Amazon (AMZN) Defeats IRS in Courtroom, Saves $1.5 Billion
Amazon.com, Inc. AMZN has managed a big win over Internal Revenue Service (IRS) in a court battle that has saved it a massive $1.5 billion in tax bill.
The case dates back to 2012 when IRS accused the retail giant of improperly reducing its U.S. tax bill by undervaluing intangible assets it transferred to Amazon Europe Holding Technologies SCS, the company’s Luxembourg subsidiary, in 2005 and 2006.
Clean Chit to Amazon’s “Transfer Pricing” Techniques
According to IRS, Amazon’s Luxembourg subsidiary should have paid a total of $3.6 billion (recalculated to $3.5 billion later) to its parent for the use of its intellectual property, while it actually paid $254.5 million.
Judge Albert Lauber of the U.S. Tax Court, however, took Amazon’s side and stated that there is no error in the company’s method of calculating the value of the assets transferred.
Lauber ruled that IRS’ determination of those assets’ worth was “arbitrary, capricious, and unreasonable.” He said Amazon transacted through a plan called "Project Goldcrest" to have the "vast bulk" of income from its European businesses taxed in Luxembourg at a "very low rate."
We note that year to date Amazon has underperformed the Zacks Internet – Commerce industry. While the industry gained 18.1%, the stock rose 12.8%. We believe this legal victory has prevented a huge drain on cash and will benefit the company’s share price going forward.
The Ruling Removes Barrier to Investment
Amazon’s global margins are already under pressure and are likely to be so at least for a few years in the future. That’s because the company is investing heavily in fulfillment centers, TV shows and movies, AWS, grocery business, logistics, India expansion and what not to cope up with slowing e-commerce business and remain competitive against rivals like Alibaba BABA, eBay EBAY and Wal-Mart WMT.
Amazon.com, Inc. Total Expenses (TTM)
Amazon.com, Inc. Total Expenses (TTM) | Amazon.com, Inc. Quote
Under such circumstances a $1.5 billion overload could have hit its investment plans considerably. Notably, the amount is more than 62% of Amazon’s 2016 revenues ($2.37 billion). Apart from saving a huge drain on resources, the win saved Amazon from earning a bad name.
Currently, Amazon has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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