IRS: Intangibles and Transfer Pricing

September 19, 2023
  • September 15, 2023.

Throughout the years, the Transfer Pricing issues involving intangibles have been cause for significant controversy between taxpayers and the Internal Revenue Service (IRS). Transaction disagreements involving intangibles have cost multinational companies millions of dollars. 

In this article, we will present three emblematic cases of multinational companies performing transactions involving intangibles.

What Are Intangibles?

The Organisation for Economic Co-operation and Development (OECD) defines an intangible as an asset, neither physical nor financial, but possibly owned or controlled for use in business activities, whose use or transfer would be compensated between independent parties in comparable circumstances.  

According to the OECD, intangible assets include patents, know-how, trade secrets, trademarks, trade names, and brands, rights arising from government contracts and licenses, and similar limited licenses and rights in intangibles. 

Landmark Disputes   

  1. United States vs. Coca-Cola: November 2020 

Case: Royalty Payments and Licensing.  

On November 18, 2020, the U.S. Tax Court ruled that Coca-Cola Co. owes more than $3.300 million in taxes due to undercharging its subsidiaries for the right to use Coca-Cola’s intangible property during the inspection period between 2007 and 2009. 

  1. Medtronic vs Comisionado: agosto de 2018 

Case: Royalty Licensing and Transfer Pricing Methods. 

The U.S. Tax Court issued its second opinion in the long-running Transfer Pricing discussion between Medtronic and the IRS over Arm’s Length royalties payable under intercompany licenses between the U.S. parent of the consolidated Medtronic group (Medtronic U.S.) and its Puerto Rican subsidiary (MPROC). 

  1. Amazon vs. U.S.: August 2019 

Case: Patent Co-operation Treaty (PCT) Calculation.  

The U.S. Ninth Circuit Court of Appeals in Seattle upheld a ruling in 2017 by the U.S. Tax Court related to intangible assets that Amazon transferred in 2005 and 2006 to the Amazon Europe Holding Technologies SCS unit.

The IRS proposed $2.200 million in adjustments, arguing that Amazon’s cost-sharing agreement contribution payments for the transfer of existing intellectual property rights were flawed. The IRS wanted to incorporate intangible assets such as workforce, goodwill, and customer relationships into the calculation. Amazon followed the tax code definition of intangibles.

The appeals court rejected the broader definition given by the IRS.

Source: Exactera