Amazon said that plans of diversifying its retail sales structure were formulated two years ago. Effective May 1, the company's revenue from retail sales shall be booked in individual European countries as part of the online retailer's change in its tax practices.
Previously, Amazon had been funneling all of its sales from Luxembourg which is now placed under the scrutiny of the European Union antitrust regulators. The investigation, which started in October, focuses on Amazon's tax-minimizing arrangements with the European country, making the company operate almost tax-free in Europe. Officials wanted to examine whether the country has given the so-called "selective advantage" to Amazon based on the context of charging low tax rates from the company.
Luxembourg has been subjected to international criticism after revelations from the media showed how companies were allowed to channel their profits to the European country and how they were subjected to pay lower tax rates instead of higher rates in places where their businesses operate more. The revelations, which occurred in November, were based on leaked documents aptly called "LuxLeaks."
In the UK, Amazon's resulting profits will then be taxed by HMRC, allowing the company to avoid being caught by the new diverted profits tax which was spearheaded by First Secretary of State George Osborne and came into law beginning on April 1. The new tax ruling imposes a severe 25 percent tax on groups which are believed to be artificially routing their profits overseas.
According to a spokesman for Amazon, the company is "now recording retail sales made to customers in the UK through the UK branch. Previously, these sales were recorded in Luxembourg."
The latest move by Amazon could add pressure on other companies to follow suit. One of these is Google which is believed to have been routing its sales through Ireland. Matt Brittin, the tech firm's northern Europe boss was told by Committee chair Margaret Hodge that Google's behavior on tax was "devious, calculated and, in my view, unethical."
Back in October 2011, Amazon disclosed that the U.S. Internal Revenue Service wanted $1.5 billion in unpaid taxes. While the company declined to give exact details on the transactions involved with the charge, it has otherwise linked it to "transfer pricing with our foreign subsidiaries" which covers a seven-year period starting from 2005.
Transfer pricing, which is being practiced by a number of multinational companies, is the manner by which corporations trade goods or services within their units.
The rule on transfer pricing, laid down by the Organization for Economic Co-operation and Development, states that it should not be used by companies in shifting their profits from high tax jurisdictions to low tax jurisdictions.
Amazon's arrangements with Luxembourg have helped the company to pay taxes with an average rate of 5.3 percent on income generated overseas. This is less than 25 percent of the average rate across the company's major foreign markets.