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- Ireland’s transfer pricing (TP) legislation is contained in the Taxes Consolidation Act 1997 (‘TCA 1997’) Part 35A, and is based on the arm’s length principle as per Article 9 of the OECD Model Tax Convention on Income and Capital, i.e. it follows the 2017 OECD Guidelines.
- Part 35A, as substituted by Finance Act 2019, applies for chargeable periods commencing on or after 1 January 2020.
- It expands the scope of TP legislation (which earlier applied only to trading transactions) to non-trading transactions, previously “Grandfathered arrangements” (pre-July 2010), capital allowances and chargeable gains relating to transactions between associated persons, with certain exceptions. In relation to the computation of capital allowances and chargeable gains or losses, the TP rules apply in respect of transactions relating to assets that have a market value of over €25 million or where the capital expenditure incurred on an asset is over €25 million.
- Finance Act 2020 provided for certain amendments to Part 35A; namely, an amendment to the definition of ‘relevant person’ (broadly a person “within the charge to tax in respect of profits or gains or losses, the computation of which takes account of the results of the arrangement”). It also revised the provisions relating to exemption for domestic transactions, with a further revision in Finance Act 2021 to clear the interpretative difficulties caused by the previous update.
- Revenue has revised the tax return from FY2020 onwards to include TP-related questions.
- A fund, including an Irish Real Estate Fund (IREF) and a Real Estate Investment Fund (REIT) are not within the scope of the TP rules.
- The new rules require larger taxpayers to prepare a master file and/or a local file in accordance with the OECD’s 2017 Guidelines for Multinational Enterprises and Tax Administrations (“OECD Guidelines”). This TP documentation must be in place no later than the date on which the return for the chargeable period is due to be filed. The documentation must be provided to Revenue within 30 days of a written request, failing which specific TP penal provisions apply.
- Small & Medium Enterprises (SMEs) are currently excluded from TP documentation requirements but they are expected to be brought within the scope in the future by Ministerial Order. From that point, a medium-sized enterprises will need simplified documentation in respect of relevant transactions, while small enterprises will continue to be exempt.
- The TP rules apply to Irish taxpayers whose profits, losses or gains are within the charge to Irish tax, including Irish branches of overseas companies. Further, section 28 of Finance Act 2021 inserted a new section 25A into the Taxes Consolidation Act 1997 to provide for the application of an OECD-developed mechanism (the “Authorised OECD Approach” or “AOA”) for the attribution of income to a branch or agency of a non-resident company operating in the State. The new section 25A applies for accounting periods commencing on or after 1 January 2022.
- Ireland’s TP rules follow the OECD Guidelines, supplemented by their additional guidance on hard-to-value intangibles, the transactional profit split method and financial transactions. The OECD Guidelines are specifically mentioned in Irish legislation, and unlike in many countries, they must be used for interpretation of the arm’s length principle.
- The OECD has also released further guidance, including its report on Financial Transactions in February 2020. Ireland formally included this guidance into Irish legislation by passing a Ministerial Order in December 2021.
- Finance Bill 2022 is expected to update the reference of the OECD guidelines to its most recent version published in January 2022. The update will provide Revenue and stakeholders with certainty in relation to transfer pricing rules and ensure Ireland's tax system keeps in step with international best practice. The amendment is applicable from 1 January 2023.Revenue has TP guidance which covers their interpretation of TP matters, this content is publicly available.
- The most appropriate pricing method should be selected on a transaction-by-transaction basis, providing the most reliable measure of an arm’s length result in each case. The current OECD methods, namely the comparable uncontrolled price, resale price, cost plus, transactional net margin, and profit split methods are all accepted but the method used must be in line with the functional and risk profile of the entity. Other methods can also be used if justifiable and appropriate.
- Revenue Guidance allows the simplified approach for low value-added services in accordance with OECD Guidelines i.e. applying 5% mark-up of cost-base, without the need for a benchmarking analysis.
- There is no set hierarchy in application of the TP methods, which is consistent with the OECD Guidelines.
- Under the self-assessment system, the burden of proof in the event of a TP audit by Revenue will fall on the taxpayer.
- Revenue may request a TP Compliance Review ('TPCR'), which is a self-review carried out by the company/MNE group of its compliance with the legislation and the application of arm’s length principle. A TPCR is not a TP audit. Certain information will be requested by Revenue in the TPCR notification letter. Generally, the taxpayer will have 3 months to respond. A TPCR may escalate to a TP audit.
- Ireland accepts the OECD TP documentation model based on the Master File and Local File (BEPS Action 13) approach. This approach is considered best practice in Ireland.
- Lack of carefully prepared documentation will generally be seen as 'careless' behaviour and any adjustment will likely result in penalties.
