In a fast-paced business world, with constantly evolving group
operational structures and trading relationships, how long does an
arrangement really remain unchanged?
The Irish transfer pricing rules were introduced in Finance Act
2010. To ease concerns that business in Ireland would suddenly face
a nightmarish review of all existing trading structures, the
transfer pricing rules provided that arrangements (the terms of
which w ere agreed before July 1 2010) would be excluded.
Unhelpfully, arrangement is defined as "any agreement or
arrangement of any kind (whether or not it is, or is intended to
be, legally enforceable)". The concept of an arrangement is
not something that existed previously in Irish tax or contract law.
It is potentially a very broad concept, meaning that all sorts of
arrangements, existing since July 1 2010, are grandfathered,
whether or not they were reduced to writing or even constituted a
binding legal agreement.
The Irish Revenue Commissioners have tempered a very broad
interpretation by stating that, to be grandfathered, the pre July 1
2010 arrangement must clearly envisage the transaction. For
example, an intercompany royalty that is calculated on a fixed
percentage of sales can be grandfathered because, while the annual
sales will vary, the agreement delivers the price. However, an
agreement to agree the royalty on an annual basis would not qualify
These pre July 1 arrangements are grandfathered potentially
indefinitely, as long as the terms of the arrangement do not
Perpetual grandfathering for existing arrangements:
What more could you ask for?
Of course the broad definition of arrangement works both ways. A
variation after July 1 2010, of any aspect of an arrangement
between connected parties, potentially means that the entire
arrangement is no longer grandfathered. For example, if the parties
to an arrangement changed the pricing calculation mechanism it
would seem clear that the arrangement should no longer be
grandfathered. But it is less clear when a new product is added to
a list of products licensed under an existing arrangement, without
any change in the pricing mechanism. Similarly, what if there had
just been a change in the governing law clause in an agreement?
Such a change hardly warrants losing grandfathered status. In this
sense an overly broad interpretation of what constitutes the
variation of an arrangement could significantly dilute the
effectiveness of the grandfathering provision included in Finance
The key benefit of grandfathering is that the arrangement will
not be subject to the requirements of the transfer pricing rules.
Accordingly, the pricing applied in arrangements between associated
parties cannot be adjusted pursuant to the transfer pricing rules
and companies are not required to have documentation in place to
support the pricing adopted in these arrangements until they are
amended after July 1 2010. Other potential benefits include
avoiding the time and cost of dealing with a transfer pricing audit
and any queries arising from such an audit.
Given the benefits of grandfathering, it is not unreasonable
that even taxpayers who are not taking aggressive transfer pricing
positions would prefer to maintain the grandfathered status of
In this context a narrow view of when an arrangement has been
varied may be more appropriate.
While every case will be fact specific and will depend on the
terms of the arrangement between the parties, it is arguable that
many variations can be made to an arrangement without jeopardising
the grandfathered status of the arrangement.
Actions such as a renewal of a contract, assignment of a
contract, amendment of a term, the addition of new services or
products to the scope of an existing agreement may all be
As time passes and business relationships evolve, taxpayers must
continue to review whether their pre July 1 2010 arrangements
remain grandfathered. Such review and consideration is particularly
important now as many corporate taxpayers prepare to file their
annual corporation tax return.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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