Amazon defeated an appeal by the IRS in the US Circuit Court of Appeals in Seattle. The two entities are fighting over a $1.5 billion tax issue.
The unanimous decision in favor of Amazon
The Seattle court decided in favor of Amazon 3-0, upholding a 2017 ruling by the US Tax Court. The case is related to the transfer of intangible assets to Amazon Europe Holding Technologies SCS in 2005 and 2006. These assets included software, intellectual property, and customer lists. The IRS wanted to impose a broader definition of taxable transfers on Amazon, which could have inflated the company’s tax bill.
Amazon’s subsidiary in question is based in Luxembourg and acts as the company’s European headquarters. This is because Luxembourg has a low corporate tax rate and the lowest value-added tax rate as well. Had the company lost the suit, it would have had to pay a significant tax to the IRS, not only for 2005 and 2006 but other tax years as well. The company earned $10.07 billion in 2018, and its net income has already surpassed $6.19 billion in the first half of 2019.
The taxation cobwebs
US companies have to pay taxes for making money in foreign lands. However, the appeals court suggests that the company is free to transfer their intangible assets to its foreign affiliates. However, these affiliates must pay intangible development costs to the company.
According to Circuit Judge Consuelo Callahan, the Treasury Department as well as the drafting history of regulations “strongly favor” Amazon in the case which suggests that intangible assets must be limited to “independently transferable” assets. The court decided to dismiss the IRS’ proposal that such assets must also include the transfer of employees, Amazon’s goodwill as well as its “culture of innovation.”
Callahan noted that the US Congress changed the definition of intangible property in 2017. While the position of the IRS is correct according to the new rules, it doesn’t apply to the decade-old case of Amazon.
The company started restructuring its business in Europe in 2005 and 2006 (which led to the IRS case), which allowed it to shift the income generated from American entities to European subsidiaries, where tax rates are relatively lower. According to the restructuring plan, European entities were now free to use the intangible assets of their American counterparts to generate business. The European units of the company agreed to a cost-sharing arrangement to compensate for the cross-Atlantic movement of the said assets.