newsweek revealed in July, that document shows how the EU’s Juncker met with senior tax officials from Amazon despite the president of the European Commission having denied having anything to do with setting up Amazon’s tax structure in Luxembourg.

The following page outlines the final tax agreement that was arranged between Amazon and Luxembourg, as well as the role played by PricewaterhouseCoopers, the global accountancy firm, in getting the Luxembourgish state to approve Amazon's newly created tax structure.