J. Clark Armitage spoke with Worldwide Tax Daily regarding the European Commission's recently released letter to Luxembourg which included preliminary findings that led to the formal state aid investigation of the 2003 tax ruling issued by the Grand Duchy to Amazon EU Sàrl. For the complete article, please visit Worldwide Tax Daily's website (subscription required).
Excerpt taken from the article "European Commission Details Challenge to Luxembourg's Amazon Ruling" by William Hoke and David D. Stewart for Worldwide Tax Daily.
J. Clark Armitage of Caplin & Drysdale told Tax Analysts that while the arrangement that allocated residual profits to AEHT and residual losses to Amazon EU is "atypical," there are some circumstances where it could make sense, such as an arrangement where there are only modest risks of loss.
"Many APAs determine a royalty for IP based on an appropriate range of operating profits expected to be earned by the licensee," Armitage said. "This makes sense where the functions of the licensee are easily benchmarked and the value of the IP can't readily be determined through the use of comparable uncontrolled transactions."
The commission also questioned the length of time the APA had been left unchanged, noting that it had been in place for more than a decade.
Armitage said there is precedent for long APAs, but that the letter does not provide enough information to show "whether a long tenure was consistent with the expectations of the parties."
"A longer tenure makes sense where the risks and profits associated with a business activity are expected to come to fruition over a longer period -- such as the life cycle of a pharmaceutical -- rather than on an annual basis," Armitage explained.