As local retailers worry about the arrival of Amazon destroying their business, the taxman will soon need to start worrying about how Amazon is going to work to minimise its tax bills.
The company, headed by billionaire Jeff Bezos with a $US460 billion ($589 billion) market valuation counts almost all its income outside the United States. It largely ends up in a Luxembourg company, Amazon EU Sarl, which is why the internet giant has come under constant fire from regulators .
Amazon has filed local accounts in Australia that show the bulk of revenue that flows to and from Amazon Web Services locally, is actually sourced from, and paid by, related parties offshore. This is a tax structure similar to those adopted by other technology companies, including Facebook, Google, Uber and Airbnb.
What we don't know yet is how revenue will be booked once Amazon starts seriously selling here.
Amazon's tax structure
What we do know is Amazon.com, which employs 341,400 staff with its main offices located in Seattle, Washington, is incorporated in low-tax Delaware. The business is divided into three segments: North America, International, and Amazon Web Services (AWS).
In Australia, Amazon files under the banner of Amazon Web Services. It effectively treats Australia as a marketing operation.
Its 2016 accounts state so: "Revenue of the company represents fees received or receivable for support services provided to external third parties and to related companies. Support services include marketing, training and professional services ..."
While Amazon made a loss, it did pay some tax in Australia. Amazon Web Services financial accounts show it earned $124 million in "revenue" in 2016 (compared with $31.7 million in the period April 22 to December 31, 2015, cited in the accounts). A breakdown of 2016 revenue from operating activities shows $7.5 million for external training and professional services and $117 million for inter-company support services.
Amazon Web Services' final income tax expense was $2.67 millon, much of which is due to $3.4 million worth of share-based compensation, which is likely not tax deductible. It also has a $42.2 million current loan from a related party, but no information is provided. Could it be from the same Lux subsidiary?
The low city in Luxembourg City. Amazon has used the low-tax nation to reduce its tax bills. Photo: NYT
Amazon also files accounts locally under "Amazon Corporate Services", which provides data-hosting services to Amazon Web Services.
The company has previously stated that "Amazon Corporate Services Pty Ltd does not represent revenue from customers using AWS services, in Australia or any other region".
Once again these accounts show hundreds of millions of dollars of related party transactions with subsidiaries offshore.
In 2016 the company received an inter-company loan from its Luxembourg company Amazon Europe Core Sarl for $146.4 million. It was classified as non-current as it is payable in April 2023. This followed an earlier inter-company loan from Amazon Overseas Holdings of $US149.6 million in 2015, which was repaid in 2016.
Amazon did not respond to questions from Fairfax Media by deadline.
Red flag alert
"The fact that it is from a Lux Amazon subsidiary is a definitely a red flag," says UTS Business School associate professor Roman Lanis.
"The corporate structure in Australia raises red flags and is similar to the other US tech/energy companies which we know have been accused/convicted of avoiding tax here.
"What we don't know is how will things change or what they will do when they start earning billions in revenue in Australia - that is, when they start selling their products here."
Amazon is going to start selling to Australian consumers, but will it pay enough tax locally? Photo: Dhiraj Singh
Revenue for Amazon Corporate Services was $317.5 million (up from $237 million for 2015, $147.2 million for 2014, $69.4 million for 2013). Profit was $39.8 million (up from $11.7 million for 2015). Its income tax expense was $13.1 million ($2.3 million for 2015). This resulted in net income of $26.7 million (loss of $13.9 million for 2015).
Massive related party deals
A breakdown of Amazon Corporate Services accounts shows massive related party service fees ($335.7 million in 2016, $247.7 million in 2015).
Its accounts state: "Data and support service fee revenue of the company represents fees received or receivable for services provided to a related company. Services include data, marketing, and other support services for Amazon Web Services, a company incorporated in the United States."
Data service fee revenue from related companies totalled $293 million in 2016, support service fee revenue from related companies was $18.3 million and rental income from related companies was $6.5 million in 2016.
Amazon's 2016 annual report states "as of December 31, 2016, cash, cash equivalents, and marketable securities held by foreign subsidiaries was $US8.6 billion, which included undistributed earnings of foreign subsidiaries indefinitely invested outside of the US of $US2.8 billion".
"We have tax benefits relating to excess stock-based compensation deductions and accelerated depreciation deductions that are being utilized (sic) to reduce our US taxable income." As of December 31, 2016, Amazon had about about $US608 million of federal tax credits potentially available to offset future tax liabilities.
Amazon has faced court battles overseas. Earlier this year it won a $US1.5 billion transfer pricing dispute in a US court.
Global tax fights
Should Amazon use its Luxembourg subsiduary to reduce its local taxes, and should the Australian Taxation Office (ATO) then try to pursue the company, a tough battle awaits.
On March 23 the US Tax Court ruled in favour of Amazon in a transfer pricing dispute, saying it was legal for the internet giant to channel its European sales through its low-tax Luxembourg subsidiary in 2005 and 2006, rather than America. Had it lost, Amazon could have faced a tax bill as high as $US1.5 billion and lower profits for future years.
Amazon has also come under fire for halving the amount of UK corporation tax it paid last year while more than doubling turnover during the same period. Accounts filed by Amazon UK Services show the company was billed just ??7.4 million ($12.6 million) for 2016 compared with ??15.8 million in 2015.
Once a series of deductions had been added, Amazon UK Services actually received a ??1.3 million credit from the British authorities.