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A recently published determination of the Tax Appeals Commission (TAC), 59 - TACD - 2024, has considered the issue of transfer pricing adjustments in Ireland for the first time.
Background
This matter involved an appeal by a taxpayer company against four amended assessments for corporation tax, raised by the Revenue Commissioners (Revenue) for the 2015 to 2018 tax years. Specifically, Revenue had sought transfer pricing adjustments in relation to the taxpayer company’s supply of services to its non-Irish tax resident parent company, which is active in the software development sector, in accordance with s.835C(2)(b) of the Taxes Consolidation Act 1997 (TCA). These adjustments related to share based awards (SBAs) granted by the parent company to employees of the taxpayer company.
SBAs
Certain eligible employees of the taxpayer company participated in the parent company’s SBAs scheme, whereby SBAs were granted to employees of the taxpayer company by the parent company, in order to incentivise their performance. The parent company did not charge the taxpayer company for the provision of the SBAs. Pursuant to the intercompany services agreements entered into between the taxpayer company and the parent company, the taxpayer company performed services, including sales, marketing and R&D activities for the parent company, for which it was remunerated on a cost-plus basis. In the taxpayer company’s financial statements for the relevant periods and in accordance with the applicable accounting standard, it recorded a line item for expenses relating to the SBAs, reflecting their “fair value”. The terms of the services agreement specifically excluded the SBAs accounting expense from the costs used in the calculation of the fee charged by the taxpayer company to its parent company and therefore the cost base on which a mark-up was applied.
Audit and assessments
Revenue subsequently carried out an audit in 2021 of the taxpayer’s affairs and took the view that the taxpayer company had not demonstrated that the intercompany service fees received from the parent company were at an arm’s length, as the cost of the SBAs should not have been excluded from the cost base for the purposes of calculating the relevant mark-up. Revenue served assessments on the taxpayer company reflecting same, in late 2021. The taxpayer company appealed Revenue’s assessments, claiming that there had been a fundamental error in Revenue’s calculation of the assessments.
Issues for consideration
It was mutually agreed between the parties that the Transactional Net Margin Method was the appropriate transfer pricing method to be applied in the circumstances.
The Appeals Commissioner identified three principal issues for decision in the appeal.
First, whether the taxpayer company was correct to exclude the SBAs expense from its cost base, when calculating the intercompany services fee that it charged to the parent company, and if incorrect, the nature of the adjustment that is required.
Second, as to the correct interpretation of sections 835C and 835D TCA, as both parties had conflicting interpretations of same – the taxpayer company contended that the provisions require an adjustment to profit, whereas Revenue contended that an adjustment to consideration was required.
Finally, whether Revenue was precluded from raising amended assessment in respect of the first year that was the subject of the audit. This was on the basis that the assessment in question had been raised outside of the standard limitation period (which is four years from the end of the period in which the relevant tax return was filed)
Determination
The TAC reversed the assessments that had been raised by Revenue, and found in the taxpayer company’s favour on all three principal points, as follows:
1. The Appeals Commissioner was satisfied that the taxpayer company had been correct to exclude the expenses relating to the SBAs from its costs when calculating the intercompany services fee that it charged to the parent company. This conclusion was based on the fact that the risks and the economic cost of issuing the SBAs were borne solely by the parent company, and not by the taxpayer company. The parent company was not just issuing the SBAs, rather it was the sole decision maker in relation to an award of SBAs across the group, was solely responsible for the administration of the SBAs, and the SBAs were granted by the parent company to the eligible employees through correspondence issued directly to the eligible employees by the parent company, and were not referenced in the employees’ employment contracts with the taxpayer company. The cost of the SBAs was separate from the services provided by the taxpayer company to the parent company and was therefore correctly excluded from the calculation of the costs of providing the inter-group services. The Appeals Commissioner considered, but was not led by the accounting treatment of the SBAs pursuant to IFRS, on the basis that the accounting treatment did not address the question of who bears the legal and economic risk. Consequently, no transfer pricing adjustment was required by the taxpayer company, as the services agreement was on an arm’s length basis.
2. The Appeals Commissioner stated that, on the plain and ordinary reading of the Irish transfer pricing legislation, she was satisfied with the taxpayer company’s interpretation of the legislation that it is the profits, rather than the consideration, that may be subject to recalculation. In other words, where an adjustment is required to be made due to the operation of the Irish transfer pricing regime, this adjustment should be made to the relevant party’s taxable profits, rather than making an adjustment to the consideration under the underlying arrangements between the taxpayer and the associated party. The Appeals Commissioner referred to the 2010 OECD transfer pricing guidelines, as well as the OECD Model Tax Convention, noting that these texts clearly reference that any adjustment should be made to profits, rather than consideration, and noted that the Irish transfer pricing regime must be read in accordance with the OECD Model Tax Convention.
3. The Appeals Commissioner held that, in principle, it is possible for Revenue to raise an assessment outside the standard limitation period where it is established that the relevant return is not a full and true disclosure. Here however, the fact that Revenue disagreed with an element of the taxpayer company’s financial statements that were included with the taxpayer company’s corporation tax return, did not mean that full and true disclosure was not made by the taxpayer in the circumstances.
Key contacts
For more information on this, please contact Paul Fahy, Partner and Head of Tax, Amelia O’Beirne, Partner, Cian Ryan, Solicitor, or any member of A&L Goodbody's Tax Department.
Date published: 27 May 2024
