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Amazon drops popular tax avoidance strategy

Aaron Pressman

Amazon.com (AMZN) is surrendering in yet another of its long-running tax battles, this one in Europe, but don't expect its many co-tax avoiders to join the party yet.

Amazon said yesterday that it would stop funneling its sales from across Europe through a Luxembourg-based entity to minimize its tax bill. Instead, the e-commerce giant will begin accounting for sales, and paying taxes, in individual European countries.

Amazon's critics are debating just how much impact the tax changes will have on the company's tax bill. But regardless, Amazon is a relatively small fish in the pond of international tax avoidance. The company's last annual report listed just $2.5 billion of "undistributed earnings of foreign subsidiaries that are indefinitely invested outside of the U.S." at the end of 2014. Those are cash reserves that can't be sent back to the U.S. for investment to build their domestic business or distribution to shareholders without first being subject to the 35% U.S. corporate tax rate.

More cash-rich tech giants have much more money locked out of the country. Microsoft (MSFT), Apple (AAPL) and IBM (IBM) have over $60 billion each in untaxed foreign profits, according to calculations by Bloomberg News. Starbucks (SBUX) and Google (GOOGL) have also been pilloried in Europe for their tax avoiding ways. All of the companies have said their maneuvers are perfectly legal and enhance shareholder value by reducing taxes and thereby increasing net income.

It's not easy to estimate how much more taxes Amazon will pay just by changing its revenue allocations among different countries, warns Dick Harvey, a law professor at Villanova School of Law and a former senior official in the Internal Revenue Service and the Treasury Department. "Amazon could allocate substantial revenues to various countries, but still retain a substantial portion of the profit in a tax-haven," Harvey says.

Amazon's move likely means at least somewhat higher European tax bills but, as with the company's agreements to pay sales taxes in many U.S. states, it also brings relief from the regulatory pressure and PR damage of being labeled a tax dodger.

The move is part of Amazon's "corporate maturation process," says Ed Kleinbard, a USC law professor and former chief of staff of the Congressional Joint Committee on Taxation. "It is acknowledging that its tax model has to catch up with its actual business model."

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But Kleinbard and other experts who have followed the issue for many years are less optimistic that Amazon's move presages any larger trend.

"If other companies join Amazon, it would be a major victory for tax authorities throughout the world," says Martin Sullivan, chief economist at Tax Analysts and also a former government tax expert. "But because this move is in large part about public relations, companies that do not sell (to) retail probably will be far less inclined to follow Amazon's lead."

Kleinbard doesn't see a trend, either. "Institutional maturity is in short supply in the new economy," he quips.

It's long past time for other members of the undistributed earnings club to throw in the towel and give up the tax avoidance strategy. In 2004, Congress and then-President George W. Bush declared a tax holiday for such trapped cash, imposing a tax rate of only 5.25%. But the move was widely panned after companies failed to use the cash to expand hiring or investment in the United States. Congressional efforts to enact another holiday have gone nowhere.

The stash from tax-avoiding companies is now up to $2.1 trillion. The stashers have been able to avoid much of the potential damage from the limited access to their cash by issuing debt. But record low interest rates are on the way out and companies can only issue so much debt before investors realize the limitations on using trapped cash to back bonds.

There certainly would be a hit to the bottom line if companies stopped shuffling sales to tax havens around the globe. The moves bolstered earnings by about 8.5% last year, according to an estimate by Jack Ciesielski, editor of The Analyst’s Accounting Observer, reported by the New York Times. But if it gave companies greater flexibility to pay dividends, buy back stock and invest in growth, the stock market might celebrate.