Originally published on Forbes.com.
Amazon is in quite a tax battle with the IRS. According to the Amazon 10-K (downloadable) there is about $1.5 billion in taxes at stake spread over a seven year period beginning in 2005. Amazon had over $74 billion in sales in 2013, but its pretax profit is around $500 million, so $1.5 billion is, as we say, a number. Apparently Amazon has already reserved nearly a third of it. The case has to do with “transfer pricing”. US companies that keep overseas earnings overseas can defer taxes on them indefinitely.
There can be questions about whether the US companies are being fairly compensated for what they provide to the overseas subsidiaries. That is what transfer pricing is about in a nutshell. We won’t go into the devilish details since this week’s decision in the Tax Court is merely about a stage in the case. The IRS was hoping to call Jeff Bezos as a witness, but he objected, this being such a busy time for Amazon with the holidays and all. The Tax Court agreed, so we will not be hearing from Mr. Bezos. The decision is as you might expect on the lawyerly side, here are some of the high points.
What’s It All About?
The deficiencies stem from a cost sharing arrangement (CSA) executed between petitioner and Amazon Europe Holdings Technologies SCS (AEHT), a Luxembourg affiliate. In entering into the CSA, petitioner transferred preexisting intangible assets to AEHT; the parties agreed to share future intangible development costs (IDCs). This case will require the Court to determine the proper amount of AEHT’s buy-in obligation with respect to the transferred property (including technology, trademarks, and customer information) under section 1.482-7(a)(2) and (g)(2), Income Tax Regs. The Court will also be required to assess the portion of petitioner’s costs properly allocable to IDCs,which will dictate in part the cost-sharing payments that AEHT is required to make.
Why Does The IRS Wants Jeff Bezos To Testify?
In his pretrial memorandum, respondent listed Mr. Bezos as a potential witness and indicated that the topics of his testimony would include the following: the history of Amazon; Amazon’s growth and success; on-line retail and other businesses and products; Amazon’s ecommerce technology; and Amazon’s restructuring between 2004 and 2006. More recently, respondent stated his desire to elicit testimony from Mr. Bezos on the following 15 subjects: “the Amazon brand”; early spending on marketing and advertising; the financial metrics used by Amazon in making important decisions; Amazon’s internal discount rate in evaluating investments; statements made in Amazon’s 1997 and 1999 letters to shareholders and certain annual reports; Amazon’s intellectual property management; Amazon’s R&D budget; Amazon’s growth rates; early Amazon risks versus risks in 2004-2005; Amazon’s geographic risks; Amazon’s business strategy as “a flywheel model”; statements in petitioner’s expert witness reports; management’s financial projections; the transfer of intangibles to AEHT; and Mr. Bezos’ “vision for Amazon.”
Fascinating stuff and I’m sure we would get from it a really clear explanation for the business reasons for parking Amazon’s intellectual property in a landlocked country with a population slightly over a half million.
But He’s Too Busy !
There was a motion to quash the subpoena supported by an affidavit. This was the part I found amusing.
The affidavit avers that appearing at trial would require a significant commitment of time by Mr. Bezos and would cause a substantial disruption of his management responsibilities during Amazon’s peak holiday season. (emphasis added)
The Ruling
Judge Lauber has to balance the burden placed on Mr. Bezos against the value of his testimony to the IRS. Even though the government predicted that the testimony would take less than a day, the broad range of subjects they are addressing would require him to spend substantial time preparing. In terms of the value of the information, they have already heard from several members of the senior leadership team so any information added by Mr. Bezos would be cumulative or duplicative.
So the subpoena is squashed and only the S-team will be weighing in with top management testimony.
When it comes to the ultimate outcome of the case, I’m not sure whether I should hope for a decision or a settlement. A decision will probably be pretty interesting, but without quotes from Mr. Bezos perhaps not so much. On the other hand it will be a real door stopper and I will have to read it probably at least twice and will feel very guilty if I can’t make anything worth writing about out of it. So I’ll remain torn on that issue. Still, it is a comfort that Mr. Bezos will not be distracted from making sure all our Christmas presents get delivered.