TAX NEWS - FEBRuary 2010
Ireland's Finance Bill 2010 introduces transfer pricing regime
The objective of the transfer pricing law is to ensure that an arm's length price is charged in arrangements involving the supply or acquisition of goods, services, money, or intangible assets between connected persons when the profits or losses of either company are chargeable to Irish tax as trading profits or losses. Corporations are deemed connected when there is at least a 50 percent ownership relationship, but they may be deemed to be connected in other circumstances.
The law provides that income can be adjusted upwards or expenditures downwards, so these provisions do not give rise to an Irish tax disadvantage for the Irish exchequer. A double tax agreement must be used if an Irish company seeks a downward adjustment to its income because of an overseas transfer pricing adjustment that increases income in the overseas counterparty company.
The transfer pricing regime will not apply to financing activities such as isolated interest-free loans. Financial services treasury companies will need to evaluate the impact of the law on their loan books and other financing transactions. The law will also not apply to isolated intellectual property (IP) transactions such as a royalty-free structure but again where the company is carrying on a trade of managing IP, a full review of transactions should be undertaken.
The law applies to both domestic and cross-border trading transactions between companies, and also to Irish branches of foreign companies that are within the charge to Irish tax on their trading activities. Transactions between head offices and branches do not fall within the terms of this law.
There is a full exemption from the transfer pricing provisions for small and medium-sized entities. A small/medium-sized entity is one with a staff head count of less than 250 and annual turnover of €50 million or less, or annual balance sheet total of €43 million in assets or less, which figures are assessed annually on a group-wide basis.
Companies are required to have available records that would reasonably be required for the purpose of determining whether the trading income of a company is computed by virtue of the arm's length principle. It should be possible to rely on counterparty documentation to meet the Irish documentation requirement. Documentation requirements will need to be reviewed and assessed during 2011 and before the filing of Irish tax returns for calendar year 2011 on or before 21 September 2012.
The law is to be interpreted in accordance with OECD guidelines on transfer pricing; specifically mentioned are the report on intangible property and the report on cost contribution arrangements. As would be expected, Ireland's double tax treaty provisions take precedence over this law.
Grandfathering of existing arrangements
The legislation contains provisions for grandfathering of existing arrangements entered into on or before 1 July 2010. The term "arrangement" is widely defined as any agreement or arrangement of any kind whether or not it is, or is intended to be, legally enforceable.
There is now an opportunity to assess the impact of the new legislation on existing agreements and there is an opportunity to ensure that new arrangements are implemented before 1 July 2010.
One of the fallouts from the global economic crisis is the more complex and prescriptive worldwide regulatory environment. The effectiveness of the larger nations in driving the tax agenda was demonstrated through the efforts of the G20 in increasing the level of exchange of tax information and the focus on tax transparency. The introduction of a formal new transfer regime is not unexpected in the context of a renewed focus on regulation and indeed the move by tax exchequers worldwide to further protect their own tax bases. Given the scope of the law and the focus on regulation globally, the introduction of this law should be neutral as regards Ireland's attractiveness as a location for investment.
Large multinational companies and their advisors already deal with transfer pricing issues on a daily basis with foreign taxation authorities; therefore, Ireland's new law should not be a significant additional burden to them. The multinational and financial services sector in Ireland has contributed significantly to Ireland's development in terms of employment and growth over the past number of decades. Companies have been attracted to invest in Ireland by a combination of factors, including its favorable taxation environment, a highly qualified English-speaking workforce, and its strategic location for the European markets and markets further afield.
It is vital that Ireland remains high on the agenda when companies decide where to locate, and one of the benefits of the new law is that companies may perceive the Irish tax authorities to be more readily available to assist them in defending their pricing policies when in discussions with overseas tax authorities on adjustments.