The Department of Finance launced a public consultation last month on Ireland’s transfer pricing rules. As announced in Ireland’s Corporation Tax Roadmap released last September, Ireland intends to update transfer pricing rules in Finance Bill 2019 which will take effect from January 2020. Read the CCAB-I response to the consultation:

Introduction

The CCAB-I recognises that Ireland’s work on changing transfer pricing rules is a part of a world-wide emphasis on transfer pricing as a tool to ensure the alignment of profit recognition with economic substance and value creation. This is supported by enhanced transparency in the form of tax related information reporting brought to the fore by the BEPS initiative. Ireland has constructively engaged with the BEPS process, and has already incorporated many of the BEPS recommendations into Irish tax law.

The reinforcement of our transfer pricing regime is an important statement to the world of Ireland’s commitment to operating a fair and substance based tax regime and it is appropriate that Ireland’s transfer pricing regime be consistent with international best practice as set out in the OECD’s revised transfer pricing guidelines published in July 2017.

The proposal to extend transfer pricing obligations to small and medium size enterprises (SME sector) would result in a disproportionate compliance burden given the level of risk of transfer mispricing arising in this sector.

Moreover, increased resources will have to be made available to Revenue to deal efficiently with the additional compliance demands within Ireland’s own domestic transfer pricing regime, increased workload under the tax treaty dispute resolution process and on the development of practical and clear guidance to transfer pricing rules through consultations with taxpayers and the OECD.

1. Incorporation of the OECD 2017 Guidelines into Irish legislation

Transfer pricing legislation will be amended to include a direct reference to the 2017 OECD Transfer Pricing Guidelines.

Do you consider that this proposed course of action will give rise to any specific issues?

It is appropriate for Ireland to implement the 2017 OECD Transfer Pricing Guidelines as this will reduce the risk of uncertainty and double taxation for Irish taxpayers on adherence by Ireland to an internationally adopted approach to transfer pricing. In practice, many counterparty jurisdictions to transactions with Irish taxpayers regard the 2017 OECD Guidelines as simply clarifying earlier guidelines and have applied the principles set out in the 2017 Guidelines as they have evolved. The key considerations for Ireland revolve around the timing of the adoption of the 2017 OECD Guidelines into domestic legislation and the adequate resourcing of the Irish Revenue to deal efficiently with the new rules and support Irish taxpayers.

Not all OECD members and observer states are implementing the 2017 Guidelines at the same time or to the same degree of rigour as Ireland by virtue of the fact that Ireland will amend tax legislation to directly reference the OECD’s 2017 Guidelines. It is important that Irish based businesses/enterprises are given early notice of the timing of adoption in order to review arrangements and prepare for adoption. Ireland should provide for a change to Irish domestic rules no earlier than 1 January 2020.

Revenue will require more resources to operate the domestic changes to Irish transfer pricing rules on foot of implementation of the 2017 OECD Transfer Pricing Guidance. Practical domestic focused guidance to the legislation must also be developed by Revenue to properly support and assist the Irish taxpayer. It would be very useful if the guidance could explore, in practice, the differences in application of the 2010 and 2017 OECD Guidelines to provide greater clarity for taxpayers on adoption.

While additional resources have been allocated to Revenue in recent years to deal with requests for relief from double taxation arising from transfer pricing adjustments, it may take at least 2 years to secure relief which is an unacceptably long period of time.

Ireland operates within OECD standards for closing cases under the Mutual Agreement Procedure1 however the timeframe standards are excessively long for taxpayers who require certainty and commercial efficiency in order to operate their business. It is important that a greater international effort is made to improve the dispute resolution process across tax authorities throughout the world.

It may be appropriate to incorporate direct references to the OECD Transfer Pricing Guidelines into Irish tax law on this occasion, but as a general point to protect the independence and integrity of our tax code, we feel that incorporating any external sources and guidelines in this manner should be done only very rarely and in exceptional circumstances.

