post Wednesday April 24, 2013
Following the U.S. Tax Authority, the Internal Revenue Service (IRS), assed a $2 billion adjustment, retail giant Amazon has recently filed an appeal of the assessment. The IRS based their adjustment on questionable valuations applied to a cost sharing arrangement made with a foreign subsidiary. Amazon has a variety of reasons to appeal, and it is widely believed that they stand a good chance of a successful appeal.
The IRS adjustment centers on what they believe to be an “unrealistically” short life span on intangibles that they transferred to a foreign subsidiary. The transfer was of various intangibles to the Luxembourg subsidiary of the online retail company. The IRS believes that the values that Amazon assessed of the intangibles were skewed because of the unreasonable life span. This case should stand as a warning to transfer pricing and valuation specialists to utilize acceptable methods in order to avoid complex tax litigation and sizeable penalties.
Judging on the recent precedent set by the “Veritas” case involving the IRS, Amazon has grounds for a sound and plausible appeal. The IRS has used a similar strategy in adjusting Amazon’s taxes to methods used in the past. As in the Veritas case, the IRS utilized the discounted cash flow method to analyze intercompany cost-sharing arrangements. In the Veritas case, the tax authority also partnered with renowned economics firm, Horst-Frisch, to value the intangibles in question. The IRS ultimately lost the appeal in the Veritas case. It is clear that Amazon will likely implement similar arguments and strategies based on the precedent that was established in the Veritas case.
It is currently unclear who will win this appeal, and likely a substantial of time will pass until a decision is made. One thing is clear, if the IRS loses this appeal, the discounted cash flow method for attacking the transfer of intangibles and cost-sharing arrangements will likely be discontinued by the U.S. tax authority. The transfer pricing and valuation world should pay attention to this important case.
Source:International Tax Review
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