Ireland’s transfer pricing rules were significantly overhauled with effect from 1 January 2020. The Irish Revenue Commissioners (“Irish Revenue”) published new guidance on the application of these rules in February 2021. We outline here the key practical impacts that taxpayers need to be aware of when considering their corporation tax filing position for 2020 and future years.
- The scope of the transfer pricing rules were expanded significantly so that many (previously exempt) transactions are now subject to the rules.
- The transfer pricing documentation requirements have been enhanced, with incentives for preparing documentation on time and penalties for non-compliance.
- An exemption for certain domestic transactions was included with the new rules, although interpretive difficulties with this exemption have since arisen.
- Irish legislation now incorporates by reference the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, published in July 2017, including the additional follow-up guidance on Hard-to-Value Intangibles and on the Transactional Profit Split Method, published by the OECD in June 2018.
- There are new and specific considerations for intra-group financial transactions.
Expanded scope of the TP Rules
Previously, Ireland’s transfer pricing rules only applied to certain trading transactions. With effect for accounting periods commencing on or after 1 January 2020, the majority of intra-group transactions are now required to be entered into on arm’s length terms and documented appropriately. The expanded rules now apply to:
- all trading and non-trading transactions;
- capital transactions between associated entities where the market value of the asset is in excess of €25 million; and
- previously ‘grandfathered arrangements’ (which are transactions entered into pre 1 July 2010 and which were previously excluded from transfer pricing rules).
There is an exemption from the transfer pricing rules for certain domestic Irish-to-Irish transactions but this may have limited application (see further below).
Helpfully, certain intra group capital transactions (which benefit from reliefs from capital gains tax) are excluded from the new transfer pricing rules. Further, certain funds such as Irish Real Estate Funds and Real Estate Investment Trusts are also not within the scope of the rules.
Regardless of whether a transaction is within the scope of the transfer pricing rules or not, records should be maintained on the taxpayer’s analysis as to whether the arm’s length rules apply or not.
Exemption for Irish-to-Irish transactions
The new rules contain an exemption from the transfer pricing rules for certain transactions between Irish entities (referred to below as the ‘domestic exemption’). However, interpretive difficulties have arisen for both practitioners and taxpayers in relation to the application of the domestic exemption. Irish Revenue have recently published guidance on the new transfer pricing rules but this does not include any material commentary on the domestic exemption or on the issues that have arisen in relation to it. As a result, certain aspects of the domestic exemption remain problematic. For example, it is not entirely clear to what extent consideration must be payable in a transaction which seeks to benefit from the exemption. We continue to advise our clients on these issues and we encourage anyone in doubt as to the application of the new rules to come and speak to us.
Application of the rules to SMEs
While the legislation includes a framework to extend transfer pricing rules to small and medium enterprises (“SMEs”), the application of these rules is subject to a ministerial commencement order. The timing of this order is not yet clear and the new rules should not have any practical impact on SMEs for FY2020.
New Documentation Requirements
A taxpayer must have the required transfer pricing documentation in place at the time of corporation tax return filing. This documentation is not required to be filed with the corporation tax return but it must be available for inspection if requested. Where Irish Revenue request sight of the documentation, taxpayers are required to produce it within 30 days of the request.
Under the new rules, certain companies are now obliged to prepare documentation in line with the Master File and Local File guidance set out in Chapter V of the 2017 OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the “2017 TP Guidelines”). A master file must be prepared if the total revenue of the worldwide group exceeds €250 million and a local file must be prepared if the total revenue of the worldwide group exceeds €50 million.
Some practical issues that are arising:
- Interaction of timing of completion of financial statements and the corporation tax return date and dealing with post year-end adjustments.
- Preparation of a “country file” (which includes all Irish taxpayers in the group) or individual / divisional “local files”.
- Whether to document capital transactions, in particular, acquisitions of capital assets in the context of establishing basis for future disposals.
- Dealing with Covid-19 impacts for FY2020 transfer pricing policies to allow for timely preparation of documentation.
New penalty regime (carrot and stick!)
As stated above, the relevant documentation must be made available within 30 days of receipt of a written request from a Revenue officer. A penalty of €4,000 will be imposed where the documentation is not provided within this 30 day timeframe. If the taxpayer is within the scope of the local file obligations, the penalty is increased to €25,000 plus €100 per day for so long as the failure continues.
The new rules also specifically provide that tax geared penalties will not be applied where the records are prepared on time and are delivered within the required timeframe in response to a request from Irish Revenue. The taxpayer must also demonstrate that they have made ‘reasonable efforts’ to comply with the legislation and that the records are accurate, notwithstanding a transfer pricing adjustment.
