Supreme Court Elects Not to Touch Altera Case
Inaction by the U.S. Supreme Court capped a closely watched transfer pricing case involving chipmaker Altera. The high court on June 22 denied a certiorari petition filed by the Intel Corp. subsidiary, leaving intact a Ninth Circuit panel's ruling a year earlier that had upheld rules requiring affiliated businesses to include stock-based compensation when divvying up the cost of developing intellectual property.
The cost-sharing rules that the justices elected not to address mandate a specific treatment for companies engaged in IP development with related parties, rather than recommend a comparability analysis.
Some tax law experts told Law360 that the court's decision could prompt the Internal Revenue Service to challenge transfer pricing arrangements unilaterally, creating uncertainty around the traditional arm's-length standard. Others said the rules rightly affirm the IRS' ability to apply an internal economic analysis when there are no relevant comparable transactions.
The Altera case had drawn attention ever since the U.S. Tax Court in July 2015 struck down the cost-sharing rules, finding that the U.S. Department of the Treasury hadn't adequately explained its stance that they aligned with the arm's-length standard. The standard underpins the pricing of goods and services transacted between units of a multinational corporation.
In its 2-1 decision to restore the rules in June 2019, the Ninth Circuit panel found there historically had been a fluid definition of "arm's length." Because Treasury had applied an internal comparison method, it didn't have to weigh irrelevant comments pointing to a lack of similar transactions among unrelated parties, the appeals panel concluded.
The judges rejected Altera's and other tech companies' claims that Treasury, during the 2003 process for writing the rules, ignored public comments that unrelated companies wouldn't in practice share such costs.
The case is Altera Corp. and Subsidiaries v. Commissioner of Internal Revenue, case number 19-1009, in the U.S. Supreme Court.
Facebook IP Tax Trial Delayed Over Pandemic
Facebook Inc., which since October 2016 has been embroiled in a dispute with its Irish subsidiary over license agreements governing the value of intangible property, had the Washington, D.C., portion of its U.S. Tax Court trial postponed because of the coronavirus epidemic. The Tax Court, which is based in Washington, had earlier announced it would close until further notice and cancel trials as needed amid the outbreak of COVID-19, the disease caused by the coronavirus.
The trial had been scheduled for the first and third weeks of June, the Tax Court said in an order issued March 26. That was about three weeks after the conclusion of the San Francisco part of the trial, which had begun Feb. 18.
In the last major action at the bench trial, on March 5, an IRS lawyer attempted to discredit a Facebook advertising executive's testimony by repeatedly pointing out that the company's sales revenues were growing at a time the executive said the tech giant struggled to attract long-term advertisers.
Ciarán Quilty, vice president of the global business group at Facebook, had told the court that when he joined the company in 2010, its ad business faced a number of challenges, with only sporadic success and a high "churn" rate. That means many advertisers would try out Facebook and then remove their ads because the platform wasn't effective. Even though revenues were growing, quarter-on-quarter growth was declining, Quilty testified.
On cross-examination, an IRS attorney, Ronald Collins Jr., attempted to cast doubt on Quilty's assertions by pointing out that the number of Facebook users increased during 2010, and that the company's sales revenues jumped in the U.K. and Ireland by four or five times. The IRS also said Facebook benefited from having access to more user data as its user base grew.
The dispute stems from a tax bill related to the value of intangible assets, such as copyrights, trademarks and technology, that Facebook shifted to its subsidiary in Ireland a decade ago for marketing and other services. The IRS argues that those intangibles were worth more than what Facebook claimed. If the IRS wins the case, Facebook could owe up to $9 billion in taxes.
The case is Facebook Inc. and Subsidiaries v. Commissioner of Internal Revenue, docket number 21959-16, in the U.S. Tax Court.
Wells Fargo Draws Split Panel in Rare Penalty Ruling
In a 2-1 ruling on April 24, the Eighth Circuit upheld negligence penalties against Wells Fargo & Co. for claiming foreign tax credits tied to what the majority deemed a $1.25 billion sham transaction with U.K. banking giant Barclays PLC. According to the ruling, Wells Fargo failed to prove that it relied on legal authorities to establish a reasonable basis for its tax positions — the first time an appellate court has applied a subjective standard to this type of penalty defense.
The appeals judges' split decision could raise the bar for defending returns against IRS scrutiny, affecting at least companies and individuals under the Eighth Circuit's jurisdiction, which covers several Midwestern states, tax law specialists told Law360. They said affected taxpayers may have to consider waiving privilege when using the reasonable-basis defense, and that the panel's view that supporting regulations had been clear raised larger administrative law questions, as both the dissenting judge and lower-court district judge considered them ambiguous.
The case is Wells Fargo & Co. v. USA, case number 17-3578, in the U.S. Court of Appeals for the Eighth Circuit.
Tax Court Holds Firm Against IRS Over Eaton APAs
On Jan. 7, weeks before the pandemic forced it to shut down and postpone trials, the U.S. Tax Court dismissed a renewed bid by the IRS to sanction Eaton Corp. with penalties for transfer pricing adjustments. The court opted against reconsidering an Oct. 28 ruling in which it determined that Eaton didn't owe penalties because the IRS had abused its discretion by canceling two advance pricing agreements made with the company.
The dispute stems from a decision by the IRS in 2011 to cancel the two advance pricing agreements the agency had negotiated with Eaton, which makes electrical generation and other industrial equipment, for the 2005 and 2006 tax years. The APAs determined for tax purposes the price of transactions Eaton conducted with its Caribbean subsidiaries.
Before her October ruling, Judge Kathleen Kerrigan had said in a July 2017 decision that the IRS abused its discretion in tossing the APAs. Therefore, there was no allocation under Internal Revenue Code Section 482
, which allows the IRS to reallocate income from a U.S. company's foreign affiliate to reach arm's-length results, and thus no penalties, the judge said.The case is Eaton Corp. et al. v. Commissioner of Internal Revenue, docket number 5576-12, in the U.S. Tax Court.
Amazon Tells EU Court of Transfer Pricing Error
Outside the U.S., the European Union's General Court on March 6 heard from an Amazon.com attorney that the European Commission had misapplied a well-established transfer pricing method in determining that Amazon received illegal state aid from Luxembourg.
The attorney, Michel Petite, told the court at a hearing that the commission, the EU's executive branch, erred in using the transactional net margin method, or TNMM, in October 2017 when it threw out a ruling Luxembourg had made in Amazon's favor in 2003. The ruling blessed an arrangement under which Amazon's operating company, LuxOpCo, paid royalties for intellectual property to another Amazon affiliate, holding company LuxSCS.
The commission has described the holding company as a shell. After investigating Amazon's transfer pricing deal for years, it determined the arrangement allowed the company to record most of its profits in Luxembourg without being taxed there, giving it an unfair advantage. The commission has ordered Luxembourg to collect €250 million ($281 million) in corporate income tax from the retail giant.
At the hearing on March 5, Paul-John Loewenthal, an attorney for the commission, countered arguments that it had relied too heavily on 2010 and 2017 updates to transfer pricing guidelines issued by the Organization for Economic Cooperation and Development. The guidelines recommend that in applying the TNMM, the simpler party — almost never the party owning valuable intellectual property — be tested in calculating the price for transactions between related companies.
The cases are Amazon EU and Amazon.com v. Commission, case number T-318/18, and Luxembourg v. Commission, case number T-816/17, in the General Court of the European Union.
--Additional reporting by Natalie Olivo, Dorothy Atkins, David Hansen and Molly Moses. Editing by Tim Ruel and Joyce Laskowski.
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