The Irish Revenue Commissioners ("Revenue") have recently published a new tax and duty manual1 containing guidelines for correlative adjustment claims under Ireland's double tax treaty network ("CA Guidance").
The CA Guidance applies to applications for unilateral relief from double taxation arising from transfer pricing adjustments under Ireland's double tax treaty network. As a result of organisational changes a number of years ago, correlative adjustment claims are dealt with by the relevant division in Revenue with responsibility for the taxpayer, while requests for MAP (and other bilateral dispute resolution mechanisms) continue to be dealt with by the International Tax Division. The CA Guidance further reiterates existing guidance contained in Revenue's tax and duty manual on guidelines for requesting mutual agreement procedure ("MAP") assistance in Ireland ("MAP Guidance"), however, the new CA Guidance is more detailed and provides some interesting clarifications.
The ability to claim relief for transfer pricing adjustments is increasingly important as taxpayers face audits worldwide. In addition, under Irish tax rules, taxpayers are precluded from taking a deduction for transfer pricing adjustments2 until relief has been granted in accordance with a relevant double tax treaty.
Review Standard for Correlative Adjustment Claims
The CA Guidance states that:
"Revenue officers will review the appropriateness of a claim made and will only make a correlative adjustment to the profits of the Irish company concerned to the extent that the treaty partner adjustment is shown to be an adjustment from a non-arm's length profit to an arm's length profit, and is shown to be appropriate, both in principle and as regards the amount. Accordingly, a claim may be wholly or partly accepted, or it may be wholly refused."
This guidance reflects the approach being experienced in practice in relation to existing correlative adjustment claims. The test is two-fold and taxpayers not only need to demonstrate that the resulting adjustment is arm's length, but also that the original pricing was a "non-arm's length profit". Revenue still appear to be navigating what will be required to satisfy this latter test and it may be difficult in certain circumstances to satisfy this requirement. The requirement to demonstrate that the resulting adjustment is arm's length can also be difficult to demonstrate in practice. Taxpayers should be mindful to ensure that tax settlements with foreign tax authorities are fully supported from a principled OECD perspective where a correlative adjustment may be sought.
Determinations by Revenue and Redress
Where Revenue determines that a corresponding adjustment is appropriate, the Transfer Pricing Branch of the International Tax Division will write directly to the Competent Authority of the treaty partner jurisdiction to confirm that tax has been paid on the amount of the adjustment. Once confirmed, the taxpayer will be required to submit revised computations for the relevant accounting periods, assessments will be amended and tax repaid under section 959AA TCA.
Where a correlative adjustment is not granted and repayment is refused (in whole or in part), the CA Guidance confirms that Revenue will set out the reasons for its determination and sets out two avenues of redress:
- the taxpayer has a right of appeal to the Tax Appeals
Commission ("TAC") within 30 days of the
notice of the determination by Revenue (this includes cases where a
taxpayer has existing claims already with Revenue); and
- the taxpayer can seek MAP provided it is within the time limit for making such a request under the relevant treaty.
The CA Guidance clarifies that where a taxpayer already has a correlative adjustment claim with Revenue before the publication of the guidance and, having reviewed the claim, Revenue propose to refuse the claim (in whole or in part) the taxpayer will, if it disagrees with Revenue, be invited to complete the new Form CA1 and submit it to Revenue with a view to receiving a determination which may then be appealed to the TAC.
Taxpayers who wish to potentially avail of a MAP should consult the relevant tax treaty at an early stage to ascertain the relevant time limit for requesting MAP. The CA Guidance acknowledges that in such cases protective claims for MAP may need to be filed with the International Tax Division while the correlative adjustment claim is being reviewed by Revenue.
The CA Guidance provides that a new Form CA1 is to be completed and submitted when making a claim for a correlative adjustment to Revenue and Appendix 1 to the CA Guidance contains a detailed list of information and documentation (together with English translations where appropriate) that is to be submitted to Revenue with the Form CA1.
The information and documentation to be submitted is the same information as previously set out in the MAP Guidance. However, if for any reason taxpayers are not providing any of the listed items to Revenue they are now required to explain why. The form also requires the taxpayer to explain why the original transfer pricing policy was not arm's length.
Claims are to be submitted to the Revenue Division or Branch dealing with the company's affairs via MyEnquiries or the Revenue File Transfer System ("RFTS"). A copy should also be sent to the Transfer Pricing Branch of the International Tax Division.
This guidance underscores the position that obtaining a correlative adjustment for taxpayers' unilateral audit settlements may be difficult in practice and there are significant hurdles to be satisfied. That noted, there are proactive actions taxpayers can take to support future correlative adjustment claims:
- taxpayers should work closely with their advisors throughout the foreign audit process to ensure that they are not accepting positions in the foreign jurisdiction that may prejudice their ability to seek a correlative adjustment in Ireland from Revenue. For instance, Revenue reiterate in the CA Guidance that no relief will be granted for interest and penalties or secondary adjustments. Therefore, when settling audits in other jurisdictions taxpayers should be cognisant of accepting re-characterisation of transactions that create a taxable base in the foreign jurisdiction on which foreign tax is then levied (e.g. withholding tax on deemed interest or royalties); and
- taxpayers should consider putting in place policies and procedures for their international colleagues to follow when engaged in foreign audit processes with a view to ensuring that they are getting the right information and documentation (including from the foreign tax administration) to satisfy their evidential requirements in supporting a correlative adjustment claim in Ireland.
Importantly, this guidance and experience on correlative adjustment claims further aligns with Revenue's messaging in recent years that the best approach to avoid double taxation in relation to transfer pricing adjustments is to engage in a bi-lateral dispute resolution process at an early stage and / or engage in a bilateral APA. Bi-lateral dispute resolution mechanisms include MAP under a relevant tax treaty, but also the EU Arbitration Convention or the recent EU Directive on Tax Dispute Resolution Mechanisms. Taxpayers should consider the potential use of these mechanisms at an early stage in audit settlement discussions with foreign tax authorities where material amounts of tax are at stake.
If you are interested in discussing the application of the CA Guidance to existing or future correlative adjustment claims, or to discuss the potential approaches to seeking relief from double taxation for transfer pricing adjustments, please do not hesitate to reach out to your usual Matheson contact.
1. Part 35-02-09
2. Section 81(2)(o) Taxes Consolidation Act 1997
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.