2. Removal of the exemption for arrangements in place since pre July 2010

It is intended to extend the transfer pricing legislation to arrangements the terms of which were agreed before 1 July 2010, commencing from 1 January 2020.

Do you consider that this proposed course of action will give rise to any specific issues?

Ireland’s transfer pricing rules do not apply to arrangements the terms of which are agreed before 1 July 2010. This exception is referred to as the grandfathering arrangement and the exception can potentially apply indefinitely so long as the terms of the pre-1 July 2010 arrangement does not change.

Changes to grandfathering arrangements should not apply with retrospective effect because retrospective changes to tax rules imply that our tax laws are unreliable. Compliant taxpayers have a right to consistent tax rules and changes to compliance obligations for transactions which took place more than ten years ago do not reflect well on our tax system.

Removal of the transfer pricing exemption for arrangements in place prior to 1 July 2010 should only have prospective effect.

Taxpayers impacted by such a change to the scope of transfer pricing rules should be granted a transitional period to put the documentation in place to support pricing policies relating to arrangements in place prior to 1 July 2010. Any dispute on the pricing policy adopted should not result in an adjustment to the tax computations of the company for the accounting periods prior to 1 January 2020.

Impacted companies should also be exempt from transfer pricing compliance reports for accounting periods prior to 1 January 2020.

The transfer pricing exemption should continue to apply to long term financial instruments with defined maturity periods in place prior to 1 July 2010 until the existing loan agreement has come to an end.

Many taxpayers will be impacted by the removal of the transfer pricing exemption for arrangements in place prior to 1 July 2010. Therefore pragmatic and timely Revenue guidance on how this change will operate in practice is essential.

3. Extension of transfer pricing rules to SMEs

Do you consider that transfer pricing legislation should be extended to small and medium enterprises?

Expanding transfer pricing to the Small and Medium Enterprise sector will increase the burden of compliance paperwork without significantly enhancing the integrity of the system or address a tax risk.

It is important not to lose sight of the objectives of transfer pricing rules in Ireland and internationally. The rules are in place to ensure that corporate profits are not manipulated by artificial pricing of arrangements between associated parties to reduce the tax liability of a body corporate. A large proportion of Irish SMEs are closely held companies and transactions between the shareholders and the company are already subject to arm’s length rules and extensive anti-avoidance provisions apply under the close company regime where those rules are breached. In this context it is difficult to envisage how transfer pricing rules on the SME sector are necessary or justifiable.

Ireland should prioritise measures to support and encourage the SME sector rather than introduce another layer of expensive compliance obligations on a sector most exposed to economic difficulties on foot of Brexit.

At a very minimum, transfer pricing rules should not apply to SMEs which employ fewer than 250 persons and which have an annual turnover not exceeding €50 million, and/or an annual balance sheet total not exceeding EUR €43 million, following the definition of an SME as prescribed by the European Commission2.

What level of documentation would be appropriate to demonstrate compliance with transfer pricing rules?

Without prejudice to our earlier observations that the extension of transfer pricing rules SMEs is inappropriate, if the current general exemption is removed then a specific exemption for reduced documentation requirements under section 835F TCA 1997 should be introduced to ensure that SMEs are not subject to the same documentation obligations applied to larger multinational businesses. The adoption of lighter touch documentation compliance requirements for smaller enterprises is wholly aligned with both OECD and EU transfer pricing principles.

If transfer pricing rules are extended to SMEs, what other measures might be considered to mitigate the compliance burden for SMEs?

Without prejudice to our earlier observations that it is inappropriate to extend transfer pricing rules to SMEs, further extending safe harbour approaches which set a range of prices considered to be arm’s length and perhaps apply de minimis transaction values would be essential if the general transfer pricing exemption is removed for SMEs as a means of balancing the compliance burden imposed by such rules for smaller enterprises.

4. Extending Transfer Pricing Rules to non-Trading Income and Capital Transactions

Are there issues which may arise through the extension of transfer pricing rules to non-trading income and how may any such issues be resolved?

