There has been a substantial development in the past week affecting international business as Amazon savors a huge win against the IRS on transfer pricing related tax disputes.  The findings of a US Tax Court were stark:

“The IRS acted in an arbitrary, capricious, and unreasonable manner when it applied a discounted-cash-flow method to a cost-sharing arrangement that Amazon.com made with its Luxembourg subsidiary,” the Tax Court held on Thursday [Amazon.com, Inc., 148 T.C. No. 8 (2017)].

The disputed case was based upon disputed taxes of more than $234 million in IRS assessed tax deficiencies relating to transfer pricing for the tax years of 2005 and 2006.  Transfer pricing involves the cost of goods or services exchanged between affiliated companies.  When a good or service is passed from one affiliated company to another it would be easy to discount the genuine value of the good or service in order to manipulate the “basis” in cost and the resulting tax assessed on any income that ultimately results from the transfer.  These transactions are required to be conducted at “arms length” at the same value as if the two companies involved had no connection to or affiliation with one another.

In simple terms, Amazon entered into a “Qualified Cost Sharing Arrangement” with its Luxembourg subsidiary.  Amazon gave the subsidiary the right to use software and other technology required to operate Amazon’s business in Europe including website properties, various trademarks and even customer lists.  The subsidiary made an up-front “buy-in” payment to Amazon of $254.5 million as part of the Cost Sharing Arrangement or CSA.

The IRS disputed Amazon’s allocation of ongoing Intangible Development Costs (IDCs) and ultimately disputed that the transaction had occurred at arm’s length.  The IRS applied a discounted-cash-flow (DCF) method to the expected cash flows from the European business to determine that the buy-in payments should have been $3.6 billion (the IRS later reduced this to $3.468 billion).

Amazon argued that the Comparable-Uncontrolled-Transaction (CUT) method is the best method to calculate the requisite buy-in payment, disputing methodology by the IRS on transfer pricing and allocation related issues.

The Tax Court found in favor of Amazon on almost all issues, providing a huge win against the IRS on transfer pricing and the IRS’ actions regarding the assessment of income and resulting taxation.  In it’s ruling the Court found the IRS’ process was “arbitrary, capricious, and unreasonable.” The Court further upheld Amazon’s use of the CUT method (with some noted modificaitons) was generally the best method to properly establish the amount of the buy-in payment in question.  The Court also noted the IRS abused its discretion the allocations to the IDCs and found Amazon’s allocation methods to be reasonable.

 

This case brings a very specific point into focus: The IRS has often taken actions against clients and proper accounting methodology and attempted to issue arbitrary and unreasonable findings.  The tax attorneys at Allen Barron stand firm against the agency and all IRS audits as well as California tax matters.  We hold them to the actual guidelines provided by US tax codes and laws, and the Generally Accepted Accounting Principles (GAAPs) that govern accounting practices in the US.  This is why it is so important to work with the experienced and proven tax attorneys, accounting and tax preparation teams at Allen Barron.  We invite you to contact us to learn more and for a free consultation at 866-631-3470.

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