Contributed By Matheson
Ireland’s transfer pricing rules are set out in Part 35A of the Taxes Consolidation Act 1997 (TCA) (the “TP Rules”). Part 35A was introduced in the Finance Act 2010 and was subsequently amended by the Finance Act 2019 and the Finance Act 2020. Prior to the Finance Act 2019, transactions agreed before 1 July 2010 were outside the scope of the TP Rules; however, with effect from 1 January 2020, the TP Rules now apply to transactions agreed before this date.
The Finance Act 2019 also incorporated the 2017 OECD Transfer Pricing Guidelines, including the guidance on hard-to-value intangibles and the application of the transactional profit split method (the “TP Guidelines”), replacing reference to the 2010 OECD Transfer Pricing Guidelines, into the TP Rules. As a result, when considering the TP Rules, a taxpayer must also have regard to the TP Guidelines, such that the TP Rules provide that the “arm’s-length amount” is to be determined in line with the TP Guidelines. The TP Rules further provide that any additional guidance published by the OECD will be considered part of the TP Guidelines once designated by the Irish Minister for Finance. In this regard, the recent transfer pricing guidelines on financial transactions published by the OECD in February 2020 have not yet been incorporated into the TP Rules; however, the Irish Revenue Commissioners (“Revenue”) has noted in recently published guidance that it will have regard to this guidance on financial transactions.
Revenue also issued new guidance on the amended TP Rules in February 2021 to provide further clarity to taxpayers on the practical application of the TP Rules.
In brief, subject to certain exemptions between Irish associated persons, the TP Rules require domestic and international transactions between associated persons to be at arm’s length. If an associated person has understated income or overstated expenses – ie, the transaction was not at arm’s length – Revenue may make an adjustment for tax purposes.
Ireland did not have an extensive transfer pricing regime prior to the introduction of the TP Rules as inserted by the Finance Act 2010.
As noted above, Ireland’s TP Rules were introduced pursuant to the Finance Act 2010 and were significantly altered by the Finance Act 2019. Some important changes implemented pursuant to the Finance Act 2019 include:
Further, the TP Rules are to be construed in accordance with the TP Guidelines and any further OECD guidance designated by the Irish Minister for Finance will be considered part of the TP Guidelines.
The TP Rules require domestic and international transactions between associated persons to be at arm’s length.
The TP Rules define associated enterprises in line with the TP Guidelines. For the purpose of the TP Rules, two persons will be associated if the other person is (directly or indirectly) participating in the “management, control or capital” of the other or the same person is participating in the “management, control or capital” of both persons. This would include parent companies involved in the management, control or capital of their subsidiaries.
The meaning of "control" in terms of the TP Rules is the power of a person to secure (i) by means of the holding of shares or the possession of voting power in or in relation to that or any other company, or (ii) by virtue of any powers conferred by the articles of association or another document regulating that or any other company that the affairs of a company are in accordance with the intentions of the person. A more flexible definition of control is included at Section 432 of the TCA, which addresses scenarios whereby a person may exercise control by means other than percentage shareholding. However, this more flexible test does not apply for the purposes of the TP Rules.
In partnerships, it is necessary to "look through" to the rights of the individual partners. "Control" for the purposes of a partnership means a right to a share of more than 50% of the assets or income.
Under the TP Rules, the arm’s-length amount is the amount of the consideration that independent parties dealing at arm’s length would have agreed in relation to the supply and acquisition. The TP Rules state that it is to be construed in accordance with the OECD Guidelines, including the interpretation of the arm’s-length amount.
The TP Rules do not include a definition of a “controlled transaction”. However, the TP Rules apply to any “arrangement”:
An arrangement is given a very broad definition and includes any transaction, action, course of action, course of conduct, scheme or plan and any agreement, arrangement of any kind, understanding, promise or undertaking. Moreover, the arrangement may be express or implied and it does not need to be legally enforceable for it to fall within the provisions of the TP Rules.
There is no specific list of transfer pricing methods included in the TP Rules. The TP Rules approve the transfer pricing methods applied under the TP Guidelines.
