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Amazon, Chevron tax disputes highlight uncertainty in litigating against multinationals

Nassim Khadem

When the Internal Revenue Service lost its long-running transfer pricing case against the world's largest online retailer, Amazon, on Friday, it's a surprise it didn't get US President Donald Trump angrily tweeting.

"If @amazon ever had to pay fair taxes, its stock would crash and it would crumble like a paper bag," said an earlier tweet in December by Mr Trump, who has repeatedly criticised billionaire Jeff Bezos' Amazon for failing to pay enough taxes.

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Judge Albert Lauber of the US Tax Court rejected a variety of arguments put forward by the US Internal Revenue Service (IRS) in a $US1.5 billion ($1.97 billion) transfer pricing dispute over the tech giant's transactions more than a decade ago with a Luxembourg subsidiary.

The case could have major implications for other companies in long-running disputes with tax authorities over the legality of sending income to low-tax or no-tax nations.

"The Amazon decision highlights the uncertainty of litigating transfer pricing cases, particularly those involving the valuation of intangible assets," said Chartered Accountants tax leader Michael Croker.

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"Valuable intangibles is the key battleground in transfer pricing: unlike a bank branch or a hole in the ground, IP is highly mobile and locating it in low-tax jurisdictions has long been a strategy for multinational companies, and correspondingly, a big concern for tax regulators around the world."

Although Australia has tough domestic laws aimed at multinationals, the OECD's global plan aimed at stopping multinational profit shifting – known as Base Erosion and Profit Shifting or BEPS for short – acknowledges the difficulty in litigating such cases.

The judge found that on several occasions the tax agency abused its discretion, or acted "arbitrarily or capriciously" by overestimating the value of "intangible" assets, such as software and trademarks, which Amazon had transferred to a Luxembourg unit, Amazon Europe Holding Technologies SCS.

Amazon did this through a plan called "Project Goldcrest" that would would see most of its income from its European businesses taxed in Luxembourg at a much lower rate.

Lauber's decision "should shield Amazon from potentially significant tax obligations to the IRS covering years beyond the ones covered in the lawsuit," Colin Sebastian, an analyst at Baird Equity Research, said.

William Byrnes, a transfer pricing specialist at the Texas A&M; University Law School, who has published an analysis of the decision, described it as "another major blow for the IRS in a string of such losses" for the IRS against companies transferring ownership of IP from its US parent to a lower-taxed foreign subsidiary.

The Amazon decision highlights the uncertainty of litigating transfer pricing cases, particularly those involving the valuation of intangible assets.

Chartered Accountants tax leader Michael Croker

Amazon made just $US2.37 billion profit in 2016, four times what it made in the four prior years combined, on revenue of $US136 billion. Its last Australian financial accounts filed with corporate regulator ASIC was in 2011. The company is looking to set up a bricks and mortar presence in Australia in July 2017.

Despite the US Tax Court win, Amazon may face additional tax bills in Europe if the Brussels-based European Commission decides that prior rulings by Luxembourg tax officials amounted to improper "state aid" that gave it an unfair advantage over rivals.

A formal probe into those rulings began in October 2014.

Chevron test case for Australia

In Australia, the Australian Taxation Office, which to date has spent $10 million in out-of-pocket expenses in the the Chevron case, is hoping for a win.

The case focuses on the interest rate charged on an inter-company loan, and will have global implications for the way tax paid by large companies is assessed.

In October, the ATO won its case, arguing Chevron used a series of loans and related-party payments worth billions of dollars to slash its tax bill by more than $300 million.

The tax and business community are closely watching what happens with Chevron's Federal Court appeal.

If Chevron loses – it could still take the case all the way to the High Court – it will theoretically mean that every multinational using an interrelated party loan will have to re-examine its tax arrangements.

Chevon Australia boss Nigel Hearne last week told a Committee for Economic Development of Australia breakfast in Perth that high taxes and increased regulation will reduce the competitiveness of the industry.

He cited Australia's high company tax rate and the petroleum resources rent tax (PRRT) review, which was announced by Treasurer Scott Morrison in November, as examples of this.

The Senate inquiry into corporate tax avoidance, which has looked at profit-shifting techniques used by tech giants including Apple, Google and Microsoft will now shift its focus to the oil and gas industry.

The industry argues that they already pay a lot of taxes and there should be no changes to the PRRT.

With Reuters

Follow Nassim Khadem on Facebook and Twitter.

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