The Irish tax authorities considered that the cost of employee share options (stock-based compensation) should have been included in the cost basis when determining the remuneration of “Service Ltd” for services provided to its US parent company and issued an assessment of additional taxable income for FY2015 – FY2018. Service Ltd lodged an appeal with the Tax Appeals Commission. Decision The Tax Appeals Commission ruled in favour of “Service Ltd” and overturned the tax authorities’ assessment. Excerpts “271.The Commissioner notes that the nature of the comparability analysis performed for purposes of applying the TNMM necessitates comparing “like with like”. Paragraph 1.6 of the OECD Guidelines refers to the comparability analysis as “an analysis of the controlled and uncontrolled transactions”. The Commissioner notes paragraph 1.36 of the OECD Guidelines provides that: “…in making these comparisons, material differences between the compared transactions or enterprises should be taken into account. In order to establish the degree of actual comparability and then to make appropriate adjustments to establish arm’s length conditions (or a range thereof), it is necessary to compare attributes of the transactions or enterprises that would affect conditions in arm’s length transactions.” 272.Paragraph 3.2 of the OECD Guidelines provides that that: “[a]s part of the process of selecting the most appropriate transfer pricing method (see paragraph 2.2) and applying it, the comparability analysis always aims at finding the most reliable comparables”. 273.Paragraph 3.4 of the OECD Guidelines describes the typical process that can be followed when performing a comparability analysis. It states that: “This process is considered an accepted good practice but it is not a compulsory one, and any other search process leading to the identification of reliable comparables may be acceptable as reliability of the outcome is more important than process (i.e. going through the process does not provide any guarantee that the outcome will be arm’s length, and not going through the process does not imply that the outcome will not be arm’s length).” 274.The Commissioner observes that step 8 in the process is the “Determination of and making comparability adjustments where appropriate”, with the OECD Guidelines setting out guidance around such adjustments in paragraphs 3.47-3.54. 275.The Commissioner notes the Respondent’s correspondence to the Appellant dated 30 September 2021, which under a heading “Consideration of Comparability Adjustment”, it states that: “The OECD guidance indicates that comparability adjustments may only be made if appropriate to the results of the comparables identified and does not refer to adjustments to the financial results of the tested party. As a result, it is not appropriate to adjust the financial results of [the Appellant] in its statutory financial statements for the purposes of comparing with the NCP results of the comparables which are obtained from their statutory financial statements.” 276.The Commissioner observes that the Appellant in subsequent correspondence asserts that an adjustment to the financial results of the Appellant as the tested party to exclude the SBAs expense from its cost base is reasonable and enhances the reliability of the comparability analysis. The Respondent in its correspondence dated 30 September 2021, refers to paragraphs 3.47, 3.50 and 3.51 of the OECD Guidelines.” (…) “349. Having carefully considered all of the evidence, inter alia the viva voce evidence of the witnesses, the expert evidence, the case law and legal submissions advanced by Senior Counsel for both parties, in addition to the written submissions of the parties including, both parties’ statement of case and outline of arguments, the Commissioner has taken her decision on the basis of clear and convincing evidence and submissions in this appeal. In summary and having regard to the issues in this appeal, the Commissioner is satisfied that the answer to the issues as set out above in this determination, under the heading “the issues”, is as follows: (i) Was the Appellant correct to exclude in the calculation of its costs of providing the intercompany services, the expenses identified in the statutory financial statements of the Appellant in respect of the SBAs granted by the parent company to employees of the Appellant – Yes; (ii) If the Appellant was incorrect to exclude in the calculation of its costs of providing the intercompany services, the expenses identified in the statutory financial statements of the Appellant in respect of the SBAs granted by the parent company to employees of the Appellant, what, if any, adjustment is required – Not relevant, having regard to (i); (iii) The interpretation of section 835C and 835D TCA 1997 – An adjustment to profit rather than consideration is required; (iv) With respect to FY15, whether the Respondent was precluded from raising an amended assessment having regard to sections 959AA and 959AC TCA 1997 – Yes. 350. As set out, the Commissioner is satisfied that the Appellant has shown on balance that it was correct to exclude in the calculation of its costs of providing the intercompany services, the expenses identified in the statutory financial statements of the Appellant in respect of the SBAs granted by the parent company to employees of the Appellant. Hence, the appeal is allowed.” ...

