TRANSFER PRICING: GENERAL OVERVIEW
1. WHAT ARE THE MAIN CHARACTERISTICS OF TRANSFER PRICING LAW AND POLICY IN YOUR JURISDICTION?
Ireland introduced formal transfer pricing legislation for the first time in 2010. The Finance Act 2010 introduced a new transfer pricing regime in Ireland for accounting periods commencing on or after 1 January 2011, for transactions the terms of which were agreed on or after 1 July 2010.
Broadly, the transfer pricing rules require domestic and international transactions between associated persons to be entered into at arm's length. Where an arrangement between associated entities is made otherwise than at arm's length, an adjustment can be made to the Irish company profits. An adjustment is only made where income is understated or expenses are overstated.
The transfer pricing rules only apply to trading activities. This is a key characteristic of the transfer pricing rules that is quite unusual. The meaning of "trading" in this context is discussed under Question 3.
The transfer pricing legislation specifically provides that the transfer pricing rules must be construed in accordance with the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2010.
2. WHAT HAVE BEEN THE MAIN DEVELOPMENTS OF SIGNIFICANCE FOR TRANSFER PRICING LAW AND PRACTICE IN YOUR JURISDICTION IN THE PAST 12 MONTHS?
The Organisation for Economic Co-operation and Development (OECD) final reports on base erosion and profit shifting (BEPS) are having a significant impact on international tax policy in Ireland. A formal advance pricing agreement (APA) programme has been introduced by the Irish Revenue Commissioners (Irish Revenue) to enhance certainty and transparency for taxpayers with multi-jurisdictional operations. In addition, the legislative framework required to implement country-by-country reporting has been established and enacted, with effect from 1 January 2016. The updated OECD guidelines on transfer pricing have also been incorporated into Irish legislation. In June 2016, the Irish Revenue released guidance containing frequently asked questions and answers in connection with the interpretation of legislation and regulations on country-by-country reporting in Ireland. This guidance has been updated periodically, most recently in December 2016.
In July 2016, Ireland launched a formal regime in respect of bilateral and multilateral APAs. In the past, Ireland facilitated bilateral and multilateral APAs without having a formal regime in place. It will now be possible to initiate these agreements with the Irish tax authorities. However, entry into APAs is confined to complex transfer pricing transactions that could give rise to double taxation issues.
The Irish Revenue has confirmed that Ireland's spontaneous exchange of information regime will apply retroactively to certain tax rulings issued since 1 January 2010. The regime is based on a combination of:
- The framework proposed by the OECD under BEPS Action 5.
- Directive 2015/2376/EU amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation.
The regime typically applies to rulings relating to transactions with a cross-border impact. Exchange of information applies to relevant rulings issued or amended on or after 1 January 2010 under the OECD framework, and 1 January 2012 under EU rules, and which were still in effect on 1 January 2014. All relevant rulings issued or amended by the Irish Revenue since 1 January 2014 will be subject to exchange of information, regardless of whether they remain in effect.
TRANSFER PRICING LEGISLATION
FEDERAL OR NATIONAL LEGISLATION
3. WHAT IS THE MAIN FEDERAL (NATIONAL) LEGISLATION REGULATING TRANSFER PRICING IN YOUR JURISDICTION?
Part 35A of the Taxes Consolidation Act 1997 (TCA) sets out the transfer pricing regime. The following paragraphs outline the:
- Circumstances in which the transfer pricing rules apply.
- Arrangements that are specifically excluded from the scope of the transfer pricing rules.
- Consequences of the application of the transfer pricing rules.
Scope of application of the transfer pricing rules
The transfer pricing rules apply if all the following conditions are met:
- There is an arrangement involving the supply and acquisition of
goods, services, money or intangible assets.
"Arrangement" is defined very broadly and means "any
agreement or arrangement of any kind (whether or not it is, or is
intended to be, legally enforceable)".
- At the time of the supply and acquisition, the supplier and acquirer are associated. Two persons are associated if: one person participates in the management, control or capital of the other, or the same person participates in the management, control or capital of each of the two persons; or
- the first person is participating in the management, control or capital of the other person, where that other person is a company controlled by the first person.
- The profits, gains or losses arising from the relevant activities are in respect of trading activities. "Trading" is defined in Irish legislation as including "every trade, manufacture, adventure or concern in the nature of a trade".
There is no definition of "trade" in Irish tax legislation. Generally, to be trading, the Irish company must:
- Be engaged in the key profit-making commercial activity.
- Have persons in Ireland with the requisite skills and expertise to perform that activity.
