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).
Irish Revenue Revise Code of Practice on Interventions
The Irish Revenue Commissioners (“Revenue”) published their revised Code of Practice for Revenue Compliance Interventions (the “Code”) on 11 February 2022. The Code represents a further significant development in Revenue’s approach to confronting non-compliance which remains one of its key strategic priorities.
The Code applies to all taxes and duties except customs and replaces the current Code of Practice for Revenue Audits and other Compliance Interventions. The Code applies to interventions notified from 1 May 2022.
The introduction of the Code follows a consistent and steady investment by Revenue in its IT and analytics systems, an increasingly sophisticated Risk Evaluation, Analysis and Profiling System (REAP) and an expanding Tax Appeals Commission (TAC) office which has grown from just 2 Commissioners and 4 staff in 2016 to 6.5 Commissioners and 27 staff during 2021.
Three Levels of Compliance Intervention
The Code introduces substantial changes to Revenue’s approach to compliance interventions and prescribes a three-level compliance intervention framework. A taxpayer’s ability to mitigate interest and penalties depends on which level of compliance intervention is applicable.
The three levels of compliance intervention are:
(i) Level 1: At this level taxpayers are reminded of their obligations and provided with the opportunity to correct mistakes without the cost of a more involved inquiry. Level 1 interventions will only occur where Revenue has not already engaged in a detailed examination or review of the matters under consideration. Forms of Level 1 compliance interventions include reminders on outstanding tax returns, profile interviews, requests to self-review and engagements under the Cooperative Compliance Framework.
Taxpayers should note that Level 1 intervention will not constitute a Revenue inquiry. As such, once a Level 1 intervention has been initiated, the taxpayer can self-correct or make an unprompted qualifying disclosure depending on the circumstances. Taxpayers should note that simply amending a tax return on ROS will not constitute notification to Revenue in this regard. Written notification to Revenue is required.
(ii) Level 2: Level 2 interventions will focus on confronting compliance risks and will consist of risk-based reviews and checks on data provided by taxpayers in their tax returns. Level 2 interventions include Risk Audits and a new form of Revenue inquiry called a ‘Risk Review’.
This change represents one of the most important aspects of the Code. The ‘Risk Review’, described by Revenue as a “focused intervention to examine a risk or a small number of risks on a return”, essentially replaces the aspect query which will no longer exist. Crucially, a taxpayer in a ‘Risk Review’ scenario will no longer have the opportunity to make an unprompted qualifying disclosure once a Level 2 notification has been issued. Instead, taxpayers will have 21 days from the date of notification of the intervention to notify Revenue in writing of its intention to prepare a prompted disclosure. The intervention will be considered to have started 28 days after the date on which a notification letter is issued to the taxpayer.
(iii) Level 3: Level 3 compliance interventions will consist of a Revenue investigation focusing on high risk practices and cases of suspected fraud and tax evasion. Once an investigation commences, the taxpayer is disallowed from making a qualifying disclosure in relation to the matters under investigation.
Advice for Clients
In light of the introduction of the Code, it is more important than ever that taxpayers conduct regular and robust self-reviews of their tax affairs to identify any risks. In this way, taxpayers will mitigate the extent of their exposure to tax penalties by preserving the ability to self-correct and make an unprompted disclosure.