31/03/2021 Briefing

Pursuant to Finance Act 2019, a number of changes were made to Ireland’s transfer pricing regime which are generally applicable for chargeable periods commencing on or after 1 January 2020 including:

  • the extension of the transfer pricing rules to certain non-trading transactions, capital transactions where the market value of the relevant asset exceeds €25m and previously “grandfathered” transactions;
  • the extension of transfer pricing rules to transactions involving SMEs, on the making of a Ministerial Order;
  • the incorporation of the 2017 OECD Guidelines[1] into Irish law;
  • the introduction of an enhanced transfer pricing documentation regime; and
  • the inclusion of a “substance over form” provision which requires taxpayers to disregard and recharacterise a transaction in certain circumstances.

Irish Revenue published their first detailed guidance in respect of the expanded Irish transfer pricing rules in February 2021 in an update to their Tax and Duty Manual (“the Guidance”).[2] This briefing highlights some interesting points arising from the Guidance.

Intercompany loans

Domestic exemption

Finance Act 2019 provided for a welcome exemption from the application of transfer pricing rules for certain Irish to Irish transactions where the party seeking to rely on the exemption undertakes the transaction otherwise than in the course of a trade or profession. This exemption is particularly important because of Ireland’s differing tax rates for trading and non-trading income (which can give rise to tax mismatches within groups) and because Ireland does not have a consolidation option for Irish groups.

Difficulties arose in interpreting the exemption for certain transactions including interest free loan arrangements. An amended provision providing clarity in respect of such matters was included in Finance Act 2020. However, the provision is more restrictive in nature, and as a result of concerns raised by a number of bodies it is subject to commencement by Ministerial Order and is not yet in force.

The Guidance does not include any detailed interpretation of either the existing provision or the proposed Finance Act 2020 provision and therefore the current position remains unclear. It is hoped that Revenue will take a reasonable approach in Revenue Audits of the periods during which this uncertainty arises. In the meantime, it may be prudent for taxpayers to assume that the narrower Finance Act 2020 legislation will be commenced in due course by the Minister for Finance and, where possible, structure new arrangements accordingly.

Scope of transfer pricing rules

The Guidance confirms that the following persons are not within the scope of transfer pricing rules on the basis that they are not chargeable to tax on profits, gains or losses arising from their activities:

  • Irish regulated funds, including Irish real estate funds; and
  • real estate investment trusts.

The Guidance also confirms, sensibly, that a company that is not resident in Ireland and does not have a taxable presence  here is not within the charge to Irish tax and as a consequence not within the scope of Irish transfer pricing rules.

Section 247 interest relief

Interest relief under Section 247 of the Taxes Consolidation Act, 1997 (the “TCA”) is available on a paid basis. There may be circumstances where a company claiming interest as a charge on income under Section 247 TCA has accrued interest for chargeable periods commencing prior to 1 January 2020 but which is paid in a chargeable period commencing on or after 1 January 2020. The Guidance confirms that transfer pricing rules will not apply for the purposes of determining the amount of such interest when paid in a chargeable period commencing on or after 1 January 2020.

Transfer pricing rules will apply for the purposes of determining the amount of interest that qualifies as a charge on income under Section 247 in circumstances where the interest relates to a chargeable period commencing on or after 1 January 2020.

Accurate delineation of financial transactions

In determining the arm’s length amount of interest for loan transactions, the 2017 OECD Guidelines require a consideration of the quantum of debt that a taxpayer has borrowed in addition to the rate of interest applicable to the loan.

The Guidance confirms that the 2017 OECD Guidelines apply to all financing arrangements in place in chargeable periods commencing on or after 1 January 2020 and that notwithstanding that there may be limited availability of historic information in relation to some loan arrangements that were entered into in chargeable periods commencing before 1 January 2020, taxpayers are expected to use all available information to carry out the full analysis of the loan arrangement in accordance with the 2017 OECD guidelines including an analysis of the quantum of debt.

