Tax, Transfer Pricing and Tax Controversy
The international tax landscape continues to be influenced by extensive changes on a global level as further measures aimed at enhancing fair and transparent taxation are proposed or introduced. The source of these changes is a combination of measures agreed at an OECD, EU and domestic level.
Any changes to the international tax landscape in 2022 and 2023 will likely centre on the outputs from the landmark agreement by the OECD's Inclusive Framework on what is described as a two pillar solution to address the tax challenges arising from digitalisation and globalisation of the economy. Public consultations have been ongoing throughout the first half of 2022 in respect of the various building blocks of the Pillar One and Pillar Two proposals. These proposals are described briefly below.
It is clear that 2022 and onwards into 2023 will be a transformative period in the international tax landscape and any new measures will particularly be felt in the area of transfer pricing.
Tax - Latest Developments
The area of transfer pricing has undergone considerable change in recent years. The Finance Act 2019 broadened the scope of Ireland's transfer pricing rules to apply to non-trading, including capital, transactions. The OECD’s 2017 Guidelines for Multinational Enterprises and Tax Administrations (the "2017 Transfer Pricing Guidelines") were also formally adopted into Irish law at the same time.
As a result, Ireland’s transfer pricing legislation now requires that the arm’s length principle be interpreted in accordance with the OECD’s 2017 Transfer Pricing Guidelines, as supplemented by their additional guidance on hard-to-value intangibles, the transactional profit split method and financial transactions. Where the rules apply appropriate transfer pricing documentation must also be in place by a taxpayer's tax return deadline.
Although the OECD published a new consolidated version of its Transfer Pricing Guidelines on 20 January 2022, all constituent parts of the new guidelines are effectively already incorporated into Irish law and as no new commentary has been published, it is unclear whether Ireland’s transfer pricing legislation will be further updated to refer formally to the 2022 edition.
The Commission has published a draft directive to implement Pillar Two. The draft directive follows the OECD model rules closely with necessary adjustments to ensure compliance with EU law (see the legislative tracker for further details). All Member States will need to unanimously agree the proposed directive in order for it to be adopted. The Commission is also to publish a proposal on the reallocation of taxing rights under Pillar One, once the technical aspects of a multilateral convention are agreed by the OECD.
The Irish Department of Finance has recently launched a public consultation seeking views on the implementation of the Pillar Two minimum tax rate proposal in Ireland. The consultation period runs until 22 July and feedback received will be taken into account in drafting any domestic implementing legislation. Importantly, Ireland’s headline 12.5% corporation tax rate will remain in force for businesses in Ireland with revenues below the Pillar Two threshold of EUR 750 million.
There has been a marked increase in enquiries initiated by the Irish Revenue Commissioners (“Irish Revenue”) in recent years, with a resulting increase in the number of amended tax assessments being raised against taxpayers by Irish Revenue.
- Irish Revenue has bolstered its resources, both in terms of headcount and technology / data analytics expertise and systems. This is most pronounced in the context of transfer pricing where Irish Revenue’s transfer pricing branch has significantly increased its resources in recent years;
- legislative changes in response to developments at an OECD and EU level have led to increased complexity and uncertainty for many taxpayers thereby increasing the scope for Irish Revenue to initiate enquiries with respect to taxpayers’ affairs; and
- in general, there is an increased focus on the tax affairs of multinationals.
In May 2022, Irish Revenue published its 2021 Annual Report and noted strong levels of timely, voluntary compliance across all tax categories.
According to the report, in 2021 Irish Revenue completed 463,814 audit and compliance interventions, yielding €1,388 million in tax, interest and penalties and settled 131 tax avoidance cases, yielding €13.6 million in tax. The significant number of audit and compliance interventions demonstrates Irish Revenue's growing capacity in this area and highlights the need for taxpayers to be proactively prepared for such engagements. Looking ahead to 2022 and beyond, it is reasonable to expect at least similar levels of compliance related activity from Irish Revenue.
An important change that taxpayers will need to be aware of is that in February 2022 Irish Revenue issued a revised Code of Practice for Revenue Compliance Interventions (the “Code”). The Code came into effect on 1 May 2022 and will apply to all compliance interventions notified by Irish Revenue from that date onwards. The Code replaces the current Code of Practice for Revenue Audits and other Compliance Interventions 2019. However, the prior code will continue to apply to interventions in progress prior to 1 May 2022.
The Code applies to all taxes and duties except customs and sets out a new Compliance Intervention Framework (“CIF”) that introduces substantial changes to Irish Revenue’s prior approach to compliance interventions. The CIF introduces a new three-level framework for compliance interventions. All compliance interventions notified by Irish Revenue from 1 May 2022 onwards will detail the categorisation of the intervention. Taxpayers should familiarise themselves with the new Code as it will inform the approach to be taken in compliance interventions by Irish Revenue from now on.
