There has been a significant overhaul of the transfer pricing regime in Ireland, which is effective for accounting periods starting on or after 1 January 2020. This in understandable as transfer pricing rules have been in place for over a decade. The new(er) regime (in the new Part 35A of TCA 1997) is much broader in scope, with considerably more transactions falling within the new transfer pricing requirements.
Many of the changes to the regime were flagged and relate to recommendations adumbrated in the Coffey Report on the Irish corporate tax regime. The more noteworthy changes are:
· Extension of transfer pricing to non-trading transactions, with a derogation for certain Ireland-to-Ireland transactions; A significant issue is that the exemption is available only to the non-trading counterparty. Therefore, there is now a potential charge to tax at up to 25% for certain cross-border transactions such as intragroup lending. A potential 25% charge to corporation tax should focus minds on getting things right.
· Updating Ireland’s transfer pricing regime in line with the 2017 OECD transfer pricing guidance; there is a greater emphasis on people and the allocation of risks, with the objective that transfer pricing outcomes are linked to value-creation activities. The concept of “DEMPE” (development, enhancement, maintenance, protection and exploitation) functions is included in the 2017 OECD guidelines. The focus under DEMPE is that the transfer pricing outcome is based on the commercial reality.
· Removal of grandfathering provisions
· Increased documentation requirements; There are now specific requirements to prepare and maintain a master file and local file in line with Chapter V of the 2017 OECD Guidelines. This formally introduces the OECD’s three-tiered approach to transfer pricing documentation into our legislation, with country-by-country reporting obligations having been introduced in Ireland in 2016. There has also been the introduction of a penalty regime for non-compliance with the transfer pricing documentation requirements.
· Imposition of transfer pricing documentation requirements on specified capital transactions where the market value of the asset being acquired or disposed of exceeds €25m. This may have application in scenarios where an Irish taxpayer is claiming capital allowances on an asset acquired from an associated entity or where a chargeable gain arises on the disposal of an asset to an associated entity.
· Introduction of substance over form; there is now a requirement to look beyond the written contracts or agreements and focus on what is happening commercially vis-à-vis risks and people on the ground. Revenue have the power to disregard arrangements when, viewed in their totality, they differ from what would be agreed by independent parties behaving in a commercially rational manner in comparable circumstances. Arrangements that are artificial will be set aside.
· Extension to SMEs subject to a Ministerial Commencement Order.
The net effect of the foregoing is tax practitioners particularly in in the SME space need to take cognisance of the transfer pricing regime and educate themselves on what is coming down the tracks.
Furthermore, given the high profile of transfer pricing through the OECD Base Erosion and Profit Shifting (BEPS) project, together with the establishment of the dedicated transfer pricing audit branch and the increase in Revenue’s transfer pricing resources, as referenced in recent Budget statements, the number and frequency of these Revenue compliance interventions could reasonably be expected to grow in this topical area.
