Amazon Defeats IRS in Tax-Court Case -- 3rd Update
March 23 2017 - 5:00PM
Dow Jones News
By Richard Rubin and Laura Stevens
Amazon.com Inc. prevailed over the Internal Revenue Service in a
more than $1.5 billion dispute over the online retailer's
transactions with a Luxembourg subsidiary.
The U.S. Tax Court ruled Thursday that the IRS made arbitrary
determinations and abused its discretion in several instances,
marking another setback for the agency in high-profile
international corporate tax cases. It wasn't clear from the ruling
what Amazon's ultimate tax bill would be.
Amazon declined to comment. The IRS said the agency generally
doesn't comment on litigation.
The case illustrates the allure of low-tax foreign jurisdictions
for U.S. companies looking to minimize their tax bills and their
ability to beat the government in complex multiyear lawsuits.
"They get out litigated, especially on the expert witness
front," Reuven Avi-Yonah, a tax law professor at the University of
Michigan, said of the IRS. "We are talking billions, and the
resources of the taxpayer [Amazon] are much higher than the
IRS."
The online retail giant said in its annual report that the IRS
was seeking to increase its U.S. taxable income for transactions
undertaken in 2005 and 2006. For those two years alone, the
company's tax bill would have increased by about $1.5 billion plus
interest, with the possibility of additional bills for years beyond
that, according to the annual report.
A tax bill of that scale would have been significant for Amazon,
which reported profits of $2.37 billion last year on revenues of
$136 billion.
The case involved a series of transactions known at Amazon as
Project Goldcrest that helped lower the company's tax bill. The
plan, wrote Judge Albert Lauber, was to transfer U.S. assets, such
as software, trademarks and customer lists, to the Luxembourg
headquarters "and to have the vast bulk of the income from Amazon's
European businesses taxed in Luxembourg at a very low rate."
U.S. companies must pay U.S. corporate taxes on the income they
earn around the world. They can get tax credits for payments to
foreign governments and can defer the residual U.S. tax until they
repatriate the profits. That system creates an incentive for
companies to book profits in low-tax countries and leave them
there. Many technology companies have done just that by selling
intellectual property to their foreign subsidiaries and attributing
foreign profits to those entities.
According to the law, they must make those sales at an arm's
length price and can be required for tax purposes to make annual
payments back to the U.S. parent, which was the situation in
Amazon's case.
Such cases can turn out to be very dependent on the particular
facts at hand and the methods for valuing intellectual
property.
Judge Lauber's 207-page ruling is a detailed analysis of
competing experts' opinions on the useful lives of Amazon's assets
and the appropriate discount rates.
"Regardless of the correctness of the decision on the merits,
cases like this -- costing millions of dollars to litigate,
featuring 30 expert witnesses battling one another, and decided
through a 200 page opinion -- are symptomatic of an unadministrable
international tax system," said Ed Kleinbard, a tax law professor
at the University of Southern California. "We urgently need
international tax reform."
Amazon isn't out of the woods, however. The company still faces
scrutiny in Europe, where Brussels is examining its European tax
deals to determine if they constitute illegal "state aid" from
Luxembourg to the company, benefits that could give them an unfair
advantage over rivals.
An untaxed Amazon subsidiary reported EUR1.89 billion of profit
from 2006 to 2013, according to company filings in Luxembourg, home
to its European business. That profit could translate into hundreds
of millions of euros in tax liability if Brussels decides that it
should have been taxed in Luxembourg, according to experts. Both
Luxembourg's government and Amazon have said that the company
received no special treatment. Amazon has added that it pays all
required taxes.
Write to Richard Rubin at richard.rubin@wsj.com and Laura
Stevens at laura.stevens@wsj.com
(END) Dow Jones Newswires
March 23, 2017 17:45 ET (21:45 GMT)
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