On August 16, 2019, the United States (U.S.) Court of Appeals for the Ninth Circuit (the Court) issued its opinion in the case of Amazon.com, Inc. & Subsidiaries v. Commission of Internal Revenue, finding in favor of the taxpayer. This case pertains to the arm’s-length nature of a buy-in payment made by a Luxembourg subsidiary of Amazon for pre-existing intangible property associated with a cost sharing arrangement entered in 2005.
Amazon.com. Inc. originally recorded a buy-in payment of $255 million, which was recalculated by the Commissioner to be approximately $3.6 billion. To arrive at its value, the Commissioner applied a methodology which identified all non-routine/non-benchmarkable income as the income associated with the transferred intangibles. In doing so, the Commissioner essentially argued that all intangible assets of value, including “residual-business assets” such as goodwill and going concern value, were compensable intangibles under the regulations that were in place at the time.
Given the time period at issue (2005 and 2006), the applicable regulatory framework is the U.S. transfer pricing regulations promulgated in 1994 and 1995. The Court affirmed the U.S. Tax Court’s 2017 decision that these regulations limited the definition of intangibles to assets which can be “independently transferred.” However, the Court did insert a widely discussed footnote which noted that the outcome of its ruling would “no doubt” be different had the case been decided under the 2009 regulations or by the 2017 statutory amendment which broadened the regulatory definition of intangibles in the context of a related party transfer. Despite this footnote, it remains unclear how courts might decide a similar case involving a post-2009 transaction. Nonetheless, U.S. practitioners and taxpayers alike should familiarize themselves with this case and this opinion as its consequences for the relevant time period are significant.
The Court’s full opinion written by Judge Callahan is available here.
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