TP Ticker – October 2019

Court Opinion in Amazon.com v Commissioner of Internal Revenue

In August, the US Court of Appeals for the Ninth Circuit published its opinion on the case “Amazon.com & Subsidiaries v. Commissioner of Internal Revenue” on the definition of “intangibles” under the transfer pricing regulations from 1994 and 1995.  The case relates to a restructuring that Amazon had undertaken in 2005 and 2006 by granting a subsidiary in Luxembourg the right to use certain intangibles, such as website technology, trademarks, and customer lists.  The transaction was structured as a buy-in of the Luxembourg subsidiary into a cost-sharing arrangement.  With this, the Luxembourg subsidiary acquired the right to use the US-developed intangibles in its local market in Europe for payment of a lump-sum and ongoing proportionate funding of the future R&D activities that further developed these intangibles.  The buy-in payment was taxable at “fair market value” for Amazon’s US affiliate and valued at about 225 million USD by the taxpayer.  The Internal Revenue Service (“IRS”) disagreed with the extent of intangibles considered by Amazon’s valuation and calculated an arm’s-length buy-in payment of about 3.6 billion USD by also considering intangibles such as culture of innovation, workforce in place, going concern value, goodwill, and growth opinions.  Amazon had disagreed with this assessment and petitioned to the Tax Court accordingly.  As the Tax Court had agreed with the taxpayer’s view, resulting in the IRS’ appeal.  Main question of the case was, if a catch-all clause in the old TP regulations covered the types of intangibles considered by the IRS.  The Tax Court as well as the appellate court concluded that the old TP regulations intended to only cover separately transferable intangibles and that the intangibles the IRS additionally considered in its assessment were not falling in this category.  While the appellate court acknowledged that the new TP regulations from 2009 and 2017 would cover the additional intangibles, it confirmed the decision of the Tax Court that under the regulations in force at the time, the assessment of the IRS was unreasonable.

The decision of the Ninth Circuit can be accessed online for example via the website Justitia here: https://law.justia.com/cases/federal/appellate-courts/ca9/17-72922/17-72922-2019-08-16.html