Intangibles and the Transfer Pricing Reconstruction Rules: A Case Study of Amazon

Abstract

Intellectual Property (IP) migration represents a significant challenge to tax administrations, often involving significant tax revenue. In the Amazon case regarding the transfer of its IP from the US to Luxembourg, the Court rejected the valuations of both parties (US $255 million versus US $3.5 billion) and determined that the “arm’s length” valuation should be US $779 million instead. This “loss-loss” decision highlights how the traditional transfer pricing regime has struggled to tackle IP migration structures. On the other side of the Pacific Ocean, despite strong objection from businesses, Australia introduced a comprehensive statutory reconstruction regime empowering its tax administration to disregard intra-group transactions, and it is possibly the world’s first country to do so. Australia’s experience may provide useful insights into whether statutory reconstruction rules are desirable for other countries. This article first provides an overview of the Amazon case. It then traces the evolution of the OECD’s position on reconstruction over the years, setting the stage for the analysis of Australia’s statutory reconstruction rules, and concludes with a road test by reference to the Amazon case. The analysis suggests that the OECD’s 2017 Guidelines on reconstruction — together with the new rule allowing the use of ex post outcomes as presumptive evidence — may enhance the basis of applying reconstruction.

Note: “This material was first published by Thomson Reuters, trading as Sweet & Maxwell, 5 Canada Square, Canary Wharf, London, E14 5AQ, in the British Tax Review as Intangibles and the Transfer Pricing Reconstruction Rules: A Case Study of Amazon [2020] BTR, No.3 and is reproduced by agreement with the publishers”."