TAC determination: VAT recovery entitlement

Background 
The TAC issued its determination recently in relation to an appeal concerning the entitlement of an Irish plc holding company to recover VAT incurred on certain transaction and ongoing costs. The amount of VAT in dispute was €45m.

The background facts to the case are somewhat complex but broadly:

• Following a restructuring by way of spin-off / de-merger of part of the corporate group in question and a subsequent corporate inversion executed by way of scheme of arrangement, the Appellant – NYSE listed Irish company – became the ultimate parent of the group. The Appellant held shares directly in four subsidiaries (including a Company A) and also held shares indirectly in a number of other subsidiaries the majority of which were held by Company A. 
• Throughout the periods under dispute, the Appellant provided a range of management services to four of its indirect subsidiaries (Service Recipients). In order to provide these services the Appellant received a range of services from a non-Irish group company pursuant to a transfer pricing agreement (Company I).
• The Appellant recovered VAT (domestic or reverse charge) in respect of all costs incurred. This included ongoing costs associated with the supply from Company I in addition to transaction costs associated with the spin-out / de-merger and the corporate inversion.
• Irish Revenue disputed the VAT recovery taken by the Appellant and raised assessments with a view to seeking partial VAT recovery in respect of ongoing costs and no VAT recovery in respect of the transaction costs. The Appellant appealed those assessments to TAC.

TAC determination on the issues
TAC Commissioner O'Mahony (Commissioner) determined the case by reference to five key issues or questions.

Was the Appellant engaged in economic activity?
On the question of whether the Appellant engaged in economic activity, Commissioner determined that the Appellant was at all material times actively engaged in the management of all aspects of the business of the Appellant Group. It acted as an 'active holding company' in that it was actively managing all aspects of the business of the Appellant Group and did so through its agreement with Company I and its service agreements with subsidiaries. The Appellant's engagement and involvement in managing those subsidiaries was for the purposes of the exploitation of its holdings in those companies for the purpose of obtaining income therefrom on a continuing basis.

What was the supply received by the Appellant from Company I?
On the question of the nature of the supply received by the Appellant from Company I (i.e. various management services including corporate executive, business development, human resources, internal audit, finance, tax, legal, treasury, risk management and operations), Commissioner determined this constituted a single, composite supply of services. This supply was subject to reverse charge VAT at the standard rate.

Did the Appellant use the supply received from Company I for its economic activity?
On the question of whether the Appellant used the single, composite supply of services from Company I for the purposes of its economic activity such that the associated reverse charge VAT is recoverable, Commissioner determined that to be the case. There was found to be a direct and immediate link between the input costs suffered by the Appellant on the single composite supply of services received from Company I and the supply of management services by the Appellant to the various subsidiaries. This was regardless of the fact certain subsidiaries were not party to the underlying service agreement and the cost of the management services were borne by only four of the subsidiaries. The transfer prices agreed between Company I and the Appellant and the Appellant and the subsidiaries was found not to have a bearing on this issue.

Is the Appellant entitled to a deduction in respect of the spin-out/de-merger costs?
On the question of whether the Appellant was entitled to an input tax deduction in respect of costs associated with the spin-out/de-merger, Commissioner determined VAT recovery should be permitted. The decisions to execute the transaction were an integral part of the active management by the Appellant's Board of the Appellant Group's business as a whole. The planning and execution of the transaction constituted economic activity on the part of the Appellant. The transaction benefited the group as a whole such that the costs in respect of it related to the Appellant's economic activity and had a direct and immediate link to the Appellant's taxable output supplies to its direct and indirect subsidiaries. 

Is the Appellant entitled to a deduction in respect of the corporate inversion costs?
On the question of whether the Appellant was entitled to an input tax deduction in respect of costs associated with the corporate inversion, Commissioner determined VAT recovery should be permitted. The Appellant's Board initiation, oversight and execution of the transaction was an integral part of the active management of the Appellant's Group's business as a whole.

Implications for prior transactions
This case will be of interest to groups that have historically entered into corporate inversions, spin-outs or other significant corporate transactions and in respect of which associated costs are incurred by group holding companies with the VAT recovered thereon. The determination clearly supports treating such costs as general overheads of a business. The case will also be of wider interest to groups containing Irish located holding companies that have historically recovered VAT on ongoing costs. 

For more information on this topic please contact Bryan Hughes or any member of our Tax Disputes & Enquiries team.

Date published: 13 July 2022