Our transfer pricing guide provides an overview of the Irish Transfer Pricing rules.
Irish transfer pricing rules apply to arrangements entered into between associated persons (companies) on or after 1 July 2010, involving the supply or acquisition of goods, services, money or intangible assets.
Ireland’s transfer pricing (TP) legislation is contained in the Taxes Consolidation Act 1997 (TCA 1997) Part 35A, and is based on the arm’s length principle as per Article 9 of the OECD Model Tax Convention on Income and Capital.
- Ireland’s transfer pricing (TP) legislation is contained in the Taxes Consolidation Act 1997 (TCA 1997) Part 35A, and is based on the arm’s length principle as per Article 9 of the OECD Model Tax Convention on Income and Capital, ie it follows the 2017 OECD Guidelines.
- Part 35A, as substituted by Finance Act 2019, applies for chargeable periods commencing on or after 1 January 2020 and, in relation to the computation of certain capital allowances where the related capital expenditure is incurred on or after 1 January 2020. Finance Act 2020 provided for certain amendments to Part 35A; namely, an amendment to the definition of ‘relevant person’ (broadly a person 'within the charge to tax in respect of profits or gains or losses, the computation of which takes account of the results of the arrangement') and a re-write of the exemption for domestic transactions. The amendments provided for in Finance Act 2020 are the subject of a Ministerial Commencement Order.[i]
- Transfer pricing rules do not currently apply to SMEs, however such taxpayers will be brought within the rules when the Ministerial Commencement Order is signed.
- The TP rules apply to Irish taxpayers whose profits, losses or gains are within the charge to Irish tax, this includes Irish branches of overseas companies.
- A fund, including an Irish Real Estate Fund (IREF) and a Real Estate Investment Fund (REIT) are not within the scope of the transfer pricing rules.
- Under the Irish self-assessment regime, in the event of an audit by the Irish tax authorities 'Revenue' the onus is on the taxpayer to confirm their transfer pricing meets the standard.
- Taxpayers who do not fall within the SME exemption are required to prepare and retain supporting documentation. Transfer pricing documentation is required to evidence that the transfer prices are in line with the arm’s length principle. The filing of transfer pricing documentation with Revenue is not mandatory, but if Revenue requests transfer pricing documentation, the taxpayer has a deadline of 30 days to file the documentation. Documentation should be prepared no later than the return filing date for the chargeable period.
- Larger taxpayers must prepare a master/local file in accordance with the 2017 OECD guidance.
- Previous 'Grandfathered arrangements' (pre-July 2010) must be considered for periods commencing on or after 1 January 2020.
[i] A Ministerial Commencement Order will be signed by the relevant government ministry. Often it will be a signed Statutory Instrument.
- Ireland’s transfer pricing rules follow the OECD Guidelines. The Guidelines, updated in July 2017, are mentioned in Irish legislation, and unlike in many countries, they must be used for interpretation of the arm’s length principle.
- The OECD has also released further guidance, including its report on Financial Transactions in February 2020.
- Revenue has transfer pricing guidance which covers their interpretation of transfer pricing matters, this content is publicly available.
- The most appropriate pricing method should be selected on a transaction by transaction basis, providing the most reliable measure of an arm’s length result in each case. The current OECD methods, namely the comparable uncontrolled price, resale price, cost plus, transactional net margin, and profit split methods are all accepted but the method used must be in line with the functional and risk profile of the entity. Other methods can also be used if justifiable and appropriate.
- A simplified approach for low value-adding services may be applied; mark-up of 5% of the cost-base without the need for a benchmarking analysis, in accordance with the 2017 OECD guidelines.
- There is no set hierarchy as the Irish legislation currently refers to the 2017 OECD Guidelines and BEPS Actions 8-10 Final Reports published by the OECD on 5 October 2015.
- Under the self-assessment system, the burden of proof in the event of a transfer pricing audit by Revenue will fall on the taxpayer.
- Revenue may request a Transfer Pricing Compliance Review (TPCR), this is a self-review carried out by the company/MNE group of its compliance with the legislation and the application of arm’s length principle. A TPCR is not a transfer pricing audit. Certain information will be requested by Revenue in the TPCR notification letter. Generally, the taxpayer will have three months to respond. A TPCR may escalate to a transfer pricing audit.
- Ireland accepts the OECD transfer pricing documentation model based on the Master File and Local File (BEPS Action 13) approach. This approach is considered best practice in Ireland.
- Lack of carefully prepared documentation will generally be seen as (at least) 'careless' behaviour and any adjustment will likely result in penalties.
- Irish legislative requirements for documentation oblige an Irish taxpayer to have records available for the purpose of determining whether income of the taxpayer was computed in compliance with the transfer pricing legislation.
- It is best practice for Irish taxpayers to maintain adequate documentation to support the pricing policies applied to its intra-group transactions.
- There is a documentation exemption for small taxpayers (when brought within scope of the rules) while medium taxpayers will have simplified documentation requirements.
- Documentation should be prepared no later than the filing date for the return for the chargeable period and must be made available within 30 days of a written request from Revenue.
- Ireland implemented CbCR (Country by Country Reporting) legislation which is effective for accounting periods commencing on or after 1 January 2016 for groups with consolidated turnover of €750m or more.
- Ireland follows the guidance of Chapter V of the OECD Guidelines for the composition of both the Master and Local file.
- The Master file documentation should contain organisational structure, description of MNE’s business(es), MNE’s intangibles, MNE’s intercompany financial activities, MNE’s financial and tax positions. In principle, a Master file should provide a high-level overview of the business, including the nature of its global operations and general transfer pricing policies on widely implemented transactions. The Master file is intended to assist tax authorities in evaluating whether significant transfer pricing risk may exist in a particular jurisdiction.
