The Irish Government recently released its feedback statement in response to the public consultation launched earlier this year regarding Ireland’s transfer pricing regime. The feedback statement provided a summary of the proposed changes being considered including draft wording for legislative purposes. The minister has announced that the proposed changes to Ireland’s transfer pricing provisions will come into force from 1 January 2020.
As expected, the 2017 version of the OECD Transfer Pricing Guidelines (2017 OECD Guidelines) will be introduced into Irish law. This includes OECD guidance on hard-to-value intangibles, and application of the Transactional Profit Split Method.
Any subsequent additional transfer pricing guidance that is 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.
The 2017 OECD Guidelines are already applicable under Ireland’s international tax treaties and therefore the introduction of these guidelines into Irish domestic law will only impact transactions with “non-tax-treaty” countries.
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 the scope of transfer pricing. For example, many cross-border outbound funding loans will now require pricing in accordance with the arm’s length principle. 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 derived from 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. Irish domestic transactions), subject to certain anti-avoidance rules.
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 materially altered since then can currently be ignored for Irish domestic transfer pricing purposes. This will no longer be the case from 1 January 2020.
The proposed legislation will apply 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 €25 million.
The main impact for taxpayers will be to ensure valuations are documented in accordance with OECD guidelines. The documentation should take 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.
The proposed rules will have a number of implications including:
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 will not apply from 1 January 2020.
The definition of an SME is:
(i) enterprises which employ fewer than 250 persons, and
(ii) which have an annual turnover not exceeding €50 million and/or an annual balance sheet total not exceeding €43 million.
The minister also made reference to the application of transfer pricing rules to SMEs with relaxed transfer pricing documentation requirements, being consistent with the approach adopted in many other OECD countries.
Therefore, it seems clear that the application of transfer pricing rules to SMEs, while deferred for now, will be introduced at some point in the future in Ireland.
OECD transfer pricing documentation requirements, in accordance with Chapter V of 2017 Guidelines, will be 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 €250 million.
The requirement to prepare a ‘local file’, in accordance with the 2017 OECD Guidelines, is introduced for groups with consolidated revenues in excess of €50 million.
For many other countries, the revenue threshold for both master file and local file is set at €750 million, or equivalent in local currency, in line with the threshold for country-by country reporting. Therefore, these new rules introduced in Ireland could impose a requirement to prepare transfer pricing documentation for a multinational enterprise that did not previously exist.
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. 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.