- Irish legislative requirements for documentation oblige an Irish taxpayer to have records available for determining whether income of the taxpayer was computed in compliance with the TP legislation.
- As mentioned earlier, SMEs are currently excluded from TP documentation requirements but they are expected to be brought within the scope in the future by Ministerial Order. From that point, a medium-sized enterprises will need simplified documentation in respect of relevant transactions, while the small-sized enterprises will continue to be exempt.
- Documentation should be prepared no later than the filing date for the return for the chargeable period and must be made available within 30 days of a written request from Revenue.
- Ireland implemented CbCR (Country-by-Country Reporting) legislation, which is effective for accounting periods commencing on or after 1 January 2016 for groups with consolidated turnover of €750m or more.
- Ireland follows the guidance of Chapter V of the OECD Guidelines for the composition of both the Master file and Local file. These requirements are applicable for the accounting periods commencing on or after 1 January 2020.
- Where the taxpayer forms part of a multinational group of enterprises (MNE group) with a total consolidated global revenue at or above €50 million in the chargeable period, the taxpayer is required to prepare a local file containing the information specified in Annex II to Chapter V of the 2017 OECD Guidelines.
- Where the total consolidated global revenue of the MNE group is at or above €250 million in the chargeable period, the taxpayer is also required to prepare a Master file containing the information specified in Annex I to Chapter V of the 2017 OECD Guidelines.
- The master file and local file should be prepared no later than the date on which a return for the chargeable period is due to be filed.
- As an alternative to individual local files, companies may choose to prepare a consolidated ‘Country File’ for all Irish entities of an MNE group. The Country File will contain essentially the same content as a local file. However, it must also include entity level qualitative and financial information. Where financial information is consolidated in the country file, companies will not be treated as having complied with their TP documentation obligations.
- The Master file documentation should contain organisational structure, description of MNE’s business(es), MNE’s intangibles, MNE’s intercompany financial activities, MNE’s financial and tax positions. In principle, a Master file should provide a high-level overview of the business, including the nature of its global operations and general TP policies on widely implemented transactions. The Master file is intended to assist tax authorities in evaluating whether significant TP risk may exist in a particular jurisdiction.
- The Master file will contain information for the group as a whole. For larger multinationals, the Master file may instead be more appropriately described by line of business. Typically, the Master file will be made available to the tax authorities in all countries where the multinational has a taxable presence.
- Local file and/or Country-specific document should contain information on the Local entity, its controlled transactions and financial information. In contrast to the Master file, which is a broad-based narrative of the group, the Local file is a report containing detailed information relating to specific intra-group transactions related to taxpayers in a specific jurisdiction. The intent of the Local file is to provide assurance to a specific tax authority that the local entities have complied with the arm’s length principle for material intra-group transactions.
- Limited risk distributor and contract services/ contract R&D arrangements could potentially be affected, especially where significant people functions are in Ireland
- Cross-border financing transactions especially in cases where the Irish entity is in the capacity of a borrower
- Transactions involving Intellectual property (IP)
- Persistent losses in a “low risk” entity
- Transactions involving payments to low tax jurisdictions
- Business restructurings, or changes in TP model, can also trigger a challenge but, businesses can evolve, and if the previous TP method no longer appears the most appropriate, it should always be reviewed, rather than being ignored for the sake of maintaining consistency.
- Penalties in relation to TP documentation are derived from the general record-keeping requirements. Two main types of penalties may apply; a fixed penalty for failure to keep or produce documentation and a tax-geared penalty in the case of a Revenue audit.
- Where a taxpayer fails to provide records that determine whether profits or gains have been computed in accordance with TP rules within 30 days of date of request, a fixed penalty of €4,000 applies.
- When a taxpayer is a person to which the local file and master file thresholds apply, fails to provide relevant information requested by the Revenue authorities within 30 days, the fixed penalty is increased to €25,000. Further penalty of €100 per day applies when failure to comply with request continues.
- The tax-geared penalty under a Revenue audit is dependent on whether there has been a qualifying disclosure, it is the first offence, it is careless behaviour or deliberate behaviour and whether consequences are significant. The penalty can be up to a maximum of 100% of tax liability.
- Section 835G(7) provides that a relevant person will be exempted or protected from a tax-geared penalty in certain circumstances. Protection from tax-geared penalties only applies to TP adjustments that fall within the careless behaviour category of default. Where the additional tax due relates to deliberate behaviour category of default, the relevant tax-geared penalty will apply even where TP documentation is provided within 30 days of a written request from a Revenue officer.
- The penalty for a failure to file a CBCR is €19,045 plus €2,535 for each day the failure continues. The penalty for filing an incomplete or incorrect CBCR is €19,045.
