An extract from The Transfer Pricing Law Review, 5th Edition
Formal transfer pricing legislation was introduced in Ireland for the first time through the Finance Act 2010 for accounting periods commencing on or after 1 January 2011 in respect of transactions, the terms of which were agreed on or after 1 July 2010. Ireland's transfer pricing legislation is set out in Part 35A of the Taxes Consolidation Act 1997 (TCA).2 The Irish transfer pricing legislation was substantially updated in the Finance Act 2019,3 with effect from 1 January 2020.
Before the introduction of transfer pricing legislation in 2010, there were limited circumstances in which an 'arm's-length' or 'market-value' rule applied in Irish tax legislation. However, there was certainly some familiarity with the concept. For example, capital gains tax rules always required the imposition of market value on certain transactions undertaken otherwise by means of a bargain and arm's length;4 interest in excess of a 'reasonable commercial return' may be reclassified as a distribution;5 and, historically, income or losses qualifying for the (no longer applicable) 10 per cent corporation tax rate for manufacturing operations were calculated as they would for 'independent parties dealing at arm's length'.6
The transfer pricing legislation introduced in 2010 certainly broadened the scope of application of transfer pricing in Irish tax legislation, and the changes in the Finance Act 2019 further broadened the scope. As might be expected, where the transfer pricing rules apply, an arm's-length amount should be substituted for the actual consideration in computing taxable profits. The arm's-length amount is the consideration that independent parties would have agreed in relation to the arrangement in question.7 The transfer pricing legislation applies equally to domestic and international arrangements but does not apply to small and medium-sized enterprises, pending implementation by Ministerial Order that will extend the scope to medium-sized enterprises.8
Irish tax legislation requires that the profits or gains of a trade carried on by a company must be computed in accordance with generally accepted accounting practice subject to any adjustment required or authorised by law.9 Therefore, Irish transfer pricing legislation may result in an adjustment to the accounting profits for tax purposes. Where a transaction is undertaken at undervalue this may be a deemed distribution by the company for Company Law purposes, and if the company does not have distributable reserves this may be an unlawful distribution by the company.
The Finance Act 2019 substantially reformed the Irish transfer pricing legislation introduced in the Finance Act 2010, and addressed the various shortcomings in the legislation that had been identified as part of an independent review. The key reforms introduced in section 27 of the Finance Act 2019 can be summarised as follows.
First, transactions the terms of which were agreed before 1 July 2010 are no longer 'grandfathered' or excluded from Irish transfer pricing legislation. Practically, the expectation of the Irish Revenue Commissioners (Irish Revenue) was that the grandfathering of transactions predating 1 July 2010 would have been lost through the passage of time, where actual trading relationships change, even though contractual terms may not. Nevertheless, this will mean that taxpayers must prepare supporting transfer pricing documentation for previously excluded transactions.
Second, the transfer pricing legislation now applies to non-trading transactions as well as trading transactions. Previously, the transfer pricing legislation only applied to profits or losses arising from the relevant activities that were taxed at the 12.5 per cent rate of corporation tax as the profits of a trade or profession.10 Now, non-trading transactions that would be subject to the 25 per cent corporation tax rate may be subject to the arm's-length requirement. This is particularly relevant where an Irish company has granted an interest-free loan or royalty-free licence other than in the course of a trading activity. Now, the interest or royalty charged must be arm's length and supported by relevant documentation. There was some concern about possible negative tax arbitrage in respect of non-trade loans between Irish companies where interest income would be taxable at 25 per cent and interest paid as part of a trade would be deductible at 12.5 per cent. However, the Finance Act 2019 provides for an exclusion from the transfer pricing legislation in such Ireland-to-Ireland transactions where both parties are within the charge to Irish tax and neither company is a Section 110 TCA company. Nevertheless, there are limits to the scope of the exclusion, as highlighted in the Finance Act 2020,11 so particular care must be taken on the application of the exclusion to intercompany loans or receivables between Irish companies. It is not a blanket exemption on all transactions and must be considered on a case-by-case basis. Further guidance is expected in coming months to address some of the uncertainty on the scope of this exemption.
Third, the transfer pricing legislation has been extended to capital transactions (including assets and intangible assets) where the market value of the assets or capital expenditure is greater than €25 million. There are a number of exemptions to the application to capital transactions, in particular where the disposal is treated for the purposes of Irish tax legislation as being at no gain, no loss (e.g., group transaction or reorganisation relief). It is arguable that this change is not significant given that Irish tax legislation did previously provide for an open market value rule on capital transactions between connected persons. However, this requirement is seen as particularly relevant to taxpayers ensuring there is adequate documentary evidence prepared in accordance with OECD guidelines.
