The effect of the proposed Irish transfer pricing rules
What is transfer pricing?
Transfer pricing refers to the prices at which related entities (e.g. a parent company and its subsidiary) set the price that they pay each other for goods, services, the use of money, intangible assets, and similar transactions.
Transfer Pricing rules require that transactions between associated persons should take place at arm’s length. In other words, the results of the transaction should be consistent with the results that would have been realised if independent parties had engaged in the same transaction under the same circumstances.
Which laws or guidelines govern the control of Irish transfer pricing?
The rules regarding transfer pricing in Ireland are outlined in sections 835A to 835H of the Taxes Consolidation Act, 1997 (TCA).The principles in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations must be followed when analysing whether a transaction has been entered into “at arm’s length”.
Whilst no specific transfer pricing regime of general application has been in place until now, the requirement that transactions between associated entities should be entered into “at arm’s length” is not an entirely new concept for the Irish tax system.
For example, Section 81 of the TCA provides that no deduction will be allowed where a disbursement or expense was not wholly or exclusively laid out or expended for the purposes of the trade of that company. Although this provision does not explicitly require that transactions be entered into at arm’s length, the power granted to the Revenue Commissioner to deny a deduction in effect allows the Revenue Commissioner to adjust the price paid by the company for the goods or services. Furthermore, it is a requirement in section 453 of the TCA that manufacturing companies that benefit from the reduced corporate tax rate of 10 percent are required to enter into transactions at arm’s length. The reduced rate of corporate tax of 10 percent is no longer available to companies after 31 December 2010.
The cessation of the 10 percent regime on 31 December 2010 has provided legislators with an ideal opportunity to consolidate the various arm’s length principles, providing the taxpayer with more clarity and certainty in relation to associated entity transactions.
What is the effective date for the Irish transfer pricing rules?
The new rules apply to accounting periods of companies beginning on or after 1 January 2011. Only new arrangements entered into on, or after, 1 July 2010 are affected. Contracts or arrangements in place before that time are not affected.
The effect of the proposed Irish transfer pricing rules
Who falls within the scope of the Irish transfer pricing rules?
The rules apply to related party transactions within all enterprises that meet the size requirements. The rules apply to both domestic and cross-border transactions.
An enterprise will not fall within the rules if it fits within the definition of a small or medium sized enterprise. The following are the key criteria:
- Less than 250 employees; and
- turnover of less than €50 million
- assets of less than €43 million.
When applying these criteria, one must consider the consolidated enterprise, which will encompass both Irish and foreign companies, and the economic activities of individuals who are controlling shareholders.
What inter-company transactions are affected?
The Irish Transfer Pricing regime only applies to trading transactions involving the supply and acquisition of goods, services, money or intangible assets between associated persons or companies, and is applicable to overstated expenses or understated receipts.
The following intercompany arrangements could therefore be affected:
- Provision of management services
- Intra-group transfers of trading stock
- Certain Intellectual Property licensing
- Treasury and finance operations, such as cash pooling performed centrally for a group.
Non-trading transactions are not covered by the new rules. Such transactions might encompass the letting of buildings and certain interest free loans that are not advanced in a trading context. There is also a specific provision that enables group companies to elect out of the application of the transfer pricing provisions in respect of transfers of development land.
What does “associated” mean?
Companies or individuals are deemed to be associated where one participates in the management, control or capital of the other. An example of this would be a parent company and its subsidiary.
Companies are also associated with each other where one common company participates in the management, control or capital, and directly or indirectly controls two companies. An example of this would be two subsidiaries, which would be associated with each other.
How do I determine that an intercompany transaction is arm’s length?
The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations are to be used to determine the arm’s length nature of an intercompany transaction. These guidelines specify various methods that can be applied to determine comparable arm’s length prices for intercompany transactions.
What will the effect be if the Irish Revenue determines that the arrangement was not entered into at arm’s length?
If the Irish Revenue determines that the transaction was not entered into at arm’s length and this has the effect of reducing profits or increasing losses within the charge to tax under Case I or II of Schedule D, an adjustment will be made by substituting the arm’s length consideration for the actual consideration. There are no specific transfer pricing penalty provisions, so the normal taxation interest and penalty provisions can apply.
Are corresponding transfer pricing adjustments allowed?
Corresponding adjustments will be made in relation to domestic transactions. In other words, where the profits of a company are increased as a result of a transfer pricing adjustment, a corresponding adjustment is available to the counter party to the transaction. Therefore, in a domestic context, there might be no net cashflow tax effect but distortions will arise where one of the parties might have trading losses or one of the parties enters into the transaction as a capital transaction as opposed to a trading transaction.
Who will be performing audits at Irish Revenue?
Irish legislation provides that only authorised officers may make enquiries relating to a taxpayer’s compliance with the transfer pricing provisions.
What documentation do I require?
The legislation obliges a person involved in a transaction, which is within the scope of the transfer pricing legislation, to have records available that may reasonably be required for the purposes of determining whether the income of that person has been computed at arm’s length.
To the extent that transactions are covered from the other side (e.g. a transaction between a US parent and an Irish subsidiary where US transfer pricing documentation has been prepared), additional Irish-specific documentation may not be required. However, some analysis should be done at the time that the transaction is entered into to determine that the transaction is arm’s length, as an arm’s length result cannot be guaranteed after the event.
When should the documentation be prepared by?
The legislation specifies that documentation should be prepared on a timely basis, but no specific time deadline is outlined.