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.” ...

In these two cases from Israel the Supreme Court rules on the issue of whether or not companies using the cost plus method must include stock-based compensation in the cost base. The Court concludes that stock-based compensation is an integral part of the compensation package of the Israeli subsidiaries’ employees with the objective of improving the quality of services rendered and strengthening the bond between the companies’ and employees’ cohesive goals. Therefore, such compensation should be included in the cost base. The Court also addressed the burden of proof in relation to transfer pricing disputes in Israel. Section 85 A (c) (2) provides that the burden of proof is with the tax authority if the taxpayer have submitted all required documentation, including a transfer pricing study, that “adequately substantiate” intercompany prices to be in accordance with arm’s length principle ...

Amazon is an online retailer that sells products through Amazon.com and related websites. Amazon also sells third-party products for which it receives a commissions. In a series of transactions  in 2005 and 2006, Amazon US transferred intangibles to Amazon Europe, a newly established European HQ placed in Luxembourg. A Cost Sharing Arrangement (“CSA”), whereby Amazon US and Amazon Europe agreed to share costs of further research, development, and marketing in proportion to the benefits A License Agreement, whereby Amazon US granted Amazon Europe the right to Amazon US’s Technology IP An Assignment Agreement, whereby Amazon US granted Amazon Europe the right to Amazon US’s Marketing IP and Customer Lists. For these transfers Amazon Europe was required to make an upfront buy-in payment and annual payments according to the cost sharing arrangement for ongoing developments of the intangibles. In the valuation, Amazon had considered the intangibles to have a lifetime of 6 to 20 years. On that basis, the buy-in payment for pre-existing intangibles had been set to $254.5 million. The IRS disagreed with the valuation and calculated a buy-in payment of $3.5 billion, by applying a discounted cash-flow methodology to the expected cash flows from the European business. The IRS took the position, that the intangibles transferred to Amazon Europe had an indefinite useful life and had to be valued as integrated components of an ongoing business rather than separate assets. The case brought before the US Tax Court HAD two issues had to be decided: Amazon Europe’s buy-in payment with respect to the intangibles transferred; and The pool of cost, on which Amazon Europe ongoing cost sharing payments were to be calculated. The Courts decision on Amazon Europe’s buy-in payment IRS’s position of “indefinite useful life” in the valuation of the intangibles and the buy in payment was rejected by the court, and the comparable uncontrolled transaction (“CUT”) method applied by Amazon – after appropriate upward adjustments – was found to be the best method. The Courts decision on Cost Share Payments The Court found that Amazon’s method for allocating intangible development costs, after adjustments, was reasonable. US CSA regulations pre- and post 2009  US CSA regs in effect for 2005-2006 refer to the definition of intangibles set forth in section 1.482-4(b), Income Tax Regs. Here intangibles are defined to include five enumerated categories of assets, each of which has “substantial value independent of the services of any individual.” These include patents, inventions, copyrights, know-how, trademarks, trade names, and 20 other specified intangibles. The definition of intangibles in the pre 2009 CSA regs did not include value of workforce in place, going concern value, goodwill, and growth options, corporate resources or opportunities. In 2009 new CSA regs were introduced in the US where the concept of “platform contribution transaction” (PCT) applies. According to the new regs. there are no limit on the type of intangibles that must be compensated under a cost sharing arrangement. But these new US CSA regulations did not apply to the years 2005 – 2006 in the Amazon case. See also the US vs. Veritas case from 2009. 2019 UPDATE The 2017 decision of the Tax Court has later been appealed by the Commissioner of Internal Revenue ...