Transfer Pricing Case 59TACD2024: What Multinationals Need to Know

The Tax Appeals Commission made its first determination in relation to transfer pricing in its determination 59TACD2024. The case involved a multinational granting share options to employees of an Irish subsidiary and such transactions’ transfer pricing implications. What are the key points from the determination for multinational companies?

Kevin O’Donohoe, Senior Manager, Transfer Pricing: "Earlier this year, the Tax Appeals Commission (“TAC”) delivered a groundbreaking decision when it ruled in favour of an appellant in the first ever transfer pricing case heard in Ireland (59TACD2024) .

The case concerns that of an Irish subsidiary of a multinational technology company with its immediate parent, a US-headquartered company and an initial assessment raised by Revenue with respect to services provided by the Irish subsidiary to its US parent company. In its assessment, covering a four-year period between the years 2015 and 2018 inclusive, Revenue made an adjustment for the non-inclusion of share-based awards in the relevant cost base for mark-up when determining the service fee to be charged by the Irish subsidiary to its parent.

The assessment was overturned on appeal on the basis that share based awards did not represent an economic cost to the subsidiary despite the fact that it is recorded as financial cost in its financial statements.

In overturning the assessments, the commissioner looked to the OECD Transfer Pricing Guidelines to determine whether the costs associated with the issuance of the share-based awards represented an economic cost to the Irish subsidiary. In doing so, it agreed with the OECD guidance which states that one should look at the functional analysis to determine where the actual cost of the share issuance had been borne rather than where it has been recorded for accounting purposes. In looking at the functional analysis of both of the relevant parties, as well as hearing detailed evidence, it had found that the US parent not only bore the financial risk in issuing the awards, but it also performed the relevant functions involved in the share issuance.

The decision places emphasis on the merit of the OECD Guidelines as opposed to findings in other jurisdictions which look to accounting expense treatment under FRS 102, which includes these expenses as a notional cost to the subsidiary. While the commissioner did not dispute the accounting treatment, it did find that application of the arm’s length principle requires their exclusion from the cost base in providing services to the parent company under the relevant services agreement.

The determination of the TAC also addressed a number of secondary issues including the rejection of Revenue arguments of unsatisfactory comparables, enforcement of the statutory time limit for the re-opening of returns, and the admissibility of expert witnesses.  

The case represents the first of its kind in Ireland and finds against some international case law. Aside from posing the possibility of more similar cases being brought for appeal with regard to transfer pricing issues, the case itself is a helpful international precedent in showing an appeal commissioner taking significant regard of the OECD Guidelines as part of its decision in conjunction with the application of local transfer pricing legislation."