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Ireland’s Transfer Pricing feedback statement

Ireland’s transfer pricing feedback statement Ireland’s Transfer Pricing feedback statement

The Irish Government has released its feedback statement in response to the public consultation launched earlier this year regarding Ireland’s transfer pricing regime. The statement provides a summary of the proposed changes being considered including draft wording for legislative purposes.

The proposed changes to Ireland’s transfer pricing rules are expected to be introduced in Finance Bill 2019 and to come into force from 1 January 2020.

KPMG has responded to the Department of Finance in relation to the feedback statement. This document summarises the key provisions in the feedback statement and their likely practical impact together with items suggested by KPMG as requiring further consideration. 

2017 OECD Transfer Pricing Guidelines

As expected, the 2017 version of the OECD Transfer Pricing Guidelines (“2017 OECD Guidelines”) (including OECD guidance on Hard-to-Value Intangibles and Application of the Transactional Profit Split Method) will be introduced into law.

Any subsequent additional guidance published by the OECD after the passing of Finance Act 2019 can be introduced as designated by the Minister for Finance. The Minister therefore retains control of the extent to which future OECD pronouncements can impact domestic law. For example, the OECD has been working for some considerable time on guidance on the transfer pricing aspects of financial transactions and which guidance is expected in the near future. This guidance is expected to elaborate on how transfer pricing principles apply to the capital structure of multinational enterprises, thin-capitalisation issues, pricing of loans and other credit arrangements, treasury functions, cash-pooling and financial guarantees.  Some of these are contentious issues and the Minister is encouraged to proceed with caution on the adoption of future OECD transfer pricing announcements.

There has been much commentary on the impact of the 2017 guidelines which provide greater clarity and place greater emphasis on the substance of commercial and financial relations relative to their legal form. The guidelines introduce a clear framework for analysing the substance of commercial relations including the allocation and pricing of risk. This can be summarised as follows:

  1. Identify economically significant risks;
  2. Determine how specific, economically significant risks are contractually assumed;
  3. Determine how the parties to the transaction operate in relation to the assumption and management of the specific, economically significant risks, and in particular which enterprise or enterprises perform control functions and risk mitigation functions, which enterprise or enterprises encounter upside or downside consequences of risk outcomes, and which enterprise or enterprises have the financial capacity to assume the risk;
  4. Determine whether the contractual assumptions of risk is consistent with the conduct of the associated enterprises;
  5. Where the party assuming the risk does not control the risk or does not have the financial capacity to assume the risk, apply the guidance on allocating risk as set out in the OECD Guidelines; and,
  6. The actual transaction as accurately delineated by considering the evidence of all the economically relevant characteristics should then be priced taking into account the financial and other consequences of risk assumption.

The 2017 OECD Guidelines are already applicable under Ireland’s tax treaties and therefore the introduction of these guidelines into Irish domestic law will only impact transactions with “non-tax-treaty” countries.

While it is clear that the intention of the draft legislation is to apply the 2017 OECD guidelines, the proposed legislative approach seeks to codify into law certain principles related to substance over form and non-recognition of a transaction. Comprehensive guidance is contained in the OECD Guidelines that addresses how these issues should be addressed in practise. In isolation, the proposed language is arguably capable of misinterpretation unless it is clearly connected to the OECD approach. For example, one misinterpretation is that the draft legislation could be read to impose potential thin capitalisation tests on debt funding which may not be intended. The Minister is encouraged to ensure that the legislative language is clear about adopting the relevant OECD guidelines in applying the arm’s length principle. We understand this is the intended policy objective. 

Non-trading transactions within the scope of transfer pricing

Current Irish transfer pricing rules only apply to ‘trading’ transactions. A significant but expected change is that “non-trading” transactions will be brought within the scope of transfer pricing rules from 2020.

This will bring a significant number of commercial arrangements within scope. For example, many cross-border outbound funding loans will now require pricing in accordance with the arm’s length principles. This will impact Irish groups that provide financing to foreign group companies to fund international businesses and markets. In many cases, the income arising will be taxed in Ireland as passive income at 25% unless it is connected to an active financing trade.

There is an important exemption for non-trading transactions where both parties to the transaction are within the charge to Irish tax (i.e. domestic transactions).

Examples of transactions that remain outside the scope under the proposed wording of the Irish transfer pricing rules include:

  • Loans (i.e. non-trading) between companies within the charge to Irish tax
  • Letting of properties where both companies are within the charge to Irish tax
  • Irish parent company financial guarantees provided to Irish subsidiaries

This exemption applies provided the arrangement is not made with a main purpose to obtain a tax advantage as part of a scheme or arrangement involving another ‘non-Irish’ party.

Arrangements agreed pre 1 July 2010

The exemption from transfer pricing rules for pre-July 2010 (i.e. “grandfathered”) arrangements is to be removed - transactions that were agreed prior to July 2010 and not altered materially since can currently be ignored for Irish domestic transfer pricing purposes. These are now within scope.

This is most relevant to Irish trading companies with historic pricing arrangements e.g. historic intellectual property (IP) licensing arrangements or historic service arrangements. A full assessment under OECD transfer pricing rules is required to determine an appropriate arm’s length transfer price in respect of the licensing arrangement.

The 2017 OECD Guidelines requires taxpayers to look at the economic substance of the arrangements. This requires a greater focus on the key risks and drivers of business performance and where key decision-makers that control and/or mitigate those risks are located.  For IP specific reference is made to identify the economically important decisions impacting the development, enhancement, maintenance, protection and exploitation of the IP. In analysing such matters it is necessary to assess the contributions to the transaction of all relevant parties within a MNE group and the OECD Guidelines caution the use of “one-sided” approaches in determining the appropriate transfer price.

