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Amazon is known for its discounts, but this discount is steep indeed. The online retailer won a tax dispute with the IRS last Thursday, evading a federal tax bill of $1.5 billion plus interest.
The dispute began when the IRS accused Amazon of inappropriately lowering its domestic tax bill by transferring assets to a subsidiary in Luxembourg. But the U.S. Tax Court disagreed, calling the IRS's evaluation "arbitrary, capricious, and unreasonable."
The case began in 2012, but stems from transfers to its European subsidiary in the mid 2000s. That subsidiary was based out of Luxembourg, which offered tax rates much lower than in the U.S. To take advantage of those discounts, Amazon launched "Project Goldcrest" (named after Luxembourg's national bird), creating the subsidiary, Amazon Europe Holding Technologies, which then agreed to pay the parent company $226.5 million to use its IP.
That steeply undervalued Amazon's intellectual property, the IRS said. The subsidiary should have paid the U.S. counterpart at least $3.5 billion, according to the agency. That number, Amazon claimed, significantly overestimated the value of its software and trademarks.
The IRS also claimed that Amazon owed $234 million in tax on income collected from the subsidiary. If the IRS had prevailed, the total tax bill would have hit $1.5 billion plus interest, according to the company.
Amazon has been criticized for its light tax burden in the past. As Reuters notes, the President even called out the company on the campaign trail, saying it was "getting away with murder tax-wise."
But some commentators praised the outcome. "This is good for everybody, not just Amazon," according to Michael Pachter, an analyst with Wedbush Securities and former tax attorney.
"It reaffirms that the tax law permits wholly-owned subsidiaries can license intellectual property" as Amazon did, he told Reuters. "Totally legal, totally legal."
But, last week's ruling isn't the final word on Amazon's Luxembourg tax strategy. The EU is currently investigating whether Luxembourg's favorable treatment of the company amounted to impermissible "state aid."
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