Close
Close

Tax Court deals IRS another transfer pricing loss

RFP
Tax Court deals IRS another transfer pricing lossOn March 23, in Amazon.com, Inc. & Subsidiaries v. Commissioner 148 T.C. No. 8 (2017) the Tax Court held that the IRS’s approach to valuing an upfront cost sharing buy-in payment was arbitrary, capricious and unreasonable. The Tax Court also held that the IRS abused its discretion in determining that 100% of certain costs associated with a technology and content cost center constituted intangible development costs.

The case involved more than $234 million in tax deficiencies for 2005 and 2006. In the decision, the court agreed that the comparable uncontrolled transaction (CUT) method (with appropriate upward adjustments) used by the taxpayer, e-commerce giant Amazon, Inc., was the best method for determining the upfront cost sharing buy-in payment, and also agreed with Amazon’s methodology for allocating its technology and content cost center.

In 2005, Amazon entered into a cost sharing agreement (CSA) with a Luxembourg subsidiary. The CSA granted the Luxembourg subsidiary the right to use certain pre-existing assets in Europe, namely the intangibles required to operate the European website business. The CSA required that the Luxembourg subsidiary pay an upfront cost sharing buy-in payment, and also make annual cost sharing payments to compensate Amazon for the ongoing intangible development.

The regulations under Section 482 require the application of the “best method” when determining the arm’s length price for related party transactions such as the buy-in payment. Amazon believed that the CUT method was the best method under the regulations, and determined that the upfront cost sharing buy-in payment should be $254.5 million by applying such a method. As part of the CSA computations, Amazon determined the allocable costs from its cost centers to the intangible development costs by using a multistep allocation system.

The IRS disagreed with Amazon’s approach and determined that the upfront cost sharing buy-in payment should be $3.6 billion by applying a discounted cash-flow method, which the government believed was the best method. The IRS also disagreed with Amazon’s allocation of certain costs related to technology and content, finding that such costs should be intangible development costs.

The Tax Court’s decision reinforces a previous Tax Court decision, in Veritas Software Corp. v. Commissioner, 133 T.C. 297 (2009). However, both cases addressed the issue under the 1995 cost sharing regulations. The IRS and Treasury released temporary regulations on Jan. 5, 2009, which were finalized on Dec. 22, 2011. The final and temporary regulations replaced the “buy-in” payments with “platform contributions,” which expanded the scope of what constituted a contribution under the 1995 regulations. Taxpayers should be cognizant that, although parts of the decision do have broader applications to transactions occurring after the temporary and final regulations, the decision is addressing transactions under the 1995 cost sharing regulations.

Contact
David Sites
Partner, International Tax Services
+1 202 861 4104

David Bowen
Principal, Transfer Pricing Practice Leader
+1 202 521 1580

Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.