By Catherine O’ Meara (Partner, Matheson, Dublin)
The Irish Government recently published a Transfer Pricing Rules Feedback Statement, which confirms that changes to the country’s transfer pricing rules and their implementation are forthcoming.
Non-trading transactions and capital transactions within the remit of the Irish transfer pricing rules
The first noteworthy change confirms that transfer pricing rules will now apply to all transactions including capital transactions and non-trading transactions.
From January 1, 2020, non-trading transactions will fall within the remit of the Irish transfer pricing rules for the first time.
The primary example of where this new application will apply is in circumstances where an Irish lender is lending interest-free on an intra-group basis. The lender will now have to apply an arm’s length interest rate, on which that lender will have to pay Irish corporation tax.
This may prove to be inequitable in Irish-to-Irish transactions in circumstances where the interest income is taxed at the “non-trading” rate of 25 percent but the corresponding deduction is given at the trading income rate of 12.5 percent.
To circumvent this inequity, the Department of Finance has issued specific “Irish-to-Irish” rules which will ensure that, in such circumstances, the lender will not be required to impose an arm’s length rate. This exception is subject to a specific anti-avoidance rule.
Additionally, transfer pricing rules will now apply to capital transactions with a value over EUR25m, including circumstances in which an Irish company is acquiring assets outside the jurisdiction (e.g. IP onshoring). Such change is likely to result in an increasingly onerous documentation process, as discussed below.
Adoption of the BEPS recommendations
Ireland will be adopting the 2017 OECD Guidelines from January 1, 2020 and will also be incorporating the 2018 guidance on the application of the transactional profit split method. Further consultation will be carried out in relation to the adoption of transfer pricing guidance in the context of the attribution of profits to permanent establishments.
An important legislative amendment allows Irish Revenue to look at the substance of the transaction and re-characterize intra-group arrangements and intra-group transactions in cases where no third party would have entered into such a transaction.
It is notable that Revenue has been given this power as Irish tax law, hitherto, did not adopt a principle of substance over form in any great manner.
Transfer pricing documentation
The documentation process surrounding transfer pricing will now be more onerous.
Companies, including SMEs (to which the transfer pricing regulations will now apply), will be required to have “master files” and “local files” containing all transfer pricing information/calculations for the previous year.
Once requested by Revenue, a company will have only 30 days to hand-over requested files. It is therefore important that companies ensure relevant transfer pricing documentation is prepared in advance.
Such “local” and “master” files will be required to be prepared by the time of the relevant corporation tax return date and it is expected that Revenue will begin to request the transfer pricing documentation as a matter of course, particularly for large corporate taxpayers.
Another anticipated change that will come about on foot of the new transfer pricing rules is that grandfathering provisions previously in existence for pre-2010 transactions will no longer apply from 2020.
It is important to note that the application of the transfer pricing rules will not be retrospective (i.e. the new transfer pricing rules will not apply to transactions concluded between the years 2010-2019).
Further, the Department of Finance has acknowledged that it may not be possible to satisfy transfer pricing documentation requirements regarding such transactions and that documentation requirements, in such circumstances, will be somewhat more flexible.
In summary, Ireland is changing its transfer pricing rules to adopt many of the recommendations of the BEPS process and resulting new OECD guidance on transfer pricing. The tax authority has acknowledged the administrative burden that this may give rise to but is equally conscious of Ireland’s international obligations.
It is anticipated that these rules will result in further and more expansive audit activity from Irish Revenue in due course.