InDisputes: USD 518m Expense Not Deductible ' Tax Advice Referred To As Evidence Against Taxpayer

• Published date: 06 February 2023
• Subject Matter: Tax, Tax Authorities
• Law Firm: Matheson
• Author: Catherine O'Meara, Kevin Smith, Anna Crowley and Colm Brussels

Ireland's tax court recently ruled that a USD 518m expense incurred by a multi-national company ("MNC") was not deductible for Irish tax purposes, resulting in the MNC having a material Irish tax liability. The court concluded the expense was of a capital nature which formed part of the purchase price for shares, so was not deductible as a conventional trading expense. The Irish Revenue Commissioners referred to tax advice from the MNC's tax advisors as evidence against the MNC in proceedings.

Broadly, the MNC agreed to assume USD 988m of pre-existing intra-group debt obligations of a target entity it acquired by share acquisition. The MNC repaid some of those obligations and incurred a USD 518m early prepayment expense. The purchase price for the target entity was reduced by the amount of obligations repaid by the MNC, including the USD 518m early prepayment expense. The tax court concluded that the early prepayment expense formed part of purchase price consideration, so could not be deducted as a normal business expense. It was not relevant that the target entity (which carried on a trade) may have deducted the early prepayment expense if it had paid the amount itself.

It is notable that tax advice provided to the MNC by its tax advisors was available in evidence and was referred to by the Irish Revenue Commissioners during the course of proceedings in support of their position. The materials available in evidence included:

• step papers noting uncertainty as to the tax treatment of the prepayment charge; and
• emails highlighting advisors being 'particularly concerned' about the charge and noting that it could be a 'major issue' for the MNC.

It is not clear how the taxpayer's advice came to be available in evidence before the...