The amount of money Amazon.com Inc reports through a tax-exempt vehicle in Europe has dropped sharply in the past two years, even as European sales jumped, after the U.S. tax authority tightened rules it felt were being abused to shift profits.
Amazon minimises its tax bill by having the U.S. unit which owns its technology licences lease the rights to re-license the technology to a tax-exempt partnership based in Luxembourg.
This partnership then resells the software rights to other affiliates for a much higher price, corporate and court filings show.
Such arrangements have drawn fire from politicians on both sides of the Atlantic as well as citizens struggling with higher personal taxes and cutbacks in state services imposed to pay for the financial crisis.
The Group of 20 leading economies has vowed to crack down on corporate tax avoidance and the practice of shifting profits into low or no tax jurisdictions.
Amazon has been a frequent subject of politicians' criticism in Europe over the way it channels all European revenues to Luxembourg where profits can be earned tax free.
However, since 2012, when a dispute between the company and the UK tax authority was disclosed in court filings, the amount of profit reported by the group's Luxembourg-based tax-exempt partnership, Amazon Europe Holding Technologies SCS, has halved.
The company declined to comment on Friday but has previously said it follows the tax rules in all the countries where it operates.
The U.S. tax authority, the Internal Revenue Service (IRS) declined to comment, citing federal privacy rules that prohibit it from discussing individual taxpayers.
Most companies seek to pay no more tax than they have to because managers have a fiduciary duty to investors to maximise long-term profits.
Amazon and the IRS have been in dispute for years about Amazon Europe Holding. The unit pays U.S. affiliates to use existing software and shares the U.S. affiliates' cost of funding new technology, in return for the right to re-license this technology to affiliates in Europe.
According to a filing with the U.S. Tax Court in December 2012, the IRS has argued that Amazon Europe Holding should have paid much more to the U.S. affiliates, A9.com Inc and Amazon Technologies Inc., for the rights it received.
If Amazon Europe Holding had paid more, this would have increased Amazon group's U.S. taxable income. The IRS said Amazon Europe should have paid the U.S. arm an additional $110 million in cost-sharing payments in 2006 alone.
Amazon took a legal