In a fast-paced business world, with constantly evolving group operational structures and trading relationships, how long does an arrangement really remain unchanged?
The Irish transfer pricing rules were introduced in Finance Act 2010. To ease concerns that business in Ireland would suddenly face a nightmarish review of all existing trading structures, the transfer pricing rules provided that arrangements (the terms of w hich w ere agreed before July 1 2010) would be excluded.
Unhelpfully, arrangement is defined as “any agreement or arrangement of any kind (whether or not it is, or is intended to be, legally enforceable)”. The concept of an arrangement is not something that existed previously in Irish tax or contract law. It is potentially a very broad concept, meaning that all sorts of arrangements, existing since July 1 2010, are grandfathered, whether or not they were reduced to writing or even constituted a binding legal agreement.
The Irish Revenue Commissioners have tempered a very broad interpretation by stating that, to be grandfathered, the pre July 1 2010 arrangement must clearly envisage the transaction. For example, an intercompany royalty that is calculated on a fixed percentage of sales can be grandfathered because, while the annual sales will vary, the agreement delivers the price. However, an agreement to agree the royalty on an annual basis would not qualify for grandfathering.
These pre July 1 arrangements are grandfathered potentially indefinitely, as long as the terms of the arrangement do not change.
Perpetual grandfathering for existing arrangements: What more could you ask for?
Of course the broad definition of arrangement works both ways. A variation after July 1 2010, of any aspect of an arrangement between connected parties, potentially means that the entire arrangement is no longer grandfathered. For example, if the parties to an arrangement changed the pricing calculation mechanism it would seem clear that the arrangement should no longer be grandfathered. But it is less clear when a new product is added to a list of products licensed under an existing arrangement, without any change in the pricing mechanism. Similarly, what if there had just been a change in the governing law clause in an agreement? Such a change hardly warrants losing grandfathered status. In this sense an overly broad interpretation of what constitutes the variation of an arrangement could significantly dilute the effectiveness of the grandfathering provision included in Finance Act 2010.
The key benefit of grandfathering is that the arrangement will not be subject to the requirements of the transfer pricing rules. Accordingly, the pricing applied in arrangements between associated parties cannot be adjusted pursuant to the transfer pricing rules and companies are not required to have documentation in place to support the pricing adopted in these arrangements until they are amended after July 1 2010. Other potential benefits include avoiding the time and cost of dealing with a transfer pricing audit and any queries arising from such an audit.
Given the benefits of grandfathering, it is not unreasonable that even taxpayers who are not taking aggressive transfer pricing positions would prefer to maintain the grandfathered status of certain arrangements.
In this context a narrow view of when an arrangement has been varied may be more appropriate.
While every case will be fact specific and will depend on the terms of the arrangement between the parties, it is arguable that many variations can be made to an arran gement without jeopardising the grandfathered status of the arrangement.
Actions such as a renewal of a contract, assignment of a contract, amendment of a term, the addition of new services or products to the scope of an existing agreement may all be possible.
As time passes and business relationships evolve, taxpayers must continue to review whether their pre July 1 2010 arrangements remain grandfathered. Such review and consideration is particularly important now as many corporate taxpayers prepare to file their annual corporation tax return.