By: Brianna Schacter

Last month the U.S. Tax Court ruled in favor of Amazon in a $1.5 billion tax dispute.[1] The dispute, centering on Amazon’s Luxembourg subsidiary office and its transfer pricing arrangements, is just the first in a series of tax cases being brought by the IRS against U.S. multinational companies.[2] Transfer pricing happens when separate divisions of a company transact with each other and are used “when individual entities of a larger multi-entity firm are treated and measured as separately-run entities.”[3] Transfer pricing issues can be extraordinarily complex, and the IRS has set forth several rules and regulations in an effort to regulate. Most importantly, §482 of the Internal Revenue Code states:

In the case of two or more organizations . . . owned or controlled directly or indirectly by the same interests, the Secretary may distribute, apportion, or allocate gross income, deductions, credits or allowances between or among such organizations . . . if he determines that such distributions, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any such organizations . . . .[4]

In the case of Amazon, Judge Albert Lauber rejected the IRS’s claims and stated the department had “abused” its discretion and acted in an “arbitrary, capricious, and unreasonable” manner.[5] The ruling is particularly important for other U.S. technology companies involved in similar tax disputes, many of which take several years to complete.[6]

The IRS’s case claimed that the online retailer owed billions in unpaid royalties and interest in the U.S. for its intangible assets that were transferred to the Luxembourg office.[7] Amazon countered these claims by pointing out the IRS’s obvious flaw in determining 100% of the technology and content costs constituted intangible development costs, and also claimed the IRS drastically overestimated the value of those intangible assets.[8] Additionally, the IRS attempted to prove that an initial buy-in payment from the subsidiary to Amazon was not conducted at arm’s length, as mandated by law.[9] However, Amazon was able to successfully prove the IRS’s calculation method had been previously rejected by the Tax Court.[10]

This crucial ruling does not fully end Amazon’s, or other similarly positioned companies’ tax troubles. Amazon, for example, is also under investigation by the European Commission for its tax settlements with Luxembourg that enabled the company to pay extraordinarily low taxes.[11] The European Commission has continued to investigate several large multinational corporations, including Starbucks, McDonald’s, and Apple, it believes have taken an unfair advantage of the tax laws.[12] The tax scrutiny of U.S. multinationals operating in Luxembourg, in particular, has also substantially increased since the country adopted the Foreign Account Tax Compliance Act (“FATCA”) in 2014.[13] Under this agreement, financial institutions must comply with due diligence and registration duties and are required to report any U.S. accounts held.[14] FATCA is a set of rules designed to prevent and detect tax evasion by U.S. persons and companies.[15]

U.S. Multinational corporations should continue monitoring future tax rulings on the issues of transfer pricing and arm’s length transactions. Although the current ruling is favorable towards businesses, the climate could quickly change as the European Commission continues to target companies it views as tax abusers.

[1] Anjana Haines, Amazon Defeats IRS in $1.5 Billion Tax Case, International Tax Review (Mar. 24, 2017),

[2] wins $1.5 Billion Tax Dispute Over IRS, CNBC (Mar. 24, 2017),; Anjana Haines, Joint International Investigation Targets Tax Evasion Enablers and Credit Sussie, International Tax Review (Mar. 31, 2017),

[3] Transfer Price, Investopedia (last visited Apr. 2, 2017),

[4] 26 U.S.C.S. § 482.

[5] Amazon Just Won a $1.5 Billion Tax Fight, Forbes (Mar. 23, 2017),

[6] Haines, supra note 1 (“The giant online retailer’s win means other online technology companies facing similar disputes over their overseas earning could potentially succeed when their cases are concluded.”).

[7] Alistair M. Nevius, Amazon Wins Multimillion Dollar Transfer-Pricing Dispute With IRS, Journal of Accountancy (Mar. 23, 2017),

[8] Haines, supra note 1.

[9] Nevius, supra note 5 (nothing that Amazon granted the Luxembourg subsidiary the right to use certain preexisting intangible assets and the subsidiary was required to make an upfront “buy-in payment” of $254.5 million to Amazon).

[10] Nevius, supra note 5 (Explaining the IRS had applied a discounted-cash-flow method to the expected cash flows from the European business to determine that the buy-in payments yet this method is equivalent to one rejected by the Tax Court).

[11] Haines, supra note 1 (“The company is being investigated for its tax rulings with Luxembourg that enabled it to pay very little tax in the country. It is only one of several US multinationals that has faced increased scrutiny for its European tax practices in recent years.”).

[12] Amelia Schwanke, European Commission State Aid Investigations: A Timeline of Events, International Tax Review (Oct. 17, 2016),

[13] Luxembourg Overview, PricewaterhouseCoopers (Dec. 2, 2016),

[14] Id.

[15] Luxembourg Tax Reform 2017, Grant Thorton (2017),

Share this post