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Ireland Announces Updates to Transfer Pricing Rules
AUTHOR(S): John Ryan
KEY CONTACT(S): Matthew Broadstock, Joe Duffy, Aidan Fahy, Turlough Galvin, Shane Hogan, Alan Keating, Greg Lockhart, Catherine O’Meara, Mark O’Sullivan, Liam Quirke, John Ryan, Kevin Smith, Gerry Thornton, Barry McGettrick, Vahan Tchrakian, Anne Harvey, Brian Doohan
PRACTICE AREA GROUP: Tax
On 2 September 2019, the Irish Department of Finance issued a feedback statement outlining changes that will be made to the Irish transfer pricing rules with effect from 1 January 2020. Irish transfer pricing rules apply to certain transactions entered into by associated parties. The key changes to the Irish rules are summarised below:
- the transfer pricing rules will apply to non-trading transactions, save for certain Irish-to-Irish non-trading transactions;
- grandfathering that existed for transactions agreed before 1 July 2010 will be removed;
- the transfer pricing rules will begin to apply to capital transactions where the market value of the asset exceeds €25 million;
- the transfer pricing legislation will expressly permit re-characterisation of transactions where parties acting at arm’s length would not have entered such arrangements;
- the application of the transfer pricing legislation will be based on the substance of an arrangement where the substance is inconsistent with the form of the arrangement;
- the transfer pricing legislation will incorporate by reference the 2017 OECD Transfer Pricing Guidelines, the OECD Guidance issued in 2018 on Hard to Value Intangibles and the OECD Guidance issued in 2018 on the Transactional Profit Split Method;
- the documentation requirements will be updated so that master files and local files will have to be prepared (subject to certain financial thresholds) and an express timeline for the preparation of supporting documentation will be included in the legislation; and
- the transfer pricing rules will apply to medium-sized enterprises in respect of transactions where the consideration payable exceeds €1 million – commencement of this provision will be subject to a Ministerial Order.
The changes that have been announced are broadly in line with what had already been signalled by the Irish Department of Finance (“Finance”).
The document that was issued (the “Feedback Statement”) was a response to a public consultation that had been held earlier this year. It includes draft legislative provisions that may be included in the Finance Bill 2019 to effect the announced changes. Finance has requested comments on the Feedback Statement at the earliest opportunity and no later than 13 September.
We have included additional detail on each of the proposed changes below.
Application of rules to non-trading transactions
The Irish transfer pricing rules are currently limited so that they only apply to transactions entered into by Irish taxpayers in the course of a trade. The rationale for excluding the rules from applying to non-trading transactions was Ireland’s dual rate system (which taxes trading transactions at 12.5% and non-trading transactions at 25%) which could result in inequitable outcomes if transfer pricing rules applied to transactions entered into between an Irish entity that was trading and a related non-trading entity.
From 1 January 2020 the current limitation that applies the rules only to transactions carried on in the course of trade will be removed and the rules will apply where either party to a transaction is within the charge to Irish tax. For example, if a non-trading Irish entity (taxed at 25%) advanced an interest free loan to a non-Irish resident related party, the updated transfer pricing rules will deem an arm’s length rate of interest to be received by the Irish lender.
As the dual rate system continues to apply, new rules have been devised for Irish-to-Irish transactions:
- the transfer pricing rules will not apply to the transaction if both parties enter the transaction otherwise than in the course of a trade;
- if one party enters the transaction in the course of a trade, the transfer pricing rules will apply to that party in respect of the transaction but the rules permit an upward adjustment of profits only (similar to the existing rules). For example, if an Irish entity borrowed interest free from a related Irish entity in circumstances where the Irish borrower entered the transaction in the course of a trade but the Irish lender did not, the borrower could not rely on the rules to recognise a deemed interest deduction nor would the rules apply to increase the non-trading lender’s income to recognise arm’s length interest;
- where an Irish party enters into a transaction with another Irish party otherwise than in the course of a trade, the transfer pricing rules can still apply if that Irish-to-Irish transaction is connected to another transaction with a non-resident party and the main purpose of the Irish-to-Irish transaction is to obtain a tax advantage.
Grandfathering to be removed
The grandfathering of transactions agreed before 1 July 2010 will be removed from 1 January 2020. This change had been previously flagged by Finance.
