Will the Taxman Cause Problems for eBay?

Lawmakers in both Germany and Great Britain are closely inspecting eBay’s (NASDAQ:EBAY) accounting, as the company’s decision to locate its European Union sales base in Luxembourg may have cost the two countries a combined $1 billion in sales tax.

What is the Problem with eBay’s Luxembourg Location?

According to EU regulations, companies are allowed to establish subsidiaries in Luxembourg and levy sales tax, often known as Value Added Tax, at the country’s low rate. However, the rules also stipulate that tax officials from member states can challenge any claim to residence and the right to use Luxembourg’s low VAT, if the company is determined not to have sufficient staff or assets to be considered a legitimate supplier of goods and services.

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As Reuters reported, eBay’s unit in Luxembourg has a staff of nine. Furthermore, the Luxembourg-based unit transfers its revenues to a Berne-based unit, which allows the company to take advantage of Switzerland’s favorable corporate income tax rates.

EBay has denied any wrongdoing so far.

How Will Germany and Britain Respond?

While neither country has launched an investigation, lawmakers in both Germany and Great Britain are calling for governmental leaders to examine the issue.

“I hope that HMRC (Her Majesty’s Revenue and Customs) takes note…and takes prompt action,” parliament member and chairman of the Public Accounts Committee Margaret Hodge told Reuters.

CHEAT SHEET Analysis: Does “Honest Accounting Govern eBay’s Books”?

One of the core components of our CHEAT SHEET Investing Framework requires companies to have zero evidence of accounting manipulation. While eBay is not in direct violation of any European Union regulations, corporate tax practices have become an important issue in Europe this year. Many companies from Google (NASDAQ:GOOG) to Amazon (NASDAQ:AMZN) are under scrutiny for paying incredibly low income tax in countries where they make billions of dollars in sales. If an investigation into eBay’s accounting is begun, the company may no longer be able to take advantage of Luxembourg’s low VAT, and as a result its tax load will greatly increase.

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