Following a compliance intervention, taxpayers who want to challenge an amended tax assessment will generally appeal in the first instance to the Tax Appeals Commission ("TAC"). The recently published 2021 Annual Report of the TAC illustrates the TAC’s continuing success and efficiency as a forum for resolving complex and high-value tax disputes. Interestingly, the report highlights that 41% of appeals closed in 2021 (representing approx. €2.23 billion of disputed tax) were resolved by settlement between the parties. This trend of cases settling is one we anticipate will continue.
1,793 appeals (representing €3.146 billion of disputed tax, over 90% of which was corporation tax) were closed by the TAC in 2021. This is the highest number of cases closed by the TAC in a single year to date and demonstrates its growing efficiency.
“The Commission has made progress and we are making strides in our throughput and output relative to the case base, contributing to the economy and the Exchequer. I look forward to 2022 building on the positive foundation of 2021.”
Tax Appeals Commission Annual Report 2021, Chairperson’s Statement of Marie-Cleary Maney
For taxpayers initiating appeals in 2022 they can expect an efficient experience from the lodgement of the Notice of Appeal to receiving a determination, although this will depend on the complexity of the case.
The success of TAC as a forum for resolving tax disputes is a trend we expect to continue in 2022 and this has been aided by a recent Court of Appeal decision, Lee v Revenue Commissioners  ICEA 18 where the scope of TAC's jurisdiction was clarified.
That noted, the question as to the division of powers between the TAC and the courts, and the correct forum for a tax dispute, will remain a significant point of importance in disputes going forward. Therefore, in contemplating a dispute taxpayers will continue to need to be conscious of the appropriate forum for the dispute, particularly when considering the arguments they want to raise.
The data from both Irish Revenue and TAC indicates that for 2022 and beyond tax disputes will demand the attention and resources of taxpayers as they not only become familiar with the operation of the new Code but also as the TAC grows in popularity as a forum for resolving disputes.
"While I acknowledge that there will be a big price to pay for Ireland with this agreement …it is a price that we are prepared to pay if it ensures tax certainty, and reduces the risk of disputes and trade tensions – none of which is in anyone’s interests."
Keynote Speech by Finance Minister Donohoe to the Irish Tax Institute Global Tax Policy Webinar (Published 17 May 2022).
InDisputes Series: Challenging Tax Assessments - Thinking Outside the Code
In a recent tax appeals case, a taxpayer successfully challenged an assessment raised by Irish Revenue for capital gains tax arising from a disposal of shares in a Maltese tax resident company.
In upholding the taxpayer’s challenge, the Irish Tax Appeal Commission (the “TAC”) once again demonstrated its ability to determine legal arguments that go beyond the provisions of the domestic Irish tax code (the “Code”). As such, taxpayers should ensure that all available legal arguments are considered when challenging a tax assessment.
Background to the Determination
The taxpayer challenged the application of a provision of the Code which effectively disregards the existence of a non-Irish tax resident company to impose a tax charge directly on the shareholder of the non-resident company.
In this instance, the taxpayer was the 100% shareholder of a Maltese tax resident company (“MaltaCo”). MaltaCo disposed of a shareholding in an Irish resident trading subsidiary (“TradeCo”) for over EUR 29 million. Irish Revenue sought to treat the chargeable gain on the disposal of TradeCo as if it had accrued directly to the taxpayer (ie, MaltaCo was effectively disregarded).
Three Pronged Attack: Domestic, International and EU Law
The determination carefully considered the assessment to tax in light of the provisions of Irish domestic tax law, the Ireland – Malta double tax treaty (the “DTT”), and EU law. The TAC ultimately held in favour of the taxpayer on all grounds, as follows:
- Domestic law: While the relevant domestic provision required that the chargeable gains of MaltaCo be attributed to the taxpayer, the TAC held that any such chargeable gains were to be computed as if MaltaCo was within the charge to Irish tax. Consequently, applying the fiction that MaltaCo was Irish tax resident, the Irish participation exemption operated to exempt any gains accruing on the disposal of TradeCo. On this basis, there were no chargeable gain to attribute to the taxpayer.
- Double Tax Treaty: The DTT allocates taxing rights in respect of gains from the disposal of shares based on the tax residence of the seller. On this basis, the TAC found that the disposal of TradeCo by MaltaCo was taxable only in Malta. Consequently, the domestic charging provision could not “prevail” and the DTT took precedence.
- EU law: The free movement of capital constitutes a fundamental freedom of the EU. In this instance, a difference in treatment arose because of the taxpayer’s decision to invest in a non-resident company (ie, MaltaCo) instead of an Irish resident company. Consistent with previous decisions, the TAC reiterated that it had jurisdiction to consider the compatibility of domestic tax law with EU law and disapplied the domestic provisions in this instance.
Advice for Clients
This determination once again highlights the importance for taxpayers to think outside the confines of the Code when preparing a tax appeal. Provisions of the Code should always be considered in light of their EU and international law context, with a careful consideration of the relevant underlying legal and jurisdictional principles. In this way, taxpayers can ensure they maximise their chances of success when challenging a tax assessment.