- The Master file will contain information for the group as a whole. For larger multinationals, the Master file may instead be more appropriately described by line of business. Typically, the Master file will be made available to the tax authorities in all countries where the multinational has a taxable presence.
- Local file and/or Country-specific document should contain information on the Local entity, its controlled transactions and financial information. In contrast to the Master file, which is a broad-based narrative of the group, the Local file is a report containing detailed information relating to specific intra-group transactions related to taxpayers in a specific jurisdiction. The intent of the Local file is to provide assurance to a specific tax authority that the local entities have complied with the arm’s length principle for material intra-group transactions.
- Limited risk distributor and contract services/ contract R&D arrangements could also potentially be affected, especially where significant people functions are in Ireland.
- Persistent losses in a 'low risk' entity
- Licensing payments to low tax jurisdictions
- Business restructurings, or changes in transfer pricing model, can also trigger a challenge but, businesses can evolve, and if the previous transfer pricing method no longer appears the most appropriate, it should always be reviewed, rather than being ignored for the sake of maintaining consistency.
- Penalties in relation to transfer pricing documentation are derived from the general record-keeping requirements. Two main types of penalties may apply; a fixed penalty for failure to keep or produce documentation and a tax geared penalty in the case of a Revenue audit.
- Where a taxpayer fails to provide records that determine whether profits or gains have been computed in accordance with transfer pricing rules within 30 days of date of request, a fixed penalty of €4,000 applies.
- When a taxpayer is a person to which the local file threshold applies, fails to provide relevant information requested by the Revenue authorities within 30 days, the fixed penalty is increased to €25,000. Further of €100 per day applies when failure to comply with request continues.
- The tax-geared penalty under a Revenue audit is dependent on whether there has been a qualifying disclosure, it is the first offence, it is careless behaviour or deliberate behaviour and whether consequences are significant. The penalty can be up to a maximum of 100%.
- Where there is a reduction in the amount of losses carried forward, a penalty of 10% of the reduction may be due.
- A business may receive a mitigation of a penalty for behavioral factors and/or if it had made a reasonable attempt to demonstrate an arm’s length result.
- The penalty for a failure to file a country-by-country report/equivalent country-by-country report is €19,045 plus €2,535 for each day the failure continues. The penalty for filing an incomplete or incorrect country-by-country report/equivalent country-by-country report is €19,045.
- Revenue will expect to see that a search for potential internal comparables has taken place before defaulting to an external database search for comparables.
- Local comparable companies are preferred, whilst EMEA or regional comparable companies can be accepted.
- Note that where databases are used, contrary to popular understanding, there is no specific requirement that the interquartile range be used (however, it will often be calculated as a means to eliminate outliers, given that incomplete information will always be an issue in external database searches).
- An APA is an arrangement between one or more tax authority and a taxpayer that determines in advance of controlled transactions an appropriate set of criteria (i.e., transfer pricing method, critical assumptions, etc.) for the determination of the transfer pricing for those transactions over a fixed period of time.
- Ireland’s bilateral APA program has been in effect since 1 July 2016.
- An application for a bilateral APA may be made by a company which is tax resident in Ireland for the purpose of the relevant double tax treaty and also by a PE in Ireland of a non-resident company in accordance with the provisions of the relevant treaty.
A MAP is the process which allows competent authorities to interact with the intent to resolve international tax disputes involving cases of double taxation (juridical and economic) as well as inconsistencies in the interpretation and application of a double tax convention.
The objective of the MAP process is to negotiate an arm’s length position that is acceptable to both tax authorities and seek to avoid double taxation for taxpayers.
Taxpayers have a right to enter the MAP process for transfer pricing disputes.
- Currently, SMEs are excluded from the scope of transfer pricing rules. The legislation makes provision to bring SMEs within the scope of transfer pricing rules subject to Ministerial Commencement Order.
- Depending on their size, small companies will be fully exempt from transfer pricing documentation requirements while medium companies will have significantly simplified documentation requirements.
- The exemption criteria are based on EU recommendation 2003/361/EC as follows:
- Small: less than 50 employees, and either turnover or gross assets not exceeding €10 million
- Medium: less than 250 employees and either turnover not exceeding €50 million or gross assets of less than €43 million.
- There is an exclusion from the application of transfer pricing rules to the computation of non-trading income in certain circumstances.
- For computations of capital allowances and chargeable gains or losses, the transfer pricing rules apply in respect of transactions relating to assets that have a market value of over €25 million or where the capital expenditure incurred on an asset is over €25 million.
- Ireland has not implemented a digital services tax at present although the EU and OECD have proposals to allocate a portion of profits based on the location of consumers. The EU interim proposal is a simple 3% turnover-based tax. There is a possibility that the EU will push its own proposals.
- Revenue has recently placed a great focus on improving the standards of transfer pricing documentation and economic analyses via reviews of taxpayer and agent 'behaviour'. It will expect local reviews of functions, assets and risks, accurate characterisation, and high-quality TP documentation, otherwise penalties may be sought. Revenue is very keen to stress the benefits of 'cooperative compliance'.
- The economic fallout of COVID-19 is likely to have widespread impact and an increase in transfer pricing, Corporation Tax enquiries globally is expected. All MNCs should be reviewing their potential exposure to transfer pricing enquiries and DPT and updating documentation accordingly.
- Where supply chains have been disrupted or work brought to a halt due to lockdown measures, expected profits may not eventuate. Comparable companies will often have been affected in the exact same way as multinational groups, but evidence must be gathered and documented contemporaneously.