Article
Tax dispute affects transfer pricing strategies for multinational corporations
Oct. 21, 2024 · Authored by Sid Paruthi
The outcome of a tax dispute between the IRS and Airbnb Inc. may set precedents for how multinational corporations approach transfer pricing and valuation of intellectual property (IP) in cross-border transfers.
Specifically, it may hamper the use of the income method in setting these values.
View details of the ruling and its potential impact below.
IRS alleges Airbnb liability
The IRS alleges that Airbnb Inc. understated its U.S. taxable income by $1.33 billion for 2013, stemming from resources and rights provided to its Irish affiliate under a platform contribution transaction (PCT).
While Airbnb used an income method to value its licenses, the IRS applied an unspecified method, resulting in an additional $573 million in penalties. It contends that Airbnb is liable for a 40% penalty on the alleged tax underpayment, citing a gross valuation misstatement under Internal Revenue Code (IRC) Sections 6662(e)(1)(B)(ii) and (h)(2)(A).
On July 31, 2024, Airbnb filed a petition with the United States Tax Court to contest the IRS determination, Airbnb Inc. v. Commissioner, T.C. No. 12423-24.
This case underscores the critical importance of robust transfer pricing strategies and compliance in international operations.
Background on Airbnb Inc. v. Commissioner
In 2013, Airbnb established an international framework through a technology and intellectual property licensing agreement with its Ireland-based subsidiary. This agreement included a cost-sharing arrangement for the use and development of technology products, customer data, and marketing intangibles.
In return for the resources, capabilities, and rights provided by Airbnb, the Irish affiliate made a lump-sum $35 million PCT payment.
However, under Section 482 of the Internal Revenue Code and applicable Treasury Regulations, the IRS asserts that the correct payment should have been $4.2 billion.
What changes with Airbnb Inc. v. Commissioner
The Airbnb petition challenges the IRS' $4.2 billion adjustment to the PCT payment, as well as $573 million in penalties. The key issues include:
Valuation dispute
What is platformization?
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