Ireland operates two rates of corporation tax; 12.5% on trading income and 25% on passive, non-trading income. The extension of transfer pricing rules to non-trading transactions could give rise to mismatches if the income earned by the originator is taxable at 25% and the recipient is entitled to a deduction at 12.5%. This will pose problems particularly for transactions between Irish resident parties.

Domestic taxpayers in particular should be protected from transfer pricing mismatches and double taxation if transfer pricing rules are extended to non-trading income. Moreover it is not immediately clear to us how the operation of the OECD Transfer Pricing guidelines, given their emphasis on cross border transactions, can support such an extension. Separate provisions appropriate specifically to Irish law and practice might have to be drafted to operate in parallel with the OECD guidelines.

Recent EU case law3 supports the non-application of transfer pricing requirements to domestic transactions while applying it to cross border transactions as being a proportionate application of protections by a Member State and nor being in breach of EU freedoms under the Treaty on the Functioning of the European Union.

Do you believe that the current market value rules are sufficient so that capital transactions do not need to be subject to separate transfer pricing rules? Could these rules be supplemented by additional documentation requirements?

Irish tax law has long established market value rules for capital asset disposals between connected parties (section 547 to 549 TCA 1997 and section 623 TCA 1997) for Capital Gains Tax purposes. Market value is also fundamental in connected party transactions for capital allowances purposes (section 312 TCA 1997 and section 291A TCA 1997).

On the basis that taxpayers subject to Irish CGT and benefitting from Capital Allowances are already required to meet rigorous market value standards, additional transfer pricing regulation is unnecessary.

If transfer pricing rules are extended to capital transactions, then at a very minimum, transactions qualifying for group relief under section 617 TCA 1997 should be excluded to ensure that a tax is not imposed which would not otherwise arise.

5. Extending Transfer Pricing Documentation

What particular issues do you consider might arise if the enhanced documentation requirements were to apply from 1 January 2020?

The timing for taxpayers to prepare transfer pricing documentation should remain unchanged, i.e. upon request. Ireland should not impose a mandatory standard or contemporaneous preparation of documentation. The level of adequate documentation (master files and local files) should be considered in accordance with the taxpayer’s size and complexity of transactions.

In accordance with OECD recommendations as set out in the BEPS Action 13 Report, Revenue should provide practical guidance on the expected scope of documentation in the master and local files.

Are there any circumstances in which the documentation requirements should be reduced or limited in specific respects?

In the event that transfer pricing rules are extended to the SME sector, SMEs should only be required to provide information about material cross-border transactions upon specific request from Revenue.

6. Application of Authorised OECD Approach to branch profit attribution

Do you consider that the Authorised OECD Approach to attribution of branch profits would be an appropriate approach to adopt into Irish law?

The application of the Authorised OECD Approach (“AOA”) to the attribution of branch profits could provide additional certainty on the scope and measure of profits attributable to branches. If it is adopted under domestic provisions, guidance would be welcome on the interaction of the AOA under domestic provisions and its application to branches in pre-2010 tax treaty jurisdictions where AOA measures are not reflected in the tax treaty.

Are there any special considerations required in respect of SMEs?

A lighter touch documentation approach should apply to smaller enterprises which should include the provision of documentation only on request as part of a Revenue audit and/or transfer pricing risk assessment intervention. Compliance with documentation requirements for SMEs should be supported with safe harbours documentation guidelines for branch profit attribution.

1 P10, OECD MAP statistics for Ireland for 2016/2017 show that it took on average 26 months for Ireland to resolve attribution/allocation cases. The OECD average for transfer pricing cases was 30 months in 2017.

2 COMMISSION RECOMMENDATION, of 6 May 2003, concerning the defi nition of micro, small and medium-sized enterprises.

3 Case C-382/16, Hornbach-Baumarkt AG Finanzamt Landau.