In February 2020, the OECD published “Transfer Pricing guidance on Financial Transactions”. The Guidance confirms that while this OECD guidance has not yet been implemented into Irish law and is subject to a Ministerial Order, it will be considered as “best practice” by Revenue when analysing transfer pricing issues associated with financial transactions. The practical effect of the application of this OECD guidance in an Irish context remains to be seen.

Historic intercompany balances

The extension of the transfer pricing rules results in the application of those rules to intercompany balances which may have arisen over a number of years and there may be some practical difficulties in tracing the inception of such intercompany balances. The Guidance confirms that where, despite all reasonable efforts, it is not possible to trace the origin of each movement of the intercompany balance, the balance should be treated as arising from the earliest date for which reliable information is available. The taxpayer should establish or “benchmark” the arm’s length interest rate as if the arrangement was effective from that date and prepare transfer pricing documentation on this basis. The Guidance states that this approach should only be taken where all efforts to trace exact origin of the intercompany balance have been exhausted. All movements in intercompany balances from 1 January 2020 must be tracked and transfer pricing rules applied accordingly.

Capital transactions

The transfer pricing rules provide for a number of specific exclusions  for capital transactions including where capital assets are treated for the purposes of the taxation of chargeable gains (“CGT”) as transferring at such a value as gives rise to neither a gain nor a loss including for example group relief under Section 617 TCA. In addition transfer pricing rules should not apply to transactions to the extent that they qualify for reorganisation relief under Section 584 TCA (or that section applied by any other section) on the basis that there is no disposal for CGT purposes where the relief applies. Revenue confirm in the Guidance the expected interpretation that transfer pricing rules should not apply to the capital transactions listed below.

Section 626B

In general, the transfer pricing rules should not apply to a disposal to which Section 626B applies on the basis that it is exempt from CGT.

However, where the acquirer of shares, the disposal of which qualified for relief under Section 626B TCA , is within the charge to Irish tax, the Guidance confirms that Revenue expect the acquirer, in relation to a subsequent disposal of the shares, to be able to demonstrate that the amount of consideration paid for the acquisition of the shares complies with transfer pricing (unless that later disposal itself qualifies for exemption under Section 626B TCA).

Deemed disposal events 

In certain circumstances a disposal is deemed to arise for tax purposes where there is no actual disposal. This may occur for example where a company migrates or transfers assets offshore (under the exit charge provision of Section 627 TCA). In these circumstances there is generally a deemed disposal and acquisition by the same person. Revenue confirm in the Guidance that for transfer pricing rules to apply there must be an actual disposal and acquisition of a chargeable asset as part of an arrangement between associated persons. Therefore, ‘deemed disposal events’ are outside the scope of transfer pricing rules.

Penalties

Fixed penalties

Transfer pricing documentation should be prepared no later than the tax return deadline date and must be made available to Revenue within 30 days of a written request from a Revenue officer.

Revenue confirm in the Guidance that where a taxpayer fails to comply with the requirement to provide transfer pricing documentation within 30 days of such a written request, a fixed penalty of €4,000 will apply. Where the taxpayer is a member of a Multinational group with an annual global consolidated turnover of €50 million or more in the relevant chargeable period the fixed penalty is increased from €4,000 to €25,000 plus €100 for each day on which the failure continues.

Tax geared penalties

Revenue confirm in the Guidance that where a transfer pricing adjustment results in additional tax due, a relevant person will be protected from a tax-geared penalty that may otherwise apply which relates to careless but not deliberate behaviour, where the relevant person;

  • has fulfilled the requirements to prepare, and provide upon request, transfer pricing documentation within the specified timeframe; and
  • the records provided are accurate and demonstrate that notwithstanding the transfer pricing adjustment, the relevant person has made reasonable efforts to comply with the transfer pricing requirements in setting the actual consideration payable or receivable under an arrangement.

The Guidance sets out what can be considered reasonable efforts (for example, conducting functional interviews, ensuring factual information remains up to date, validation of benchmarks, evidence of controls to manage pricing, etc.). A description of these activities should be included within the transfer pricing documentation.

[1]  OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, published on 10 July 2017.

[2] Part 35A-01-01.