Review of Ireland’s Tax Code Published
Transfer Pricing Aspects
In October 2016, the Irish Government appointed an independent academic expert to undertake a review of Ireland’s corporation tax code. The report with the output of this review was published on 12 September 2017 by the Irish Government.
The terms of reference of the review encompassed the following matters:
- Ensuring that Ireland’s corporation tax regime does not provide preferential treatment to taxpayers;
- Further implementing Ireland’s commitments under the OECD Base Erosion and Profit Shifting (BEPS) project which includes the transfer pricing aspects contained in Actions 8-10 and 13;
- Achieving the highest international standards in tax transparency;
- Delivering tax certainty for businesses and maintaining the competitiveness of Ireland’s corporation tax offering including maintaining the 12.5% rate of corporation tax.
This alert details the key transfer pricing related proposals arising from the review including potential changes to Ireland’s transfer pricing domestic laws which may ensue such as:
- Updating Ireland’s domestic transfer pricing laws to align with the 2017 version of the OECD Transfer Pricing Guidelines including Action 8-10 and 13.
- Removal of grandfathering exemption, whereby arrangements which were in place and the terms agreed before 1 July 2010 are outside Ireland’s domestic transfer pricing rules.
- Expansion of domestic transfer pricing rules to non-trading transactions and capital transactions.
- Obligation on Irish taxpayers subject to transfer pricing laws in Ireland to have transfer pricing documentation in place in accordance with Action 13 and the new Chapter V of the OECD Transfer Pricing Guidelines; i.e. Master File and Local File approach.
- Consideration to extending domestic transfer pricing rules to SME groups which are currently outside the scope of Ireland’s documentation regime.
Transfer Pricing proposals
The key transfer pricing related proposals are outlined below in more detail.
A – Further Implementation of Ireland’s commitments under BEPS Actions 8-10 and 13
At present, Ireland’s domestic transfer pricing law is aligned to the 2010 version of the OECD Transfer Pricing Guidelines. The report recommends that Ireland should update its domestic law to align with the current version of the OECD Transfer Pricing Guidelines which were published in July 2017. The new guidelines include the changes arising from the OECD BEPS project, namely the principles contained in Action 8-10 (Aligning Transfer Pricing Outcomes with Value Creation) and Action 13 (Transfer Pricing Documentation and Country-by-Country Reporting).
In relation to Action 8-10, one of the main impacts for companies operating in Ireland will relate to how entitlement to intangible related returns are allocated amongst group members. The amendments in the 2017 OECD Transfer Pricing Guidelines contain critical changes in relation to the allocation of risk and allocation of intangible-related profits. Legal allocation of risk under contract between related parties will be disregarded to the extent the allocation is not consistent with the actual conduct of the parties. What is key is who controls risk and who has the financial capacity to bear risk. In relation to the allocation of intangible-related returns, the guidelines differentiates between economic ownership and legal ownership of intangibles, the execution of value-creating development, enhancement, maintenance, protection and exploitation (“DEMPE” functions) and allocation of arm’s length remuneration thereto.
In relation to Action 13, the main impact for companies operating in Ireland will be the introduction of a two-tier transfer pricing documentation requirement – a Master File and Local File. Companies operating in Ireland will already be familiar with the other key pillar of Action 13 – country-by-country reporting requirements which are already included in Ireland’s domestic tax law. The significant difference between current documentation requirements and Action 13 documentation requirements are that groups will be required to provide tax authorities with substantially more information on their global operations than in the past including specific information on intangibles, financing activities, the supply chain of key products/services and details of relevant tax rulings and advance pricing agreements.
B – Application of transfer pricing law to arrangements (“grandfathered” arrangements) the terms of which were agreed before 1 July 2010
When Ireland’s transfer pricing law was introduced in Finance Act 2010, Irish Revenue included provisions to ensure certain trading transactions would fall outside the transfer pricing documentation requirement. Such arrangements are termed “grandfathered arrangements”. To the extent the terms of a grandfathered arrangement were not subsequently amended, then it was possible that the transaction in question did not fall within the ambit of transfer pricing laws in Ireland. The report indicates that if Ireland’s domestic transfer pricing law is not extended to grandfathered arrangements, there will be no specific transfer pricing provisions – whether including or excluding the 2017 OECD Transfer Pricing Guidelines – applying to such arrangements. The report also states that if legislative changes are introduced to remove this exemption, consideration would need to be given to the announcement and commencement date of any such changes.
