Keystone Strategy Supports Amazon in its Favorable Outcome of a $1.5 Billion Tax Dispute

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Keystone Strategy provided economic and technical support to several testifying experts on behalf of Amazon in the recent $1.5 billion tax transfer pricing dispute with the Internal Revenue Service (IRS).

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Keystone Strategy provided economic and technical support to several testifying experts on behalf of Amazon in the recent $1.5 billion tax transfer pricing dispute with the Internal Revenue Service (IRS).

Contact: Dr. Rohit Chatterjee, Keystone Strategy
(857) 202-6499 | rchatterjee@keystonestrategy.com

Keystone Strategy, an economics and strategy consulting firm, provided economic and technical support to several testifying experts on behalf of Amazon in the recent $1.5 billion tax transfer pricing dispute with the Internal Revenue Service (IRS) which resulted in a favorable outcome for Amazon.

At issue in this case were the tax implications related to how Amazon valued the intangible assets required to run their European website business, transferred from Amazon U.S. to a European subsidiary. In his March 23, 2017, ruling, U.S. Tax Court Judge Albert G. Lauber rejected the IRS’s position that the intangible assets had a perpetual or “indefinite” useful life and should be valued jointly as a whole business using a discounted cash-flow based analysis (Amazon.com Inc. & Subsidiaries v. Commissioner of Internal Revenue, 148 T.C. No. 8, Docket No. 31197-12, March 23, 2017). Amazon’s experts argued that the intangibles should be treated as three distinct collections of assets (website technology, marketing intangibles, and customer information), each with its own value based on its useful life.

Working closely with Amazon and its representing law firms Morgan, Lewis & Bockius LLP and Skadden, Arps, Slate, Meagher & Flom LLP, Keystone partnered with four academic experts whose collaborative work was instrumental in evaluating the transferred intangible assets, determining their useful life, and the appropriate decay rates upon which royalty rates were calculated. As part of the ruling, the judge agreed that the transferred intangible property had a finite useful life.

The Keystone experts that supported Amazon are:

  • David C. Parkes, George F. Colony Professor of Computer Science, and Dean for Computer Science, Harvard University, who evaluated eight (8) separate major software components of Amazon’s website technology, and determined the expected useful life of Amazon’s website technology by measuring the degree to which those components were actually modified over time.
  • Alan D. MacCormack, MBA Class of 1949 Adjunct Professor of Business Administration at Harvard Business School, who evaluated actual changes to Amazon’s source code and testified on its useful life and its rate of decay over that useful life.
  • David Franklyn, Professor, and Director of the McCarthy Institute for IP and Technology Law, University of San Francisco (USF), who testified to the value of Amazon’s transferred marketing intangibles (comprised of trademark and domain names), by analyzing the relative allocation of the marketing intangibles between the European portfolio and the U.S. portfolio.
  • Marco Iansiti, David Sarnoff Professor of Business Administration and Unit Head, Technology and Operations Management, Harvard Business School, who testified to the rate of innovation and technological change in e-commerce during the years at issue, and provided an upper bound to the value of Amazon’s technology.

About Keystone
Keystone is an innovative strategy and economics consulting firm that delivers transformative ideas to the market. The company partners with Fortune 500 companies on leading-edge challenges in science, technology, and business. The firm’s Tax Practice provides deep technical, economic, and engineering knowledge on such topics as technology valuation, economic and Industry analysis, product pricing, and valuation of marketing and other intangibles. Keystone regularly combines the strategic insights of leading experts from Harvard, Stanford, MIT, Wharton and other top universities with the practical industry expertise of its accomplished professionals. Learn more about Keystone at http://keystonestrategy.com.

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