United States

Amazon wins the transfer pricing case against the IRS


As summarized in our recent tax alert, the U.S. Tax Court ruled against the IRS and concluded that Amazon properly priced the value of certain pre-existing intangibles to be used in Amazon’s European business. The tax court agreed with Amazon that its method for determining the requisite buy-in payment was the best method to use and its cost-allocation method was reasonable for allocating certain costs. The tax court also found the IRS abused its discretion in allocating certain costs.

This was yet another blow to the IRS and could end up costing the IRS billions in other cases if the ruling persuades other companies to continue to fight on similar issues. That said, this may motivate the IRS to “sharpen its pencils” and re-examine its valuation methodologies in assessing taxpayers’ cost-sharing arrangements (CSAs) – still viewed by the IRS as a high-priority area presenting significant tax recovery opportunities. In this light, it is important for taxpayers that have CSAs with foreign-related parties to continuously analyze and update the definition of the covered intangibles, along with the valuation and associated cost apportionments used to justify the terms of the CSA. It is important to compile robust facts and proper benchmarking documentation to support the terms of the CSA. This will help taxpayers stay in alignment with the terms and conditions of the CSA and better mitigate potential transfer pricing risks.     

Of the two critical components, the buy-in payment valuation still poses the greatest risk in implementing CSAs. This case raises important questions and considerations for taxpayers including:

  • What are the intangible assets being contributed to the arrangement?  What are the specific attributes and categories of the intangibles?
  • How is the useful life of intellectual property (IP) being determined?  Are the IP components segmented for the useful life determination?  What is the underlying support for the IP’s useful life?
  • Are the intangibles, its ownership and usage well defined and documented?
  • Does the valuation method(s) address both the seller’s and buyer’s perspectives?  For example, does it address only the seller’s perspective (e.g., only a U.S. perspective)?  Or does it address both the U.S. and OECD perspectives (assuming buyer is foreign non-U.S)?
  • Do multiple methods drive similar valuation amounts?
  • Are the discount rates applied based on robust support?  What is the degree of sensitivity around the discount rates?
  • Are the cost apportionments in line with the participants’ reasonably anticipated benefits (RABs)?
  • Does this court decision change management’s transfer pricing reserve position, if any?

Taxpayers should review their CSAs in light of this decision and assess whether they are well documented because the IRS continues to be active in this area. 

John Kim

Senior Director

John provides transfer pricing valuation and related tax advisory services to multinational companies. reach him at john.kim@rsmus.com.

Areas of focus: Transfer Pricing ValuationInternational Tax Planning Strategies

How can we help you with your tax planning?

Receive our tax newsletters by Email




Global mergers & acquisitions webcast series

  • February 24, 2022