Taxpayer Wins First Transfer Pricing Case – Introduction
In a notable ruling, the Irish Tax Appeals Commission (TAC) has decided in favor of a taxpayer in Ireland’s first-ever transfer pricing case.
The case revolved around transfer pricing adjustments proposed by the Revenue Commissioners (Revenue) concerning the supply of services by an Irish subsidiary (Taxpayer) to its US parent company (Parent), particularly focusing on share-based awards (SBAs) granted to the Taxpayer’s employees by the Parent.
Lowdown to the case
The Taxpayer, under intercompany services agreements, performed sales, marketing, and research and development activities for the Parent on a “cost-plus” basis.
This arrangement meant the Taxpayer charged the Parent a fee based on its costs plus a mark-up. Although the Taxpayer’s financial statements included expenses for SBAs as required by Financial Reporting Standard 102 (FRS 102), the intercompany agreement explicitly excluded these expenses from the cost base used to calculate the charges to the Parent.
The Revenue contended that the Taxpayer failed to demonstrate that the intercompany service fees were at arm’s length, arguing that SBA costs should have been included in the cost base for the markup calculation.
Both parties agreed that the Transactional Net Margin Method (TNMM) was the appropriate transfer pricing method to apply in this case.
Economic Costs v Accounting Expenses
The Taxpayer disputed the Revenue’s view, asserting that SBA costs were notional and should not factor into the cost base for determining intercompany charges.
The Taxpayer’s expert witness argued that the economic risk associated with SBAs was borne by the Parent’s shareholders, who effectively diluted their ownership to incentivise the Taxpayer’s employees.
The TAC, relying on OECD guidelines, sided with the Taxpayer.
It considered whether the SBAs created an economic cost for the Taxpayer, ultimately concluding that the Parent bore the risk and administrative burden of the SBAs.
The TAC emphasised that while the accounting treatment of SBAs was correct, it did not reflect the economic reality.
Therefore, the SBAs should be excluded from the Taxpayer’s cost base in accordance with the arm’s length principle.
Admissibility of Evidence
The Revenue objected to the admissibility of the Taxpayer’s expert reports, claiming they were opinions on Irish domestic law rather than expert economic evidence.
However, the TAC found the expert witnesses credible, independent, and helpful in addressing the appeal’s issues.
The TAC accepted the Taxpayer’s evidence on accounting treatment as uncontroversial.
Assessment Period
A contentious point was the 2015 tax return and the four-year statutory time limit for Revenue to raise an assessment.
The Revenue argued the time limit did not apply because the return was insufficient, citing flaws in the transfer pricing documentation.
The TAC, however, stated that a “sufficient” return does not need to align with Revenue’s assessment, as long as the taxpayer provided full and true disclosure.
Consequently, the TAC ruled in favour of the Taxpayer.
Taxpayer Wins First Transfer Pricing Case – Conclusion
This decision holds international significance, diverging from rulings in other jurisdictions such as Israel.
For instance, in the Israeli cases of Kontera and Finisar, tax authorities required that SBA costs be included in the cost base for calculating cost-plus remuneration, despite the subsidiaries not incurring these costs.
This TAC ruling, informed by comprehensive expert testimony and aligned with OECD Transfer Pricing Guidelines, will impact multinational corporations with SBA schemes.
Businesses should consider reviewing their transfer pricing policies in light of this landmark decision.
Final thoughts
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