Nike Victorious in Claiming Foreign Tax Credits From Royalties

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By Erin McManus

Sept. 14 — Nike Inc. can take more than $300 million in credits for foreign taxes paid on intellectual property royalty payments from one subsidiary to another.

In stipulated decisions entered Sept. 13 and 14, the U.S. Tax Court said Nike had no deficiencies for its tax years ending in 2011 and 2012 ( Nike, Inc. v. Commissioner, T.C., No. 10776-15, stipulated decision entered 9/14/16 ; Nike, Inc. v. Commissioner, T.C., No. 16869-16, stipulated decision entered 9/13/16 ).

The decisions end Nike's dispute with the Internal Revenue Service over the disallowance of foreign tax credits that resulted in deficiencies totaling more than $250 million.

Arm's-Length Payments

Nike International Ltd.—a Nike subsidiary—licensed intellectual property used outside the U.S. to a second subsidiary, Nike European Operations Netherlands BV. According to petitions filed with the Tax Court, Nike European made arm’s-length royalty payments totaling $3.86 billion to Nike International during tax years 2010 through 2012 (149 DTR K-3, 8/3/16).

The IRS said in its explanations of the deficiencies that Nike didn't properly allocate incurred foreign withholding taxes to the foreign royalty income under partnership tax rules.

Both Nike International and Nike European are disregarded subsidiaries of Nike Pegasus, a Bermuda partnership. In its petitions, Nike said the tax expenditures were allocated to partners in Nike Pegasus—three disregarded entities also formed under Bermuda law—in the same ratios as the profits and losses and in accordance with the partners' interests in Nike Pegasus.

Baker & McKenzie LLP represented Nike.

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To contact the editor responsible for this story: Meg Shreve at

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