Transfer Pricing – Highlights from Finance Bill 2021

1. Ireland-to-Ireland Transactions

The first concerns the exemption of non-trading domestic related party (“Ireland-to-Ireland”) transactions from transfer pricing provisions. 

The changes clarify that no consideration needs to be paid in a transaction for the exemption to apply. The legislation states that the supplier (or lender; or landlord) will benefit from the exemption if any consideration, if receivable, would be chargeable to tax. From the perspective of the acquirer (or borrower; or tenant), they will also benefit if any consideration, if payable, would be deductible for tax.

There are anti-avoidance measures included in the new provisions:

• the beneficiary from the exemption must be tax resident in Ireland for the whole of the chargeable period;
• it must involve a bona fide commercial transaction;
• tax avoidance must not be the main or one of the main purposes of the transaction;
• any deduction claimable must not be greater than the amount actually paid or payable;
• the transaction must not be part of a wider tax avoidance scheme; and
• adequate records must be kept of the transaction.

The new provisions apply to chargeable periods beginning on or after 1 January 2022.

Application to Financial Services Industry

To the extent that Financial Services industry participants are engaged in domestic related party transactions (i.e. both parties to the transaction are resident in Ireland for tax purposes), an analysis is required to determine if the transaction falls within the narrow scope of the domestic exemption. If the transaction does not meet the domestic exemption requirements, then the general transfer pricing rules will apply and the transaction must be priced at arm’s length. Note - qualifying companies under Section 110 TCA 1997 cannot avail of the domestic exemption.

2. Authorised OECD Approach (AOA)

The second amendment brings the Authorised OECD approach (“AOA”) into Irish domestic law.

The AOA attributes profits to a branch or permanent establishment that would have been earned at arm’s length as if it were a separate and independent legal enterprise performing the same or similar functions under the same or similar conditions.

The new legislation introduces additional documentation requirements, penalties for failure to comply with requests from Irish Revenue and protection from tax-geared penalties where a taxpayer prepares appropriate documentation and provides it to Irish Revenue on a timely basis.

The documentation requirements do not apply to small or medium enterprises where the income attributable to the Irish branch is less than €250,000.  

The new legislation applies to accounting periods beginning on or after 1 January 2022. 

Application to Financial Services Industry

The guidance on how to apply the AOA in practice is provided in the OECD 2010 Report on the Attribution of Profits to Permanent Establishments. Careful consideration is required when dealing with an Irish branch that is part of a banking group, trading group or insurance group as there are explicitly prescribed steps that need to be followed when applying the AOA to branches in these 3 sub-industry groups.

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