OECD guidance on documentation
TP documentation and policies will need to reflect the new OECD guidance, now within the remit of Irish legislation. Some practical considerations include:
- the updated guidance on intangible ownership in the 2017 TP Guidelines, including the application of the “DEMPE” principles, will need to be carefully considered in TP documentation for FY2020;
- the valuation of IP will need to take into account the guidance on Hard-to-Value Intangibles, published by the OECD in June 2018; and
- taxpayers are performing fresh reviews of their transfer pricing policy in light of both the new OECD guidance and changing audit practice.
Transfer Pricing of Financial Transactions
As the expanded transfer pricing rules now apply to both trading and non-trading transactions (apart from those which benefit from the domestic exemption), this has had a particular impact on the structuring of intra-group financial transactions.
Transactions which would not usually be entered into between independent businesses, such as interest-free loans and financial guarantees, were commonplace within multinational groups before the expanded rules came into force. These transactions are typically entered into for the purposes of managing group cash flow and liquidity needs, rather than for tax planning purposes.
For many multinational groups, the expansion of the rules has added significant administrative burden to the structuring of their day-to-day financial transactions and operations. Below are some examples of the issues that have arisen for multinational groups since the expansion of the rules:
- some interest-free loan arrangements have required restructuring or elimination;
- certain group guarantee arrangements have required fresh analysis to examine their compatibility with the arm’s length principle (with corresponding restructuring in certain instances);
- existing inter-company balances arising out of unpaid consideration (eg, for the provision of goods or services) between group companies are now considered to fall within the scope of the new transfer pricing rules, adding additional complexity and administrative burdens; and
- there has been an increase in the volume of transfer pricing documentation that must be prepared.
It had been expected that Irish Revenue would publish detailed guidance on the application of the domestic exemption and, in particular, it was hoped that this guidance would address the position of interest-free loans. As noted above, Irish Revenue’s recently published guidance does not directly address these points and it remains to be seen if any further guidance will be published in the coming months.
Finance Act 2020 amendments
Although subject to a ministerial commencement order, Finance Act 2020 has proposed a significant number of amendments to the existing legislation dealing with the domestic exemption. The amendments, if commenced, would address some of the interpretive difficulties noted above. In particular, the amendments contained in Finance Act 2020 propose to introduce the concept of a ‘qualifying loan arrangement’ which would be exempt from the transfer pricing rules. Broadly, under the new legislation, a loan will be exempt from the transfer pricing rules where it is entered into between two Irish-resident companies, in circumstances where the lender has loaned the money otherwise than in the course of a trade and where the borrower is:
- a company engaged in a trade and, if interest was charged on the loan, the company would be entitled to claim a tax deduction for that interest;
- a company whose income consists wholly or mainly of rental income (from Irish real estate) and, if interest was charged on the loan, the company would be entitled to claim a tax deduction for that interest; or
- a holding company which uses the proceeds of the loan to either on-lend to other companies at interest or subscribe for, or acquire, shares in another company and where certain other conditions are satisfied.
The timing of the commencement of this new legislation is not yet known.
OECD guidance on financial transactions
In February 2020, the OECD published specific guidance on the application of the arm’s length principle to financial transactions for the first time (the “Financial Transactions Guidance”). This guidance provides useful and detailed guidance on the pricing of the most common intra-group financial transactions such as loans, financial guarantees, treasury services and captive insurance arrangements.
As stated above, Ireland’s current transfer pricing legislation incorporates the 2017 TP Guidelines by reference, with the effect that particular provisions of the Irish legislation must be interpreted in accordance with the 2017 TP Guidelines. Although the Irish legislation has not yet been updated to formally incorporate the Financial Transactions Guidance, Irish Revenue recently published guidance which confirmed they would consider it “best practice” to have regard to it. Therefore, and especially in light of the expanded scope of Ireland’s transfer pricing rules, the Financial Transactions Guidance should be borne in mind when reviewing the pricing and terms of intra-group financial transactions going forward.
We will be publishing a more detailed article on the transfer pricing rules and their application to financial transactions in the coming weeks.
As the scope of Ireland’s transfer pricing rules has been expanded significantly, it is strongly recommended that all taxpayers consider the implications for their operations and seek advice where they are in any doubt. Further, taxpayers should make themselves aware of the new and enhanced documentation requirements which may apply to their groups and to particular transactions they enter into.
Please contact a member of Matheson’s transfer pricing team if you have any queries.