The companies NCL Investments Ltd and Smith & Williamson Corporate Services Ltd (the Companies) had granted its employees stock options to acquire shares in the ultimate holding company, Smith & Williamson Holdings Limited (SWHL). The companies employ staff and make those staff available to other companies in the group in return for a fee. That fee is based on the costs that the companies incur in employing the staff, marked up with a profit element. The Companies claimed deductions in the computation taxable profits. The tax authorities accepted that IFRS2 required the Companies to recognise an expense in their income statements equal to the fair value of the options, but held that the debits were inapt to affect the profits of the Companies for corporation tax purposes. These transactions were treated by IFRS2 as a capital contribution (benefit) granted by SWHL to the Companies. The Debits did not represent any cost to the Companies, nor did they anticipate or reflect an actual cost which would arise in the future. On that basis tax authorities disallowed deductions for corporate tax purposes. An appeal was filed by the companies which was allowed by the lower courts. Appeals were then filed by the tax authorities. Judgement of the Supreme Court The Supreme Court dismissed the tax authorities’ claims and decided in favour of the Companies ...

Altera’s request for a Supreme Court review of the decision issued by the US Court of Appeal in June 2019 has been denied. A case cannot, as a matter of right, be appealed to the U.S. Supreme Court. A party seeking to appeal to the Supreme Court from a lower court decision must file a writ of certiorari. If a court grants the writ of certiorari, then that court will hear that case. However, if four Justices do not agree to review the case, the Court will not hear the case. This is defined as denying certiorari. Altera’s request for Supreme Court review of the decision issued by the Court of Appeal. The Commissioner of Internal Revenue’s response to Alteras request ...

Altera has asked the US Supreme Court for a judicial review of the Decision from the U.S. Court of Appeals for the Ninth Circuit over the validity of Internal Revenue Service regulations  that requires related companies to share the cost of stock-based employee compensation when shifting their intangible assets abroad applying US Cost Sharing regulations. In the decision a divided panel in the Court of Appeal upheld the regulation as “permissible” and therefore entitled to deference under Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). In the Petition Altera presents three questions: 1. Whether the Treasury Department’s regulation is arbitrary and capricious and thus invalid under the Administrative Procedure Act, 5 U.S.C. 551 et seq. 2. Whether, under SEC v. Chenery Corp., 332 U.S. 194 (1947), the regulation may be upheld on a rationale the agency never advanced during rulemaking. 3. Whether a procedurally defective regulation may be upheld under Chevron on the ground that the agency has offered a “permissible” interpretation of the statute in litigation. Under the third bullit Altera argues that the Chevron doctrin was applied erroneously by the Court of Appeals. The Chevron doctrin states that an agency is allowed a “permissible” interpretation where statutes are not sufficiently clear. Excerps from the 1984 Chevron case: "In these cases the Administrator's interpretation represents a reasonable accommodation of manifestly competing interests and is entitled to deference: the regulatory scheme is technical and complex, the agency considered the matter in a detailed and reasoned fashion, and the decision involves reconciling conflicting policies. Congress intended to accommodate both interests, but did not do so itself on the level of specificity presented by these cases. Perhaps that body consciously desired the Administrator to strike the balance at this level, thinking that those with great expertise and charged with responsibility for administering the provision would be in a better position to do so; perhaps it simply did not consider the question at this level; and perhaps Congress was unable to forge a coalition on either side of the question, and those on each side decided to take their chances with the scheme devised by the agency. For judicial purposes, it matters not which of these things occurred. Judges are not experts in the field, and are not part of either political branch of the Government. Courts must, in some cases, reconcile competing political interests, but not on the basis of the judges' personal policy preferences. In contrast, an agency to which Congress has delegated policymaking responsibilities may, within the limits of that delegation, properly rely upon the incumbent administration's views of wise policy to inform its judgments. While agencies are not directly accountable to the people, the Chief Executive is, and it is entirely appropriate for this political branch of the Government to make such policy choices-resolving the competing interests which Congress itself either inadvertently did not resolve, or intentionally left to agency charged with the administration of the statute in light of everyday realities. When a challenge to an agency construction of a statutory provision, fairly conceptualized, really centers on the wisdom of the agency's policy, rather than whether it is a reasonable choice within a gap left open by Congress, the challenge must fail. In such a case, federal judges - who have no constitu­ency - have a duty to respect legitimate policy choices made by those who do. The responsibilities for assessing the wisdom of such policy choices and resolving the struggle between competing views of the public interest are not judicial ones: "Our Constitution vests such responsibilities in the political branches." TVA v. Hill, 437 U. S. 153, 195 (1978). We hold that the EPA's definition of the term "source" is a permissible construction of the statute which seeks to accommodate progress in reducing air pollution with economic growth. "The Regulations which the Adminstrator has adopted provide what the agency could allowably view as ... [an] effective reconciliation of these twofold ends" United States v. Shimer, 367 U. S., at 383." Altera ends the partition with the following statement: “The Ninth Circuit permitted a startling departure from accepted rules of administrative law, and its expansion of Chevron validates the concerns many Justices have raised about that doctrine. The Tax Court rejected the agency’s position in an opinion that was striking for its “uncommon unanimity and severity of censure,” yet the court of appeals simply “assume[d] away” the regulation’s problems, “send[ing] a signal that executive agencies can bypass proper notice-and- comment procedures as long as they come up with a clever post-hoc rationalization by the time their rules are litigated.” App., infra, 160a, 165a, 167a (Smith,  J., dissenting from denial of rehearing). It is time for this Court to step in.” ...