Fourth, the 2017 OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (2017 OECD Transfer Pricing Guidelines) have been explicitly referenced so that the Irish transfer pricing legislation must be interpreted in so far as is practicable in a manner that is consistent with the 2017 OECD Transfer Pricing Guidelines as supplemented by:
- the Guidance for Tax Administrations on the Application of the Approach to Hard-to-Value Intangibles;12
- the Revised Guidance on the Application of the Transactional Profit Split Method;13 and
- such additional guidance, published by the OECD on or after the date of the passing of the Finance Act 2019, as may be designated by the Minister for Finance.
This means that as from 1 January 2020 due consideration must be given to development, enhancement, maintenance, protection and exploitation (DEMPE) functionality in pricing intangibles transactions between Irish taxpayers and associated companies resident in non-tax treaty partner countries. Previously the 2017 OECD Transfer Pricing Guidelines were only relevant as an interpretation aid to the arm's-length principle under Ireland's double tax treaties.
Fifth, Irish transfer pricing is now more prescriptive regarding the form of transfer pricing documentation and the timing for production of such documentation. Specifically, there is now an obligation to prepare a master file and a local file in accordance with Annex I and Annex II of the 2017 OECD Transfer Pricing Guidelines where the requisite financial thresholds are exceeded and such documentation must be prepared at the time at which the corporation tax return is due to be filed. Furthermore, specific penalties have been introduced for failure to provide the necessary documentation when requested.
Sixth, the transfer pricing legislation previously excluded small and medium-sized enterprises. Going forward, only small enterprises will be excluded (less than 50 employees and annual turnover/assets of less than €10 million). However, commencement of this provision is subject to Ministerial Order and in the meantime medium-sized, as well as small, enterprises remain exempt.
Seventh, the transfer pricing legislation now includes explicit 'substance over form' provisions whereby Irish Revenue may consider the substance of a transaction where the substance differs from what has been agreed in writing. In addition, Irish Revenue are expressly permitted to recharacterise transactions entered into by associated enterprises if such transaction would not have been entered into by parties acting at arm's length.
Broader taxation issuesi Diverted profits tax, digital sales tax and other supplementary measures
Ireland has not introduced a diverted profits tax or other measures to supplement transfer pricing rules.
The European Commission issued a decision on 30 August 2016 that two tax rulings granted to Apple in Ireland constituted state aid. Ireland and Apple appealed this decision and on 15 July 2020, the General Court of the European Union annulled the decision of the European Commission in finding that Ireland had not granted state aid. However, even though during the years covered by the decision Ireland did not have transfer pricing rules in domestic law, the General Court confirmed that the European Commission could consider the conformity of tax rulings with an arm's-length principle under EU law. The European Commission have appealed the finding of the General Court.ii Tax challenges arising from digitalisation
Ireland has been an active participant in tax reform discussions throughout the BEPS process. Regarding the OECD Secretariat proposals under Pillar One and Pillar Two, Ireland has adopted a pragmatic and principled approach. The Irish Minister for Finance is broadly supportive of a collective solution under Pillar One, even though a realignment of taxing rights under the Unified Approach (or a variant thereof) is likely to see a reduction in Irish corporation tax receipts. It is acknowledged that the absence of agreement does not result in the status quo but rather in a variety of unilateral taxing measures and inevitable EU proposals. A balanced global solution to the realignment of taxing rights is likely to provide greater certainty to business and to Ireland in the medium term. The Minister for Finance has expressed some reservations on the GloBE proposal under Pillar Two as going beyond what is needed to address the tax challenges of digitalisation. Nevertheless, Ireland continues to adopt a pragmatic approach given that in the absence of agreement through the Inclusive Framework, proposals on both a realignment of taxing rights and a minimum taxation are likely at EU level.iii Transfer pricing implications of covid-19
Irish Revenue have not issued explicit guidance on the transfer pricing implications of the covid-19 pandemic. However, practical experience shows that they will look to apply the OECD guidance issued in December 2020.iv Double taxation
To avoid double taxation on transfer pricing matters, taxpayers may request mutual agreement procedure assistance under the terms of the relevant double-tax treaty or the EU Arbitration Convention. In addition, taxpayers have access to the EU Tax Dispute Resolution Directive26 for complaints submitted on or after 1 July 2019 in relation to a question in dispute that involves income or capital earned in a tax year commencing on or after 1 January 2018.
