Amazon has successfully emerged from a lawsuit brought by the Internal Revenue Service, saving the company from a huge potential tax bill.
A federal tax court judge ruled last week that the agency’s determination that Amazon’s re-assessed tax liability for 2005 and 2006 of $1.5 billion plus interest was “arbitrary, capricious, and unreasonable.”
Had Amazon lost, it would have had to pay that full amount, plus interest, and perhaps more for subsequent years.
The case largely centered on a “cost-sharing arrangement” (also known as transfer pricing) between the company’s Seattle headquarters and its European subsidiary, Amazon Europe Holding Technologies SCS. In essence, Seattle charged the Luxembourg entity a certain price to license its technology, which by law is supposed to be done at “arm’s length” prices, or whatever Amazon would charge another firm. However, this has the effect of essentially incentivizing an undervalued amount, thereby reducing a company’s American tax liability.
Last year, the advocacy group Citizens for Tax Justice noted that Amazon holds $1.5 billion offshore in “unrepatriated income.” Amazon has since updated that figure.
“Undistributed earnings of foreign subsidiaries that are indefinitely invested outside of the U.S. were $2.8 billion as of December 31, 2016,” the company notes in its February 2017 annual report. “Determination of the unrecognized deferred tax liability that would be incurred if such amounts were repatriated is not practicable.”
Amazon, Apple, Facebook and many other tech firms have recently come under increased scrutiny for abusing transfer pricing to drastically—and legally—reduce tax burdens. One particular technique, the “Double Irish,” was phased out in early 2015, but companies already using it have until 2020 to transition to something else.
Samuel Brunson, a tax law professor at Loyola University Chicago said that in transfer pricing cases that solely have to do with digital goods, figuring out their true price is difficult.
“I have no way of knowing what an arm’s length Amazon source code is worth,” he told Ars. “There’s no way that Amazon is going to sell it to a non-related entity. In terms of figuring out an actual fair price, makes it really, really hard.”