In this case, the US Court of Appeal had reversed a decision from the Tax Court that 26 C.F.R. § 1.482-7A(d)(2), under which related entities must share the cost of employee stock compensation in order for their cost-sharing arrangements to be classified as qualified cost-sharing arrangements and thus avoid an IRS adjustment, was invalid under the Administrative Procedure Act. The Court of Appeal ruled that the Commissioner of Internal Revenue had not gone beyond the authority delegated under 26 U.S.C. § 482, and that the Commissioner’s rule-making authority complied with the Administrative Procedure Act. The Opinion was shortly after (August 7, 2018) withdrawn by the Court of Appeal. A final Decision was issued June 7, 2019, reaching the conclusion that 26 C.F.R. § 1.482-7A(d)(2), under which related entities must share the cost of employee stock compensation in order for their cost-sharing arrangements to be classified as qualified cost-sharing arrangements and thus avoid an IRS adjustment, was not (arbitrary and capricious) invalid under the Administrative Procedure Act.. The Court held that the Treasury reasonably interpreted § 482 as an authorization to require internal allocation methods in the QCSA context, provided that the costs and income allocated are proportionate to the economic activity of the related parties, and concluded that the regulations are a reasonable method for achieving the results required by the statute ...

In this case, the US Court of Appeal reversed a decision from the Tax Court that 26 C.F.R. § 1.482-7A(d)(2), under which related entities must share the cost of employee stock compensation in order for their cost-sharing arrangements to be classified as qualified cost-sharing arrangements and thus avoid an IRS adjustment, was invalid under the Administrative Procedure Act. The Court of Appeal ruled that the Commissioner of Internal Revenue had not gone beyond the authority delegated under 26 U.S.C. § 482, and that the Commissioner’s rule-making authority complied with the Administrative Procedure Act. The Opinion was shortly after (August 7, 2018) withdrawn by the Court of Appeal and are now avaiting the opinion of a new panel. See below ...

Dell Spain is part of a multinational group (Dell) that manufactures and sells computers. Dell Ireland, operates as distribution hub for most of Europe. Dell Ireland has appointed related entities to operate as its commissionaires in several countries; Dell Spain and Dell France are part of this commissionaire network. The group operates through a direct sales model and sales to private customers in Spain are conducted by Dell France, through a call centre and a web page. Dell Spain use to operate as a full-fledged distributor, but after entering into a commissionaire agreement Dell Spain now served large customers on behalf of Dell Ireland. A tax assessment was issued by the tax authorities. According to the assessment the activities in Spain constituted a Permanent Establishment of Dell Ireland to which profits had to allocated for FY 2001-2003. Judgement of the Supreme Court The Supreme Court concludes that the activities of Dell Spain constitutes a Permanent Establishment of Dell Ireland under both the “dependent agent” and “fixed place of business” clauses of the treaty. The expression “acting on behalf of an enterprise” included in article 5.5 of the Spain-Ireland tax treaty does not necessarily require a direct representation between the principal and the commissionaire, but rather refers to the ability of the commissionaire to bind the principal with the third party even when there is no legal agreement between the latter two. Furthermore, the Supreme Court considers that Dell Spain cannot be deemed as an independent agent since it operated exclusively for Dell Ireland under control and instructions from the same. Regarding the “fixed place of business”, the Supreme Court states that having a place at the principal’s disposal also includes the use of such premises through another entity which carries out the principal’s activity under its supervision. This Court also explained that considering a company as a PE is not only based on its capacity to conclude contracts that bind the company but also on the functional and factual correlation between the agent and the company in the sense that the agent has sufficient authority to bind the company in its day to day business, following the instructions of the company and under its control. In regards to question of Employee stock option expences,  the Court partially upheld the claim of Dell and stated “”expenses that are correlated with income” are deductible expenses. Consequently, any expense correlated with income is an accounting expense, and if any accounting expense is a deductible expense in companies, with no exceptions other than those provided for by law” Click here for English translation Click here for other translation ...

The IRS ruled that Seagate should have included the cost of employee stock options in the net revenue calculation associated with its cost-sharing agreement with its foreign subsidiaries. Seagate appealed the ruling on the grounds that the IRS was not aware of actual arm’s length circumstances relating to the employee stock option compensation. In this case, the United States Tax Court found in favor of the IRS ...