Application of the rules to capital transactions
Under the revised regime, transfer pricing will apply to capital transactions. This will be relevant where an Irish taxpayer wishes to claim capital allowances on the acquisition from an associated entity of a capital asset (e.g., aircraft or intellectual property). It will also be relevant where a chargeable gain arises on the disposal of an asset to an associated entity.
Currently, market value is usually imposed under Irish law on related parties involved in capital transactions. Accordingly, the real impact of this change will be the requirement to prepare contemporaneous supporting documentation in respect of related party capital transactions.
Carve-out for calculating capital allowances
The transfer pricing rules will not apply for the purposes of calculating capital allowances if the capital expenditure on the asset does not exceed €25 million. Anti-avoidance provisions are included in the legislation so that an asset cannot be transferred in parts to avoid the €25 million threshold applying.
In some circumstances, capital assets are treated for the purposes of capital allowances as transferring between related parties at their tax written down value. The transfer pricing rules will not apply to such transfers.
Carve-out for calculating chargeable gains
The transfer pricing rules will not apply for the purposes of calculating chargeable gains (or allowable losses) where the market value of the asset does not exceed €25 million. Anti-avoidance provisions are included in the legislation so that an asset cannot be transferred in parts to avoid the €25 million threshold applying.
Where other provisions in the Taxes Acts treat assets as transferring for consideration that defers any chargeable gain (e.g., intra-group transfers), the transfer pricing rules will not apply.
Re-characterisation of transactions
Under the proposed drafting the Irish Revenue Commissioners (“Revenue”) will be expressly permitted to re-characterise transactions entered into by associated parties if parties acting at arm’s length would not have entered into the agreed transaction but instead would have agreed another arrangement.
In addition, the legislation will expressly require Revenue to have regard to the “substance of relations” between the parties where that differs from what has been agreed in writing. In such circumstances the arrangement must be priced by reference to the “substance of relations”.
The revised rules also confirm that where excessive consideration is paid by a party within the charge to Irish tax to an associated party and other provisions of the Taxes Acts provide that the excess shall be regarded as a distribution, that excess will continue to be treated as a distribution.
Incorporation of new transfer pricing standards
It had been indicated by Finance for some time that the 2017 OECD Transfer Pricing Guidelines would apply under Irish law from 1 January 2020. In addition, the draft language provides that the Irish transfer pricing rules should be construed consistently with the revised guidance issued by the OECD in 2018 on the Application of the Approach to Hard-to-Value Intangibles and the Application of the Transactional Profit Split Method.
Extended documentation requirements
Ireland will require master files and local files to be prepared as recommended under BEPS Action 13. The master file must be prepared if the total revenue of the worldwide group exceeds €250 million. The local file must be prepared if the total revenue of the worldwide group exceeds €50 million. There will not be a requirement to deliver the master file or local file to Revenue but the documents must be available if requested by Revenue.
The legislation will expressly provide that all supporting transfer pricing documentation (including the master file and local file) should be prepared by the time the corporation tax return for that period is due to be filed (nine months after the end of the accounting period). This reflects the position included in the existing Revenue guidance in respect of documentation that supports the transfer pricing position.
The requirements to prepare supporting documentation will not apply to previously-grandfathered transactions agreed before 1 July 2010.
Extension of the rules to medium sized businesses
The transfer pricing rules will begin to apply to medium-sized enterprises. The date from which that change will apply will be determined by Ministerial Order. No indication on timing is included in the Feedback Statement. In general terms, a business is regarded as medium-sized if:
- it employs 50 or more people but fewer than 250;
- its annual balance sheet total is €10 million or more but does not exceed €50 million; or
- its annual turnover is €10 million or more but does not exceed €50 million.
Allocating profits to permanent establishments
The consultation paper had also requested views on whether the authorised OECD approach for allocating profits to permanent establishments should be adopted by Ireland. No decision has been made so far on that proposal.
The draft language included in the Feedback Statement is expected to form the basis of the changes that will be included in Finance Bill 2019 which is due to be published in mid-October.
It is clear that from 1 January 2020, the Irish transfer pricing regime will be more expansive and will impose increased compliance burdens. If you would like further details on the proposed changes or how they might apply to your transactions, please speak to your usual Matheson contact or to any of our Tax Partners.