Tech Tax Law: The IRS v. Amazon: A 2-Minute Summary | Gordon Tax Law

International Tax Law: Amazon Wins $1.5 Billion Tax Battle with IRS

picture to accompany blog post about the IRS v Amazon tax lawsuitAmazon crushed the IRS in court. The online retailer and the tax agency clashed over transactions with Amazon’s Luxembourg subsidiary — a $1.5 billion disagreement. But would Amazon have won the same case under the new tax rules?

The IRS v. Amazon.com: A 10-Year Tax Dispute

Back in 2005 and 2006, Amazon picked Luxembourg — a country affectionately known as “the Death Star of financial secrecy” amongst de-regulatees — as its EU headquarters. At that time, the company moved several intangible assets under the new entity. Amazon credits the choice on Luxembourg’s centrality. Its low value-added and corporate tax rates also didn’t hurt.

But according to at least one investigative reporter, Amazon’s Luxembourg move was colored by some questionable backroom dealing.

Journalist David Pegg writes in The Guardian:

Amazon first arrived in Luxembourg in 2003, and within a few months secured a confidential agreement with the country’s tax authorities. Bob Comfort, Amazon’s head of tax, would later tell the Luxembourgish newspaper d’Lëtzebuerger Land that Juncker had personally offered to help Amazon. “His message was simply: ‘If you encounter problems which you don’t seem to be able to resolve, please come back and tell me. I’ll try to help.’” Comfort was later appointed Luxembourg’s “honorary consul to Seattle”, the location of Amazon’s U.S. headquarters.

Pegg goes on to outline the three-pronged plan:

The tax strategy, internally codenamed Project Goldcrest after the national bird of Luxembourg, was fundamental to Amazon’s plan to put the duchy at the heart of the European business of its global empire. Though highly complicated, at its core the scheme involved the following interplay between entities in Luxembourg and the U.S.:

  1. Amazon Europe Holding Technologies SCS(AEHT) would own the legal right to use Amazon’s intellectual property, or I.P., outside the United States. Because it was a specific type of legal entity, called a “non-resident partnership”, any money it received from other Amazon entities in exchange for the right to use that I.P. would be tax-free.
  2. Amazon E.U. Sarl, which operates Amazon’s European businesses, would pay AEHT hundreds of millions of euros in “royalty fees” for that I.P. each year. The cost of the royalties would be offset against its own tax bill.
  3. AEHT would pay Amazon’s U.S. businessits own royalty fees for the right to license out that I.P. in Europe.

The IRS, however, had different ideas. The nation’s tax agency wanted Amazon to pay on profits derived from intangible item transactions (i.e., the intellectual property, etc.). Acquiescing would have amounted to over a billion dollars in U.S. tax revenue.

IRS v. Amazon: The Intangible Assets Verdict

In the end, both a lower court and an appellate court sided with Amazon. Judge Consuelo Callahan ruled that under applicable tax law for 2005 and 2006, the IRS could only tax “independently transferable” assets.

Make note, however, that this ruling is based on 2005 and 2006 rules. The 2017 Tax Cuts and Jobs Act changed things. Under the new regulations, the IRS would win this case.

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