Amazon v. Commissioner: IRS Cost Sharing Buy-In Challenge Rejected Again

On March 23, 2017, the U.S. Tax Court issued its long-awaited opinion in a transfer pricing dispute involving Amazon's cost sharing arrangement ("CSA") with its Luxembourg subsidiary.

Amazon contributed software and other preexisting intellectual property ("IP") to a CSA, under which a Luxembourg subsidiary ("Luxco") agreed to share the costs of developing future IP for use in Amazon's European operations. Consistent with the pre-2009 transfer pricing regulations' requirement that the parties make buy-in payments for use of IP contributed to CSAs, Luxco paid $255 million to Amazon.

The IRS challenged Amazon's valuation method, claiming that Luxco's buy-in payment was not arm's length. The IRS asserted that the contributed IP had an indefinite useful life (because it served as the basis for future IP development) and used a discounted cash flow valuation method. This approach increased the buy-in payment to approximately $3.5 billion.