Certain activities can be subcontracted to third parties. However, the directors must be involved in managing the commercial activity and strategic policy of the company.
In most cases, there will be little doubt about whether a company's activities constitute trading. Guidance as to what constitutes "trading" is derived from case law and by reference to a set of rules known as the badges of trade. These rules were drawn up in 1955 by the UK Royal Commission on the Taxation of Profits and Income and have been approved by the Irish courts. The badges of trade, and matters to be considered in determining whether a particular activity constitutes a trade, include the following:
- Subject matter.
- Length of ownership of the relevant subject matter.
- Frequency of transactions.
- Supplementary work done on the relevant subject matter.
- Circumstances of sale.
- Motive for transaction.
These issues have been considered extensively in the courts. In IRC v Fraser (24 TC 498), the taxpayer had bought and sold a large quantity of whiskey and was held to be trading on the basis that the whiskey acquired was more than he could personally use. In Leach v Pogson (40 TC 585), over the course of four years, the taxpayer had set up and disposed of 29 driving schools and was held to be trading. In IRC v Livingston (11 TC 538), the taxpayers had acquired a cargo vessel and sold it at a profit and were held to be trading on the basis that, even though it was an isolated transaction, substantial work had been undertaken with a view to a subsequent disposal. In the UK High Court case of Noddy Subsidiary Rights Company Limited v CIR (43 TC 458), a company had been formed to exploit the name and image rights of a character from a children's book. It was held that, in certain circumstances, the exploitation of these rights could constitute a trade. In this case, considerable weight was placed in the evidence of a high degree of activity associated with trying to promote the brand in question, seeking out and evaluating licensees and of dealing with third parties.
The Irish Revenue issued a guidance note on the classification of activities as trading, which provides that the Revenue may be prepared to express a view as to whether a particular transaction or operation amounts to a trade or qualifies for the 12.5% corporation tax rate. In arriving at a decision, the Irish Revenue endorses the Noddy case and has stated that the key considerations are whether:
- There is any commercial rationale for the type of transaction proposed.
- There is any real value added in Ireland.
- There are employees in Ireland with sufficient levels of skills to indicate that the company is actively carrying on a trade.
The Irish Revenue also published details of cases submitted, and opinions issued, in the period from December 2002 to December 2015 on the classification of activities as trading activities. The Irish Revenue stated that opinions on the classification of activities as trading are made by reference to the specific facts and circumstances of each case. The key issues in the decision-making process are the activity, authority and skill levels within the company.
Transactions undertaken otherwise than in the course of a trade are not subject to the transfer pricing rules. However, for Irish capital gains tax purposes, transactions between connected persons are deemed to be otherwise than at arm's length, and are therefore deemed to be for a consideration equal to the market value.
Exclusions from the transfer pricing rules
The transfer pricing rules are excluded in any of the following circumstances:
- The arrangement is concluded within a small or medium-sized enterprise. A small or medium-sized enterprise means an enterprise that falls within the category of micro, small and medium-sized enterprise as defined in the Annex to the European Commission Recommendation concerning the definition of micro, small and medium-sized enterprises (OJ 2003 L124/36) (broadly, less than 250 employees and either a turnover of less than EUR50 million or assets of less than EUR43 million on a group basis).
- The arrangement was agreed before 1 July 2010. The transfer pricing legislation includes a grandfathering clause, which seeks to ensure that arrangements in place before 1 July 2010 are not subject to the transfer pricing rules. This creates some uncertainty for taxpayers where a pre-1 July 2010 arrangement is varied, but the arrangement itself remains in place, as to whether the arrangement remains grandfathered. The view of the Irish Revenue, although not published officially, is that to remain grandfathered the arrangement existing at 1 July 2010 should be able to "deliver the terms" of the ongoing arrangement.
- The arrangement relates to a section 110 securitisation special purpose vehicle. Section 110 of the Taxes Consolidation Act 1997 requires transactions entered into by certain qualifying companies to be by way of bargain at arm's length, except in respect of profit participating loan notes issued by a qualifying company.
Consequences of application of the transfer pricing rules
The consequences of the application of the transfer pricing rules are as follows:
- Where an arrangement between associated entities is made otherwise than at arm's length, an adjustment can be made where the Irish company has understated income or overstated expenses. The arm's length amount is defined as the amount of the consideration that independent parties would have agreed in relation to that arrangement.
- The relevant person to which the transfer pricing rules apply must have records available as may be reasonably required for the purpose of determining whether the trading profits have been calculated on an arm's length basis.
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