C – Expanding domestic transfer pricing rules to non-trading and capital transactions
At present, Ireland’s transfer pricing regime is only relevant for related party transactions that are taxed at the 12.5% rate of corporation tax in Ireland. This means that certain transactions are not within the remit of transfer pricing in Ireland including: non-trading interest income, certain interest expenses treated as a charge on income, rental income, non-trading royalty income, foreign income, acquisitions / disposals of tangible and intangible assets and assets subject to capital allowance claims. Also excluded presently are interest-free loan arrangements which are considered non-trading in nature. The report recommends that consideration be given to extending domestic transfer pricing rules to non-trading transactions and capital transactions. The report also recognises that certain of the above transaction classes including capital transactions and capital allowances have equivalent concepts in other parts of Ireland’s tax laws to the arm’s length principle which allow for the adjustment of capital values to reflect market value.
The report outlines a number of policy options available regarding the extension of transfer pricing rules to capital transactions including:
- continue to keep such transactions outside the scope of transfer pricing rules on the basis existing rules have comparable concepts to the arms’ length principle;
- bring all capital transactions within the scope of transfer pricing rules; and
- continue to keep such transactions outside the scope of transfer pricing rules but supplement existing market value rule contained in domestic law with the application of the OECD Transfer Pricing Guidelines where appropriate.
D – Strengthening domestic transfer pricing documentation requirements
Irish Revenue issued guidance in 2010 which outline good practice for Irish transfer pricing documentation – Tax Briefing Issue 7. This was subsequently reissued in August 2017. The existing guidance refers to Chapter V of the 2010 OECD Transfer Pricing Guidelines and EU Transfer Pricing Documentation (“EU TPD”) as representing good practice for format of documentation. Action 13 now provides for more detailed transfer pricing documentation in the format of Master File and Local File. The report suggests that there is a strong case to update Ireland’s domestic transfer pricing documentation law to align with the new Chapter V of the 2017 OECD Transfer Pricing Guidelines.
E – Extending transfer pricing rules to small and medium sized enterprises (SMEs)
At present, Ireland’s transfer pricing regime does not apply to certain small and medium sized enterprises as defined by an EU recommendation of 6th May 2003. An SME is defined as an enterprise with less than 250 employees and either turnover of €50m or less or total assets (before deduction of liabilities) of less than €43m. The application of this exemption is on the basis that such small sized groups would incur an undue administrative burden if there was a requirement to prepare transfer pricing documentation. The report states that there is already provisions contained within the OECD Transfer Pricing Guidelines which allow for a pragmatic solution for smaller enterprises when considering the level of transfer pricing support that needs to be in place to demonstrate the arm’s length nature of intercompany dealings. On that basis, the report outlines a number of policy options which could be considered:
- retain the current SME exemption in Irish transfer pricing law
- remove the SME exemption completely
- reduce the size threshold to bring more companies within the scope of domestic transfer pricing law
- remove the SME exemption completely and also reduce transfer pricing documentation requirements for such small entities to reduce compliance burden
- align with the approach taken in the United Kingdom whereby certain transactions considered to be high risk are brought within the scope of transfer pricing.
Deloitte Ireland commentary
With the significant changes contained in the new 2017 OECD Transfer Pricing Guidelines, it is likely that many of this report’s recommendations will be formally adopted. The report indicates that the recommendations, if implemented, should take place no later than the end of 2020. We would expect that the recommendations pertaining to alignment of Ireland’s domestic transfer pricing law to the 2017 version of the OECD Transfer Pricing Guidelines will be adopted in the short term. Other recommendations such as removal of grandfathering status, expansion of transfer pricing law to non-trading and capital transactions and potential removal of SME exemption may be subject to additional consultation and analysis before any formal decision is taken. As such changes are likely to have a material impact for companies in Ireland, consultation and a period of advance notice of such changes would be welcomed. Irrespective of the implementation date of any of the report’s recommendations, we would strongly advise companies to review their operations to determine the potential impact of these changes on their business and assess readiness to deal with any changes in a timely manner.