By Catherine O’ Meara (Partner, Matheson, Dublin)
The ability to claim relief from double taxation for transfer pricing adjustments is increasingly important as taxpayers face audits worldwide. The Irish Revenue Commissioners (“Revenue”) have recently issued new guidelines for taxpayers seeking correlative adjustments (“CA Guidance”) in Ireland for transfer pricing adjustments by tax treaty partner jurisdictions.
The Irish tax rules prohibit a taxpayer from taking a deduction for such transfer pricing adjustments until a correlative adjustment claim (or MAP claim) has been agreed with Revenue.
The CA Guidance provides greater detail and clarity regarding a number of issues. In particular, the CA Guidance clarifies the review standard that will be applied by Revenue in assessing correlative adjustment claims and the avenues of redress open to a taxpayer should Revenue refuse to grant a claim for a correlative adjustment in whole or in part.
Review Standard for Correlative Adjustment Claims
The CA Guidance articulates clearly the review standard that will be applied by Revenue when reviewing a correlative adjustment claim. The CA Guidance states that:
“Revenue officers will… only make a correlative adjustment to the profits of the Irish company concerned to the extent that the treaty partner adjustment is shown to be an adjustment from a non-arm’s length profit to an arm’s length profit, and is shown to be appropriate, both in principle and as regards the amount.”
This standard reflects the approach being experienced by taxpayers in practice with respect to current correlative adjustment claims with Revenue. We understand, for example, that Revenue’s view is that a correlative adjustment will be denied for a transfer pricing adjustment by a foreign tax authority from the lower to the upper quartile in an interquartile range where the original range remains undisturbed by the foreign tax authority. This is because generally all points on the range may be considered to represent an arm’s length outcome.
Revenue still appear to be navigating what will be required to satisfy them that the original pricing was a non-arm’s length profit. From a practical perspective, save in cases of taxpayer initiated transfer pricing adjustments, it will be the tax administration of the adjusting jurisdiction that will have had an issue with the taxpayer’s original transfer pricing and the starting point for the taxpayer will likely have been that its original transfer pricing resulted in an arm’s length profit. Given that much of this process may have been through verbal discussions, rather than written correspondence, it can be difficult in practice to provide written evidence on why the original pricing was a “non-arm’s length profit”. It will be interesting to see how taxpayers and practitioners will respond in practice to the guidance. What is clear is that the current approach to the consideration of correlative adjustment claims raises the real prospect of unrelieved double taxation arising for Irish taxpayers who cannot discharge this burden of proof. Given the above, taxpayers should be mindful to ensure that tax settlements with foreign tax authorities are fully supported from a principled OECD perspective where a correlative adjustment may be sought, including in demonstrating why the original pricing was not arm’s length.
New Claim Form
The CA Guidance also outlines a new claim form (Form CA1) to be completed and submitted to Revenue. Appendix 1 to the CA Guidance contains a detailed list of information and documentation (together with English translations where appropriate) that is to be submitted to Revenue with the Form CA1.
The information and documentation required to be submitted with the Form CA1 is the same information as that previously stated as required in Revenue’s MAP guidance and as such it should be familiar to Irish taxpayers and practitioners. What is new is the requirement that a taxpayer must explain why it is not providing any of the listed items to Revenue when submitting the Form CA1. In addition, and linked to the test for granting a correlative adjustment, the Form CA1 expressly requires the taxpayer to explain why the original transfer pricing policy was not arm’s length.
Keeping with existing practice, the CA Guidance confirms that claims are to be submitted to the Revenue Division or Branch dealing with the taxpayer’s affairs via MyEnquiries or the Revenue File Transfer System (“RFTS”) with a copy to be sent to the Transfer Pricing Branch of the International Tax Division.
Determinations by Revenue and Redress
Revenue acknowledge that “a claim may be wholly or partly accepted, or it may be wholly refused.”
