The European Commission announced it will make a formal investigation of online retail giant Amazon and its European corporate tax affairs.
The Commission said it will examine the tax deal struck in 2003 between Luxembourg and Amazon’s European business section.
In the Commission’s view, the agreement could amount to state aid and distortion of competition. Most of Amazon's European profits "are recorded in Luxembourg but are not taxed in Luxembourg", said EU competition commissioner Joaquin Almunia.
But in a statement, Amazon said it had "received no special tax treatment from Luxembourg", noting "we are subject to the same tax laws as other companies operating here."
And Luxembourg's finance ministry also rejected the Commission's allegations as "unsubstantiated", saying "no special tax treatment or advantage has been awarded to Amazon."
The EU is concerned about the ability of multinationals to structure their companies in ways to pay as little tax as possible by moving costs and profits among operations in different countries.
"It is only fair that subsidiaries of multinational companies pay their share of taxes and do not receive preferential treatment which could amount to hidden subsidies," said Mr Almunia.
The EU's investigation into Amazon follows on from other investigations into computer company Apple, coffee chain Starbucks, and the financial arm of carmaker Fiat.
Apple has an effective tax rate of 2% in Ireland, despite the corporate tax rate there of 12.5%, because of the way it shifts international sales to its subsidiaries.
Apple claims it has not had any "selective treatment" and the Irish government denies flouting EU rules.
Companies found guilty of breaching EU rules on state aid could be forced to repay what Brussels calculates as the amount of financial benefit they have received.
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