There are two broad categories of methodology approved for use in Ireland in line with the TP Guidelines: traditional transaction methods and transactional profit methods.
The traditional transaction methods approved for use in Ireland are the:
The transactional profit methods approved in Ireland are:
Revenue is pragmatic in its approach to the transfer pricing method most suitable to be applied to a transaction.
Methods that are not provided for under the TP Guidelines are generally not accepted by Revenue, albeit the fact that the TP Guidelines refer to the use of unspecified methods means it is theoretically possible to seek to use such unspecified methods, provided they can be shown to provide an arm’s-length amount in line with the OECD arm’s-length principle. Therefore, global formulary apportionment methods will not be accepted as they are not listed in the TP Guidelines.
There is, as yet, no Irish case law or Revenue guidance that discusses the suitability of particular methodologies.
The TP Rules do not impose a hierarchy of methods, nor has any supplementary guidance been published by Revenue indicating a hierarchy of methods.
There are no specific provisions in the TP Rules, nor guidance relating to the use of ranges or other statistical measures to be used with the arm’s-length assessment. In practice, reliance will be placed on the TP Guidelines in relation to the use of ranges and statistical measures.
There is no specific requirement for comparability adjustments. There is little established practice in Ireland as regards when comparability adjustments will be sought, but they may be sought in certain circumstances, in line with the guidance in the TP Guidelines. As of yet, Revenue has not published supplementary guidance for their application in Ireland, and in practice, this is looked at on a case-by-case basis.
The TP Rules do not provide a definition for "intangible property", but intangibles are defined elsewhere in the TCA, where the definition focuses on legally protected intangibles and intangibles for accounting purposes. The TP Rules follow the TP Guidelines, and therefore one should refer to Chapter VI of the TP Guidelines when discussing transfer pricing rules on intangibles in Ireland.
The scope of the TP Rules includes the supply and acquisition of intangibles. The TP Rules do not set out rules that apply to transactions involving intangibles specifically, nor has Revenue provided guidance on transactions involving intangibles in a transfer pricing context.
Ireland recognises the distinction between legal and beneficial ownership of intangibles. This distinction is often set out in contract between the parties. The appropriate pricing of transactions will necessarily involve an examination of these contractual agreements.
The TP Rules do not specify methodologies to be used in relation to intangibles. In practice, Revenue will follow the TP Guidelines; ie, the use of traditional transaction methods and transactional profit methods are acceptable.
The transfer pricing legislation does not specify a valuation method in relation to intangibles. The discounted cash flow, acquisition or capitalised cost method could be used. Revenue, in its guidance, states that robust documentation must be provided to support a valuation of “intangible assets”. The TP Rules do not specifically refer to the use of after-the-fact evidence to reprice a transaction that involves hard-to-value intangibles. However, Revenue will follow the guidance set out in Chapter VI of the TP Guidelines, which allows for the use of ex post evidence to determine an arm’s-length price in certain circumstances.
The introduction and application of Directive 2018/822 (DAC 6) means that cross-border arrangements involving hard-to-value intangibles between EU member states, or between EU member states and third countries, must be reported to Revenue and are subject to the automatic exchange of information between tax authorities. An arrangement must be reported within 30 days from the date on which the first step of the arrangement took place. In the case of persons advising on such arrangements, they must report within 30 days from the date on which the advice was given.
For the purposes of DAC 6, the term "hard-to-value intangibles" covers intangibles or rights in intangibles for which, at the time of their transfer between associated persons:
DAC 6 took effect from 1 July 2020, but applies to arrangements that were first implemented on or after 25 June 2018. Ireland exercised a right to defer reporting obligations that commenced in January 2021.
The TP Rules do not specifically legislate for cost contribution arrangements. However, cost sharing and cost contribution arrangements are often encountered in practice. The TP Rules are aligned with the TP Guidelines, and therefore the interpretation of cost sharing and cost contribution arrangements in the context of the TP Rules will be in line with the TP Guidelines. There is, as yet, no case law in Ireland discussing this issue.
A taxpayer may make a transfer pricing-related adjustment after filing a tax return. The rules around making such an adjustment depend on the context in which the adjustment is made.