Application to Capital Transactions

The proposed legislation will apply the the arm’s length principle to determine the market value of chargeable assets for capital gains tax purposes and to capital transactions (i.e. for capital allowance and balancing event purposes) where the transaction value/capital expenditure exceeds €25m.

The main impact for taxpayers will be to ensure valuations are documented in accordance with OECD guidelines and the documentation takes account of specific guidance in relation to dealing with the uncertainty of ‘hard-to-value intangibles’ and that the options realistically available to the parties have been considered. This would include the following types of issues:

  1. How third parties would value an asset where its value is subject to fundamental uncertainty e.g. whether a new drug obtains future regulatory approval for a new clinical treatment.
  2. How third parties would value an asset being acquired by an entity that provides valuable and unique functions relevant to the asset’s value or where the asset value is heavily dependent on its combination with other tangible or intangible assets in order.

The proposed rules appear to have a number of implications including:

  • The 2017 OECD Guidelines will apply to determine the value of intangible assets for the purposes of claiming capital allowances. The new transfer pricing rules will apply in priority to the existing tax rules governing capital allowances and will only have the effect of reducing the allowance available to the taxpayer. This could have an impact claims for intangible asset allowances under section 291A of the Irish tax legislation) on a transfer of IP to Ireland. We understand this is intended to apply only to assets acquired after 1 January 2020 and not for assets acquired prior to this date where capital allowances are claimed in s subsequent accounting periods. The Minister has been encouraged to make this clear in the legislation.
  • The measures apply to individuals and the disposal of certain assets with a market value in excess of €25million could be within scope of transfer pricing rules, where that disposal is made to an associated person. This includes a disposal to a company controlled by the individual (and their relatives).  

Small and Medium Enterprises (“SMEs”)

It is proposed the transfer pricing rules will be extended to SMEs which are currently not subject to Irish transfer pricing legislation. However, the date of implementation is subject to Ministerial order and may not apply from 2020.

The definition of an SME is:

i. enterprises which employs fewer than 250 persons


ii. which have an annual turnover not exceeding €50m and/or an annual balance sheet total not exceeding €43m.

Some SMEs may already be subject to transfer pricing rules in other countries but many will never have had to consider transfer pricing. It is important to note that there is no de minimus threshold (as some other countries have) intended.

Given the significant economic uncertainty faced by Irish SMEs due to Brexit and other matters and the potential burden of transfer pricing for transactions that may not be material to the tax position of the taxpayers, the Minister is encouraged to defer the application of the rules to SMEs. The burden for SMEs could be significantly reduced if further ‘safe-harbour’ provisions were made available as options to SMEs - Revenue currently give the safe-harbour option of cost-plus 5% for low-value services. 

Transfer Pricing Documentation

OECD transfer pricing documentation requirements (in accordance with Chapter V of 2017 Guidelines) have been introduced for taxpayer groups where annual consolidated group revenues (as reflected in the consolidated financial statements) are above specified thresholds.

The requirement to prepare a ‘master file’ (in accordance with the 2017 OECD Guidelines) is introduced for groups with consolidated revenues in excess of €250m.  The requirement to prepare a ‘local file’ (in accordance with the 2017 OECD Guidelines) is introduced for groups with consolidated revenues in excess of €50m.

For many other countries, the revenue threshold for both master file and local file is set at €750m (or equivalent in local currency) in line with the threshold for country-by country reporting. Therefore, these new rules introduced in Ireland could trigger a requirement for MNE’s that did not previously need to prepare transfer pricing documentation to now do so.

The supporting documentation should be prepared no later than the due date for the tax return for the taxable period in question and must be available upon a request by Irish Revenue in writing. Such records must be provided to Irish Revenue within 30 days from the date of the request and fixed administrative penalties can apply for a failure to keep the required records. In effect, this introduces a contemporaneous transfer pricing documentation requirement that did not exist previously. 

There are no “tax-geared” transfer pricing penalties or provisions allowing the ‘burden of proof’ to be shifted to taxpayers.

The new rules do not specify that the Irish company itself must prepare the transfer pricing documentation or that the documentation must be kept in Ireland. Therefore, if appropriate documentation has been prepared for tax purposes in another country, provided that the documentation can be made available to Irish Revenue within 30 days from the date of being requested, that will suffice. Revenue may issue further guidance on transfer pricing documentation requirements in due course.

SMEs - Transfer Pricing Documentation Requirements

It is proposed that there would be no formal transfer pricing documentation requirements introduced for ‘small enterprises’

A small enterprise is defined as:

i. enterprises which employs fewer than 50 persons


ii.  which have an annual turnover not exceeding €10m and/or an annual balance sheet total not exceeding €10m.

The same applies to medium enterprises where one party to the transaction is not within the charge to Irish tax and the transaction consideration does not exceed €1m.

The definition of a ‘medium enterprise’ is set out in the draft legislation as being an enterprise that falls within the category of SME (as defined above) but does not qualify as a ‘small enterprise’.

However, the proposed legislation does provide for simplified documentation requirements (i.e. not full scope OECD) for medium enterprises. Specifically, medium enterprises would be required to provide:

  • a description of the business of the medium enterprise, including its organisational structure, business strategy and key competitors; and
  • in relation to each relevant arrangement:
    • a copy of all relevant agreements
    • a description of the transfer pricing method used and the reasons the method was selected, along with evidence to support the price selected as being the arm’s length amount
    • the amount of consideration payable or receivable, as the case may be, under the arrangement
    • a description of the functions performed, risk assumed and assets employed

Please contact us if you would like advice on any aspect of these proposed changes and the impact it may have for your business.