Amazon has won a transfer pricing dispute with the US Internal Revenue Service (IRS) that could have cost the US ecommerce giant $1.5bn in tax adjustments.

The case revolved around a cost-sharing arrangement Amazon had with its Luxembourg subsidiary under which it transferred to the subsidiary intangible assets, such as software, trademarks and customer lists, related to Amazon’s European online operations.

The IRS argued that the arrangement was not arm’s length – that is, the type of arrangement that two unrelated companies would make – and it disputed the methodology that Amazon used to value the assets. However, the US Tax Court, ruling in favour of Amazon, found that the IRS calculations were “arbitrary, capricious and unreasonable”.

The case could be further evidence that the IRS needs to work on its transfer pricing methodologies. Last autumn, the Treasury Inspector General for Tax Administration found that the agency was not properly equipped to evaluate transfer pricing issues.

Several reasons were cited in its report, with one standout finding. The inspector general determined that between 2012 and 2014, out of about $10.5bn in proposed adjustments in transfer pricing cases that were appealed, the IRS Office of Appeals reduced the original proposed adjustments by $8.5bn. After post-appeals processes, only about $321m was ultimately assessed.

It is well known that the IRS has suffered several budget cutbacks in recent years, eroding its ability to operate efficiently. It pointed this out in its response to the report, saying: “Our enforcement resources for dealing with inappropriate or aggressive transfer pricing issues continues to decrease.”

However, in February the IRS did release a transfer pricing audit roadmap.