Finance Act 2010: Transfer pricing

New provisions relating to transfer pricing
Transfer pricing legislation has been introduced in the Finance Bill 2010 for chargeable periods commencing on or after 1 January 2011.

Key features
The objective of the transfer pricing law is to ensure that an arm’s length price is charged in arrangements (broadly any agreement or arrangement of any kind whether or not it is intended to be legally enforceable) involving the supply or acquisition of goods, services, money or intangible assets between connected persons where the profits or losses arising from relevant activities of either company are chargeable to Irish tax as trading profits or losses.

Companies are connected where there is at least a 50% relationship. A company is connected to another company if that other company has control of it or if that other company and persons connected with that other company together have control of the company. Two companies will also be connected if the same person has control over both companies. An individual that controls a company will be connected with that company. Furthermore a company shall be treated as controlled by an individual if it is controlled by the individual and persons connected with the individual (which includes certain relatives of the individual). However while the company will be subject to the transfer pricing law, the individual will not be.

The law provides that income can be adjusted upwards and that expenditure can be adjusted downwards so these provisions do not give rise to an Irish tax disadvantage for the Irish exchequer. A double tax agreement has to be used to access tax relief if an Irish company seeks a downward adjustment to income because of an overseas transfer pricing adjustment that increases income in the counterparty company.

There is a complex series of definitions, the effect of which is that any arrangements that generate profits, gains or losses which are taxable as trading income, gains or losses fall within the scope of the law. Therefore, the transfer pricing regime will not apply to financing arrangements such as an isolated interest free loan. Financial services treasury companies will however need to evaluate the impact of the law for their loan books and other financing transactions. The law will also not apply to isolated intellectual property (IP) arrangements 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 applies 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 remit of this law.

Domestic transactions
There is a full exemption for small and medium sized entities. A small/medium sized entity is one with a staff head count of less than 250 and a turnover of €50 million or less, or a balance sheet total of €43 million or less which figures apply to the worldwide group and are assessed annually.

It is expected that the majority of Irish companies will qualify for the exemption for small and medium sized entities.

The law provides for the elimination of double counting in situations where domestic entities are involved. Where the profits of one entity are increased as a result of a transfer pricing adjustment, then the counterparty will be entitled to an adjustment for the same amount in computing its taxable income. However, relief in this regard will only be available when the tax relating to the upward adjustment is paid.

When an adjustment is made to a company that increases its income on the sale of goods and relief is provided to the counterparty company by way of an increase in the cost of purchases, the law provides that where any part of these purchases remain in stock at the end of the chargeable period, then the closing value of the stock will not be affected by the transfer pricing adjustment. This ensures that there is no cash flow disadvantage to the group.

Where the profits of a foreign branch of an Irish company are reduced as a result of a counterparty adjustment, then the law provides that the credit for foreign tax will be calculated by reference to the branch profits as reduced by the counterparty adjustment. This will occur in situations where there is a transaction between an Irish company and a foreign branch of a connected Irish company.

Property transactions and stock
The law provides that where a company is engaged in land dealing and development operations and the profits from the sale of the land would be subject to corporation tax at 25% and such land is transferred to another group company, then both companies can elect that the transfer pricing law will not apply to that transaction. The election seems limited in its scope.

Documentation
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 will need to be reviewed and assessed during 2011 and before the filing of Irish tax returns for the calendar year 2011 on 21 September 2012.

Companies are not required to file their transfer pricing documentation with the Revenue, however, records must be made available for inspection by Revenue within a period of not less than 21 days of request, which request will typically arise on an audit.

Grandfathering of existing arrangements
The legislation contains provisions for grandfathering of existing arrangements made before 1 July 2010.

There is now an opportunity to assess the impact of the new legislation on existing agreements and also provides an opportunity to ensure new arrangements are implemented before the 1 July 2010.

OECD guidelines and double taxation agreements
The law is to be interpreted in accordance with OECD Guidelines on transfer pricing and specifically mentioned are the report on intangible property and the report on cost contribution arrangements. As would be expected, the treaty provisions take precedence over the transfer pricing law.

Comment
One of the fallouts from the economic crisis is the more complex and prescriptive world-wide 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. Given the scope of the law and the focus on regulation globally, its introduction should be neutral as regards Ireland’s attractiveness as a location for investment. Domestically there is a tax impact for land dealing and developing companies due to the limited scope of the election process above and this needs to be addressed further.

Irish quoted plcs, multinational companies and their advisors already deal with transfer pricing issues on a day to day basis with foreign taxation authorities and 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 for many decades. Companies have been attracted to invest here by a combination of factors including our favorable taxation environment, highly qualified English speaking workforce and our strategic location for 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 both Irish plcs and overseas multinational companies may perceive that Irish Revenue are more readily available to assist them in defending their pricing policies when in discussion with overseas tax authorities.

Back to Finance Act 2010 home