- Revenue will expect to see that a search for potential internal comparables has taken place before using an external database search for comparables.
- For a TNMM benchmarking, Revenue will expect a full benchmarking study every three years and for the financials of the accepted comparables to be updated or refreshed on an annual basis. Pan-European comparables may be acceptable depending on the facts and circumstances. However, if there are local factors that clearly differentiate the tested party’s geographic market, they should be factored into the benchmarking exercise, where possible.
- Note that where databases are used, contrary to popular understanding, there is no specific requirement that the interquartile range be used (however, it will often be calculated as means to eliminate outliers, given that incomplete information will always be an issue in external database searches).
- An APA is an arrangement between one or more tax authority and a taxpayer that determines in advance of controlled transactions an appropriate set of criteria (i.e., TP method, critical assumptions, etc.) for the determination of the transfer pricing for those transactions over a fixed period of time.
- Ireland’s bilateral APA program has been in effect since 1 July 2016.
- 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 PE in Ireland of a non-resident company in accordance with the provisions of the relevant treaty.
A MAP is the process which allows competent authorities to interact with the intent to resolve international ax disputes involving cases of double taxation (juridical and economic) as well as inconsistencies in the interpretation and application of a double tax convention.
The objective of the MAP process is to negotiate an arm’s length position that is acceptable to both tax authorities and seek to avoid double taxation for taxpayers.
Taxpayers have a right to enter the MAP process for TP disputes.
Revenue published guidelines laying out process to be followed to claim a correlative adjustment (“CA”) under Ireland’s double tax treaty network. According to this, if a group company or subsidiary (an associated enterprise) has had to pay additional tax in a foreign country, as a result of a TP adjustment in that country, the taxpayer can submit a claim with Revenue via the CA mechanism route available to compensate for that additional foreign tax; essentially allowing an adjustment to the Irish profits of the Irish taxpayer. This mechanism only works where there is a Double Taxation Agreement with that other country.
For such CA cases, taxpayer can submit a protective MAP request while the Revenue is reviewing the claim, to ensure that the request is not time-barred when the Revenue rejects the CA claim in part or in full as an outcome of its review.
- Currently SMEs are excluded from the scope of transfer pricing rules. The legislation makes provision to bring SMEs within the scope of transfer pricing rules subject to Ministerial Commencement Order. Depending on their size, small companies will be fully exempt from transfer pricing documentation requirements while medium companies will have significantly simplified documentation requirements.
The exemption criteria are based on European Union (EU) recommendation 2003/361/EC as follows:
- Small: less than 50 employees, and either turnover or gross assets not exceeding €10 million
- Medium: less than 250 employees and either turnover not exceeding €50 million or gross assets of less than €43 million.
- The legislation currently exempts non-trading domestic related party transactions from transfer pricing provisions subject to meeting certain conditions and the anti-avoidance measures. This amendment applies to chargeable periods beginning on or after 1 January 2022.
- For computations of capital allowances and chargeable gains or losses, the transfer pricing rules apply in respect of transactions relating to assets that have a market value of over €25 million or where the capital expenditure incurred on an asset is over €25 million.
- With a corporate tax rate of 12.5%, there was concern initially in Ireland with a proposed 15% (or higher) global minimum corporate tax rate. Nonetheless, Irish policymakers have broadly welcomed the Pillar 2 agreement at a 15% tax rate as it removes the possibility of increase in this rate. In addition, the existing 12.5% rate will be retained for groups with global turnover of less than €750 million. Like many other EU states, Ireland’s domestic legislation is intended to follow the EU directive, which has yet to be agreed and could be subject to delay.
- Ireland has not implemented a digital services tax at present although the EU and OECD have proposals to allocate a portion of profits based on the location of consumers. The EU interim proposal is a simple 3% turnover based tax. There is a possibility that the EU will push its own proposals.
- Revenue has recently placed a great focus on improving the standards of transfer pricing documentation and economic analyses via reviews of taxpayer and agent “behaviour”. It will expect local reviews of functions, assets and risks, accurate characterisation, and high-quality TP documentation, otherwise penalties may be sought. Revenue is very keen to stress the benefits of “cooperative compliance”.
- The economic fallout of COVID-19 has a widespread impact and as a result of which an increase in transfer pricing, Corporation Tax enquiries globally is expected. All MNCs should be reviewing their potential exposure to transfer pricing enquiries and updating documentation accordingly.
- Where supply chains have been disrupted or work brought to a halt due to lockdown measures, profits might have been hugely impacted. Comparable companies will often have been affected in the exact same way as multinational groups, but evidence must be gathered and documented contemporaneously.