By Richard Rubin and Laura Stevens 

Amazon.com Inc. prevailed over the Internal Revenue Service in a more than $1.5 billion dispute over the online retailer's transactions with a Luxembourg subsidiary.

The U.S. Tax Court ruled Thursday that the IRS made arbitrary determinations and abused its discretion in several instances, marking another setback for the agency in high-profile international corporate tax cases. It wasn't clear from the ruling what Amazon's ultimate tax bill would be.

Amazon didn't immediately respond to a request for comment. The IRS said the agency generally doesn't comment on litigation.

The case illustrates the allure of low-tax foreign jurisdictions for U.S. companies looking to minimize their tax bills and their ability to beat the government in complex multiyear lawsuits.

"They get out litigated, especially on the expert witness front," Reuven Avi-Yonah, a tax law professor at the University of Michigan, said of the IRS. "We are talking billions, and the resources of the taxpayer [Amazon] are much higher than the IRS."

The online retail giant said in its annual report that the IRS was seeking to increase its U.S. taxable income for transactions undertaken in 2005 and 2006. For those two years alone, the company's tax bill would have increased by about $1.5 billion plus interest, with the possibility of additional bills for years beyond that, according to the annual report.

A tax bill of that scale would have been significant for Amazon, which reported profits of $2.37 billion last year on revenues of $136 billion.

The case involved a series of transactions known at Amazon as Project Goldcrest that helped lower the company's tax bill. The plan, wrote Judge Albert Lauber, was to transfer U.S. assets, such as software, trademarks and customer lists, to the Luxembourg headquarters "and to have the vast bulk of the income from Amazon's European businesses taxed in Luxembourg at a very low rate."

U.S. companies must pay U.S. corporate taxes on the income they earn around the world. They can get tax credits for payments to foreign governments and can defer the residual U.S. tax until they repatriate the profits. That system creates an incentive for companies to book profits in low-tax countries and leave them there. Many technology companies have done just that by selling intellectual property to their foreign subsidiaries and attributing foreign profits to those entities.

According to the law, they must make those sales at an arm's length price and can be required for tax purposes to make annual payments back to the U.S. parent, which was the situation in Amazon's case.

Such cases can turn out to be very dependent on the particular facts at hand and the methods for valuing intellectual property.

Judge Lauber's 207-page ruling is a detailed analysis of competing experts' opinions on the useful lives of Amazon's assets and the appropriate discount rates.

"Regardless of the correctness of the decision on the merits, cases like this -- costing millions of dollars to litigate, featuring 30 expert witnesses battling one another, and decided through a 200 page opinion -- are symptomatic of an unadministrable international tax system," said Ed Kleinbard, a tax law professor at the University of Southern California. "We urgently need international tax reform."

Amazon isn't out of the woods, however. The company still faces scrutiny in Europe, where Brussels is examining its European tax deals to determine if they constitute illegal "state aid" from Luxembourg to the company, benefits that could give them an unfair advantage over rivals.

An untaxed Amazon subsidiary reported EUR1.89 billion of profit from 2006 to 2013, according to company filings in Luxembourg, home to its European business. That profit could translate into hundreds of millions of euros in tax liability if Brussels decides that it should have been taxed in Luxembourg, according to experts. Both Luxembourg's government and Amazon have said that the company received no special treatment. Amazon has added that it pays all required taxes.

Write to Richard Rubin at richard.rubin@wsj.com and Laura Stevens at laura.stevens@wsj.com

 

(END) Dow Jones Newswires

March 23, 2017 17:30 ET (21:30 GMT)

Copyright (c) 2017 Dow Jones & Company, Inc.
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