Where Revenue determines that a correlative adjustment is appropriate, the Transfer Pricing Branch of the International Tax Division will write directly to the Competent Authority of the treaty partner jurisdiction to confirm that tax has been paid on the amount of the adjustment. Once confirmed, the taxpayer will be required to submit revised computations for the relevant accounting periods, assessments will be amended and overpaid tax repaid.
Where a correlative adjustment is refused (either in whole or in part), the CA Guidance confirms that the taxpayer has two avenues of redress:
- the taxpayer has a right of appeal to the Tax Appeals Commission (“TAC”) within 30 days of the notice of the determination by Revenue; and
- the taxpayer can seek MAP provided it is within the time limit for making such a request under the relevant double tax treaty.
In respect of existing correlative adjustment claims with Revenue, the CA Guidance helpfully clarifies a potential procedural lacuna with respect to appealing refusals to grant a correlative adjustment (either in whole or in part) to the TAC. The CA Guidance clarifies that if, having reviewed the claim, Revenue propose to refuse it (in whole or in part) then the taxpayer will, if it disagrees with Revenue, be invited to complete the new Form CA1 and submit it to Revenue with a view to receiving a written determination which may then be appealed to the TAC.
As regards MAP, the CA Guidance emphasises that taxpayers who wish to avail of a MAP should consult the relevant tax treaty at an early stage to ascertain the relevant time limit for requesting MAP as Revenue have consistently stated that requests for MAP made outside of the relevant time limit will be refused. Helpfully, the CA Guidance confirms that protective claims for MAP may be filed with the International Tax Division while the correlative adjustment claim is being reviewed by Revenue. With respect to the interaction of the appeals processes, the CA Guidance complements an amendment introduced into Ireland’s tax rules in Finance Act 2019 which allows for the staying of appeals to the TAC to allow for a MAP process to conclude.
The CA Guidance underscores the position that obtaining a correlative adjustment for taxpayers’ unilateral transfer pricing audit settlements may be difficult in practice and there are significant hurdles to be satisfied. There are, however, proactive steps that taxpayers can take with a view to discharging the burden of proof placed on them in correlative adjustment claims.
Firstly, an associated enterprise should require the foreign tax administration to cogently set out and evidence its position when proposing a transfer pricing adjustment in its jurisdiction, with a particular focus on why the original pricing does not meet the arm’s length standard and why the agreed pricing does meet the arm’s length standard. Taxpayers who “agree to disagree” or enter into settlements on a “without prejudice” basis should understand that, in any subsequent correlative adjustment claim in Ireland, they will need to confirm that they were satisfied that the original pricing was not arm’s length.
Secondly, taxpayers should work closely with their advisors throughout the foreign audit process to ensure that they are not accepting positions in the foreign jurisdiction that may prejudice their ability to seek a correlative adjustment in Ireland. Examples of this are penalties and interest and secondary adjustments as the CA Guidance reiterates Revenue’s longstanding position that no relief will be granted for these aspects of any adjustment. Taxpayers should be cognizant of this view if accepting re-characterisations of transactions that create a taxable base in the foreign jurisdiction on which foreign tax is then levied (e.g. withholding tax on deemed interest or royalties).
Finally, Irish companies should consider putting protocols in place for their international colleagues to follow when they are engaged in foreign transfer pricing audits. In particular, such protocols should seek to ensure the associated enterprise is getting the right information and documentation (including from the foreign tax administration) throughout the foreign transfer pricing audit to assist the Irish company in meeting its burden of proof and evidential requirements in Ireland, as outlined in the CA Guidance.
Ultimately, the new guidance aligns with Revenue’s messaging in recent years, and the experience of Irish taxpayers, that the recommended approach to avoid double taxation in relation to transfer pricing adjustments in an Irish context is to engage in a bi-lateral dispute resolution process at an early stage and / or engage in a bilateral APA. Bi-lateral dispute processes have recently been expanded and enhanced by the EU Directive on Dispute Resolution Mechanisms in the EU and are continually undergoing scrutiny and review at OECD level.
The key takeaway is that obtaining double tax relief should not be an after-thought to a transfer pricing audit settlement, but rather part and parcel of the strategic considerations to any transfer pricing audit process.