The legal basis for a mutual agreement procedure request falls under the equivalent of Article 25 of the OECD's Model Tax Convention on Income and on Capital in the relevant double-tax treaty. In international transfer pricing matters, it is typically advisable for each affected taxpayer to make a separate request for mutual agreement procedure assistance to the competent authority of the country in which it is resident. Under the multilateral instrument agreed as part of the BEPS process Ireland has opted to allow a taxpayer approach the competent authority of either jurisdiction. The mutual agreement procedure request must be submitted in writing within the time limit applicable in the relevant double-tax treaty (typically three years, but may vary by treaty) or the EU Arbitration Convention (three years from the first notification of the action that results or is likely to result in double taxation). The time period typically begins from the date of the first tax assessment notice or equivalent.
The minimum information to be provided as part of a mutual agreement procedure request under a double-tax treaty includes details of the relevant tax periods, the nature of the action and the names and addresses of the relevant parties. For a valid request under the EU Arbitration Convention, the request should also include details of the relevant facts, copies of assessments, details of litigation commenced and an explanation of why the principles of the EU Arbitration Convention have not been observed.27
Double taxation can also be avoided by means of settling an advance pricing agreement. Importantly, Irish Revenue are prepared to conclude a multilateral or bilateral advance pricing agreement with double-tax treaty partner jurisdictions. Irish Revenue will not conclude unilateral pricing agreements. Irish Revenue have issued detailed guidelines on the processes for advance pricing agreements.
A request for a mutual agreement procedure can be distinguished from a request for a correlative adjustment where a foreign associated taxpayer has settled a case unilaterally with its foreign tax administration with regard to a transaction with its Irish associated taxpayer, and the associated Irish taxpayer subsequently makes a claim to Irish Revenue for a correlative adjustment. Irish Revenue will consider the appropriateness of such claims and will only allow a correlative adjustment to the profits of the Irish taxpayer to the extent that it considers the adjustment to be at arm's length.
Double taxation may be unavoidable in a situation where a non-negotiable tax settlement has been agreed in one jurisdiction and Irish Revenue do not consider the settlement reached to reflect an arm's-length position.v Consequential impact for other taxes
Where a transfer pricing adjustment is simply booked as an adjustment to taxable profits and there is no adjustment to the actual price charged and invoiced as between the associated entities, then there should be no VAT impact. Where the adjustment is charged and invoiced, then VAT returns should be amended as appropriate. The VAT recovery consequences will then depend on the VAT profile of the entity in question.
For customs purposes, the price paid or payable is taken as the transaction value for customs purposes. Thus, a transfer pricing adjustment that results in a change in the price paid may be relevant to any market valuation used as part of customs reporting. In light of the recent decision of the European Court of Justice in Hamamatsu Photonics Deutschland,28 the impact of pricing adjustments on the customs valuation declared on the importation of the goods is unclear. Irish Revenue have not published guidance or otherwise commented on the decision to date.
Outlook and conclusions
The Irish transfer pricing rules were only introduced in 2010, but following the BEPS process, a comprehensive review of Ireland's corporation tax code by an independent expert and extensive public consultation, the transfer pricing rules were significantly updated in the Finance Act 2019. Irish Revenue now have the legislative framework of a modern transfer pricing regime and has recognised transfer pricing as an important tool for raising tax revenues and defending the existing Irish tax base. We have seen a significant increase in transfer pricing controversy over recent months and can expect this to continue to escalate in coming years.
It is hoped that new transfer pricing guidelines will be issued shortly to provide more clarity on some particular areas of concern within the Irish transfer pricing rules, particularly the scope of the exemption from transfer pricing for transactions between Irish companies.
As regards legislative changes, it is expected that the OECD Transfer Pricing Guidance on Financial Transactions issued in 2020 will be incorporated into Irish law before the end of 2021. In the meantime, however, these guidelines are accepted as representing best practice in terms of application of the arm's-length principle to financial transactions. The Department of Finance is currently engaged in a public consultation on the introduction of the Authorised OECD Approach to the attribution of profits to branches of non-resident companies. Legislation is expected before the end of 2021.
Furthermore, as in many other jurisdictions and as outlined above, focus remains on tax developments at an international level through the OECD and Inclusive Framework and within the EU. Ireland continues to participate actively within both organisations recognising the benefits of a multilateral solution.