With the 9th Circuit Court of Appeal's recent decision in Amazon.com Inc. et al v Commissioner of Internal Revenue, upholding a U.S. Tax Court ruling rejecting a broader definition of intangible assets in the context of transfers from a U.S. company to foreign affiliates, similarly situated companies may be tempted to celebrate alongside the taxpayers. However, the scope of Amazon.com is limited due to tax code changes enacted subsequent to the years at issue in this case.
Amazon.com transferred intangible assets required to operate its European website business to its Luxembourg subsidiary. The intangible assets included "independently transferable" assets – customer lists, intellectual property, and software. The subsidiary made an upfront payment to Amazon.com for the value of the intangible assets it received and continued to make annual cost sharing payments for ongoing intangible development costs. The Internal Revenue Service alleged that the value of Amazon.com's goodwill, employees, and "culture of innovation" should also have been included as intangible assets transferred to the subsidiary.
As part of the 2017 income tax reform, Congress expanded the definition of intangible property, found in section 367(d)(4) of the Internal Revenue Code, to include goodwill, going concern value, and workforce in place. Had this broader definition been in place at the time of Amazon.com's disputed cost sharing arrangement, Amazon.com could have been subject to approximately $1.5 billion in additional federal income taxes.
Companies engaged in inter-company transfers of intangible assets with foreign affiliates should continue to ensure such transfers are accounted for in accordance with the revised Internal Revenue Code provisions. If intangible asset transfers and/or transfer pricing agreements are not in conformance with tax code revisions, companies should seek advice from their accountants and tax counsel on the best corrective actions to take.
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