Ireland’s First Stock-Based Compensation Ruling by the TAC

Equity incentives—stock options, restricted shares, or similar instruments—are a staple of compensation packages in multinational groups. But their accounting treatment sometimes clashes with transfer pricing logic, especially when subsidiaries recognize stock basec compensation costs in profit & loss even though they never funded or issued them. 

A recent Irish decision by the Tax Appeals Commission (TAC) has shed light on this tension. In 59TACD2024, the commission ruled that notional SBC costs borne by a subsidiary should be excluded from the cost base for intercompany service recharges, when the economic burden (dilution, risk, issuance) was clearly borne by the parent. This decision may influence how companies handle SBC across jurisdictions. 

Below, we break down the facts, reasoning, implications, and how Reptune can help in navigating SBC in your transfer pricing strategies. 

Background: Accounting vs. Economic Reality 

Under certain accounting standards (e.g. IFRS or local equivalents), entities must record their share of SBC expense. That is, even if the subsidiary never issued shares or paid cash, it may need to recognize a corresponding expense and credit equity. 

From a transfer pricing viewpoint, this raises a question: if you’re a routine service provider subsidiary on a cost-plus basis, should that SBC expense form part of your cost base (and thus attract a markup)? Or should it be excluded because it is merely an accounting convention with no real economic cost to the subsidiary? 

In the Irish case, the TAC considered this question in the context of a services agreement where the subsidiary charged its parent based on costs plus a markup. The intercompany contract expressly excluded SBC from the cost base, but the tax authority argued the subsidiary’s audited accounts already included SBC, and thus it should be included in the markup base. 

Facts of Ireland’s Transfer Pricing Case

• The Irish entity performed sales, marketing, and R&D services under a cost-plus method. Both parties agreed TNMM or cost-plus was appropriate. 
• The Irish audited accounts included an expense line for SBC (as required under accounting rules). 
• Crucially, the parent had not reimbursed or recharged the SBC costs to its subsidiary. 
• The intercompany agreement explicitly excluded SBC from the cost base for markup. 
• The tax authority contended that including SBC was necessary for arm’s length alignment. 

In its decision, the TAC sided with the taxpayer. It found: 

• The Irish subsidiary had no cash outflow or legal duty in issuing SBC. 
• The economic burden and risk (e.g. dilution, performance conditions) were borne by the parent. 
• Charging markup on notional, unincurred cost would artificially inflate fees. 
• Given SBC is typically non-deductible in Ireland, including it would worsen the tax position of the subsidiary without reflecting real business economics. 
• Thus, the TAC excluded SBC from the cost base, treating it as a notional cost in the subsidiary’s accounts, not as a cost for recharge purposes. 

The Arm’s Length Principle in Ireland 

Ireland’s transfer pricing framework has always been anchored in the arm’s length principle, which was reinforced by Section 27 of the Finance Act 2019 and subsequent updates to the Taxes Consolidation Act 1997. Under this principle, related party transactions must be priced as if they were conducted between independent, unrelated parties under comparable conditions. In the SBC case, this principle played a decisive role: because the Irish subsidiary bore no real economic costs, risks, or obligations related to the issuance of stock-based compensation, including those costs in the transfer pricing base would not have been consistent with an arm’s length outcome. The court’s reasoning reflects Ireland’s alignment with OECD Transfer Pricing Guidelines and underscores its commitment to ensuring that profits are taxed where value is truly created. 

Key Takeaways & Practical Guidance 

1. Functional and Risk Analysis Wins Over Pure Accounting

The case reinforces that transfer pricing must reflect economic reality, not just accounting entries. When a subsidiary has virtually no role in designing or funding SBC, including it in the cost base runs contrary to the arm’s length principle. 

2. Contracts Have Weight, But Cannot Override Economics

The fact that the intercompany agreement excluded SBC was helpful—but not sufficient in many cases. A mismatch between document and substance is vulnerable to challenge if not well supported. 

3. Beware of Double Counting or Deductibility Issues

In jurisdictions (like Ireland) where SBC is often not deductible, including SBC in cost base may lead to taxable income mismatches. It may increase a subsidiary’s tax liabilities without any actual economic ground. 

4. This Is Not Universal Law

Other jurisdictions might interpret differently. As Dentons notes in their SBC update, approaches remain varied and case-specific. Each situation requires deep fact-based analysis. 

5. SBC in Cost Contribution or Cost Sharing Arrangements

In arrangements where multiple group members share development costs, the role of SBC becomes even more complex. Should SBC be treated as part of cost contributions? Or allocated differently? The Irish case doesn’t answer that fully, but it highlights caution when attributing notional costs. 

How Reptune Supports SBC Policy & Compliance 

Given the subtlety and risk in handling SBC, having a robust tool can make a difference: 

• Modeling options and equity costs: Reptune can help simulate different treatments of SBC across jurisdictions, showing tax impact and markup effect. 
• Document alignment: It allows you to align intercompany agreements, functional analysis, and cost bases in one platform, reducing mismatches. 
• Audit-ready justification: Reptune’s reporting module enables you to record your rationale (why SBC excluded or included) and maintain audit trails. 
• Scenario testing: You can run “what-if” scenarios—e.g. include SBC vs exclude—and evaluate margin and tax outcomes across multiple jurisdictions. 
• Global governance: Because SBC is often cross-border (employees, awards, parent/entity split), Reptune helps maintain coherence in your global transfer pricing documentation strategy. 

In short, Reptune helps convert what might be a confusing accounting quirk into transparently documented, defensible transfer pricing positions. 

Conclusion 

The Irish TAC’s decision on stockbased compensation marks a key milestone in the transfer pricing treatment of notional costs. It demonstrates that courts may reject inclusion of SBC in a service subsidiary’s cost base when the economic burden and risks lie elsewhere. But this is not settled law worldwide. 

For multinationals issuing SBC across their affiliate structure, the lesson is clear: treat SBC with care in your transfer pricing reports. Ensure your functions, assets, and risks analysis is solid, your cost base aligns with substance, and your intercompany agreements reflect your logic. 

Using advanced transfer pricing tools—like Reptune—can significantly boost your ability to model, defend, and document SBC positions across jurisdictions. In a domain where small missteps invite large scrutiny, that edge matters.