The final report on the Base Erosion and Profit Shifting (“BEPS”) Project Action 14 – Making Dispute Resolution Mechanisms More Effective, which was part of the final package of BEPS measures, contains a best practice recommendation that countries should implement bilateral advance pricing arrangement (“APA”) programmes. In broad terms, a bilateral APA is is a binding agreement between tax administrations in two countries governing how future transactions between associated taxpayers established in their respective jurisdictions will be treated for tax purposes. An APA can cover a single transaction or a series of transactions.
Ireland’s new bilateral APA programme is effective from 1 July 2016 and applies to bilateral APA applications made to the Irish tax authorities on or after this date.
Impact on multinationals based in Ireland
Under BEPS, the global tax landscape for multinational companies is under fundamental reform, the principles of which have been substantially agreed by over 60 OECD Member States.
One of the fundamental pillars of the BEPS project is to ensure that the global activities of companies are more transparent to tax authorities worldwide. The focus now is on implementing these principles into domestic legislation.
Recognising the Action 14 recommendation, as well as the need for greater certainty in relation to the taxation of cross-border transactions entered into by multinational enterprises (“MNEs”), Ireland decided to introduce a formal bilateral APA programme. Prior to the introduction of the formal programme, Ireland accepted requests for bilateral APAs on an ad hoc basis in situations where a double tax treaty partner had agreed to enter into a bilateral APA negotiation.
The bilateral APA programme is intended to apply in respect of a transaction(s) where the transfer pricing issues involved are complex, e.g. there is significant doubt over the appropriate application of the arm’s length principle, or where, for any other reason, there would otherwise be a high likelihood of double taxation arising (in the absence of a bilateral APA).
Ireland's bilateral APA programme only applies to transfer pricing issues (including the attribution of profits to a permanent establishment). An application for a bilateral APA may be made by a company which is tax resident in Ireland for the purpose of the relevant double tax treaty and also by a permanent establishment in Ireland of a non resident company in accordance with the provisions of the relevant double tax treaty. Ireland’s bilateral APA programme is conducted within the legal framework of the double tax treaty which Ireland has entered into with the other jurisdiction concerned, i.e. there must be a double tax treaty in place in order for a bilateral APA application to be considered. APAs are conducted under the Mutual Agreement Procedure (“MAP”) Article of the relevant treaty where the relevant enabling provision is present in the treaty.
The bilateral APA programme is a voluntary programme so taxpayers can choose whether or not to enter into it. The Irish tax authorities are committed to operating the programme on the basis of trust and mutual cooperation with the taxpayer and the other tax administration in order to ensure the efficient and fair processing of requests for an APA. The Irish tax authorities expect that taxpayers considering a bilateral APA request will adopt a similar approach to the programme and regards taxpayer cooperation as critical to the success of the programme.
The main purpose of an APA is to prevent disputes between a tax administration and the taxpayer with respect to the specific transaction(s) covered by the APA and to avert the risk of double taxation or taxation not in accordance with the relevant double tax treaty.
An APA provides taxpayers with certainty about their transfer pricing methodologies and may prevent examinations and litigation of major transfer pricing issues that would be costly and time consuming for both taxpayers and tax administrations. It also provides an opportunity for tax administrations and taxpayers to cooperate with each other in a non-adversarial environment.
The formal programme also provides certainty to taxpayers with respect to the process involved in applying for a bilateral APA and the ongoing reporting and administrative requirements once an APA has been entered into.
It is clear that transparency by all parties is a fundamental aspect of the bilateral APA programme. Throughout the APA process, the taxpayer should ensure that both tax administrations are provided with the same information at the same time. This applies to any information submitted by the taxpayer to either tax administration as part of the APA process.
Ireland is responding well to the BEPS Action Plan and the various steps taken over the past number of months, including the introduction of this APA programme, can be seen a positive signal that Ireland is serious about implementing the OECD actions. This can be seen as welcome step in the right direction in order to encourage greater tax transparency and promote good tax governance in Ireland