Ireland Tax: Irish transfer pricing grandfathering

Transfer pricing rules now enshrined in law

The transfer pricing rules (Rules) announced in the 2010 Irish Finance Bill on 4 February have become law. Our alert of 4 February 2010 outlined in detail the scope of the new Rules. Arrangements, the terms of which are agreed prior to 1 July 2010, are not subject to the new Rules, provided they are not substantially amended after this date. With the grandfathering deadline of 1 July 2010 fast approaching, if you have not already done so, it is now time to act to avail of this short-lived opportunity.


Why act now?

The key benefit of availing of grandfathering is to reduce the compliance burden from an Irish perspective related to grandfathered transactions. Once grandfathering expires, the Rules will apply. In summary, the benefits of grandfathering are that it:
- Reduces overall compliance costs
- Eliminates the need to prepare transfer pricing documentation for Irish purposes until such time as the agreement is renewed

It is unlikely the Irish Revenue will accept that transactions are grandfathered unless some sort of documentation evidencing entitlement to grandfathering is in place. It is therefore highly recommended that appropriate intercompany agreements, if not already in place, are put in place now.

It should be borne in mind that even where a transaction is grandfathered, there is existing VAT legislation the Irish Revenue can use to impose market value on a transaction for VAT (Value Added Tax) purposes, thereby increasing the VAT cost of the transaction for companies not entitled to full VAT recovery.

The Rules do not replace or alter existing capital gains provisions that also impose market value on certain transactions for CGT purposes. The recommended actions listed below can assist in identifying any risk that exists in these areas on past transactions.


What can you do to avail of grandfathering?

Ernst & Young recommends companies take stock of their current inter-company arrangements to assess how they may be affected. In particular, Ernst & Young recommends the following actions in advance of 1 July 2010:

1. Build a matrix of all significant inter-company arrangements, documenting and evidencing their status pre 1 July 2010
2. Confirm the agreement fully reflects the current position
3. Determine whether there are any services being provided intra-group that are not currently charged out, that should be
4. Determine which existing arrangements will fall under the Rules as "trading"
5. Determine which arrangements would be grandfathered under the Rules
6. Review finite-life agreements that are up for renewal post 1 July 2010 with a view to amending the agreement now to extend the duration of the agreement
7. Put in place documentation to support existing inter-company arrangements (to avoid any future confusion as to the contractual terms of the arrangement) where the arrangements are not currently documented
8. Consider new transactions expected to be entered into in the coming months and whether they can be accelerated
9. Design and implement processes and procedures to ensure transfer pricing is considered as part of all transactions going forward
10. Determine the VAT and other indirect tax issues associated with the new Rules


Maximizing grandfathering availability

The guiding principles in availing of grandfathering are as follows:
- Is the transaction envisaged by an arrangement that was in place before 1 July 2010?
- Does the agreement give the pricing answer, which can be determined with certainty in advance?
- The arrangement cannot be contingent on a future agreement.

Pricing terms fixed for a period of time or given by a pre-determined formula agreed prior to 1 July 2010 can avail of the grandfathering rules. New transactions, amendments to the pricing or other substantial amendments (post 1 July 2010) likely to change the allocation of risk will fall within the scope of the Rules. In addition, where an existing agreement falls due for renewal post 1 July 2010 (unless automatic renewal is expressly provided for), it will fall within the scope of the Rules upon renewal.


Opportunities from an Irish and overall group perspective

In addition to reducing compliance costs associated with availing of grandfathering, other opportunities may exist. Current market conditions offer an unprecedented opportunity to achieve a significant reduction in a group's worldwide tax burden. Given Ireland's low corporate tax rate, this may be the time for companies to revisit current transfer pricing policies, consider if facts and circumstances have changed and consider whether there is an opportunity that could support improved commercial outcomes from an Irish perspective. The current economic climate is particularly advantageous to this strategy given the high price of credit and liquidity.


How can we help?

We bring you a global perspective based on our long-standing experience of what really works in transfer pricing and tax effective supply chain management (TESCM). Our multidisciplinary TESCM teams work with you on supply chain design, business restructuring, systems implications, transfer pricing, direct and indirect tax, customs and accounting. We can help you build and implement the structure that makes sense for your business, improve your processes and manage the cost of trade. Our transfer pricing professionals help you review, document, manage and defend your transfer pricing policies and processes — aligning them with your business strategy. Our talented people work with you to build the proactive, pragmatic and integrated strategies that address the tax risks of today's businesses and help your business achieve its potential. It's how Ernst & Young makes a difference.

Our Irish transfer pricing team, headed up by Dan McSwiney, provides a broad range of services, including:
- Review of existing arrangements
- Documentation
- Planning
- Controversy management
- Audit defence assistance
- Tax Efficient Supply Chain Management