If the adjustment is made prior to a Revenue compliance intervention, the taxpayer may seek to “self-correct without penalty” provided that the correction is made within 12 months of the due date for the relevant return and a payment of the additional tax accompanies the correction. A taxpayer will not be able to self-correct without penalty if Revenue has contacted the taxpayer in relation to any type of Revenue compliance intervention or where the self-correction relates to an instance of deliberate behaviour that featured in a period prior to the period to which the self-correction relates.
A taxpayer may also seek to correct an innocent error that is not deliberate in nature and the error cannot be attributed to the taxpayer failing to take reasonable care to comply with their tax obligations. Similarly, Revenue may also allow a technical adjustment, which arises due to differences in the interpretation or application of the Irish tax rules. Revenue will not allow a technical adjustment where the issue relates to a matter that is well established in case law/precedent.
A taxpayer may also make a “qualifying disclosure” to Revenue. A qualifying disclosure is made in writing and must include a payment of tax and any interest owed. Any penalties owing will usually be agreed between the taxpayer and Revenue. A qualifying disclosure may be prompted or unprompted.
A prompted disclosure is a disclosure that is made following notification of a Revenue audit but before the audit commences, whereas an unprompted disclosure is one that is made by a taxpayer before any notification of an investigation or audit is received.
The quantum of any penalty payable to Revenue following a qualifying disclosure depends on the nature of the disclosure (ie, prompted or unprompted), category of behaviour (careless or deliberate), the level of co-operation by the taxpayer with Revenue and whether the taxpayer had made any previous disclosures.
While a taxpayer may amend tax returns, a taxpayer may not take a deduction for an expense that arises as a result of a transfer pricing adjustment in another jurisdiction. Instead, a taxpayer must rely on any reliefs that may be available pursuant to the relevant double tax treaty, such as a mutual agreement procedure (MAP) or a correlative adjustment.
All tax treaties into which Ireland enters contain a provision through which the contracting countries agree to exchange information. Some tax treaties into which Ireland has entered are aligned with the OECD Model Tax Treaty, which includes provisions on the exchange of information between tax authorities for the purposes of each states’ domestic laws. In addition, Ireland has entered into information exchange agreements with certain states.
Ireland has also ratified the Convention on Mutual Administrative Assistance in Tax Matters, which contains articles on the exchange of information in tax matters between signatory states.
The EU Directive on Mutual Assistance for the Exchange of Information (2011/16) and the EU Directive on Mutual Assistance for the Recovery of Claims Relating to Taxes, Duties and Other Measures (2010/24) are applicable in Ireland and provide for the exchange of information and mutual assistance between member states in relation to taxation. The use of the directives on exchange of information has become increasingly prevalent in the EU in recent years.
DAC 6 also provides for the automatic exchange of information on arrangements that are potentially aggressive, both between member states and between member states and third-party countries. Certain categories of transactions that involve transfer pricing are caught within the DAC 6 reporting requirements, namely:
DAC 6 took effect in Ireland on 1 July 2020 under Part 33 of the TCA, but the reporting obligations were deferred to January 2021 for commencement.
Ireland also exchanges information on country-by-country reports, advance pricing agreements and financial account information under the Foreign Account Tax Compliance Act and the Common Reporting Standard.
Further, Ireland is subject to international agreements on the exchange of country-by-country (CBC) reports pursuant to the Multilateral Convention on Mutual Administrative Assistance in Tax Matters and the Multilateral Competent Authority Agreement for exchanges of CBC reports (CBC MCAA). The CBC MCAA provides for the automatic exchange of information of CBC reports of multinational enterprise (MNE) groups between signatory states in which the MNE groups operate. As of January 2021, Ireland has 64 bilateral relationships activated under the CBC MCAA or exchanges under the EU Council Directive (2016/881/EU) and under bilateral competent authority agreements.
The OECD Global Forum on Transparency and Exchange of Information for Tax Purposes published a peer review report in 2017 on Ireland’s exchange of information processes. The report showed that there is satisfaction with the quality and timeliness of the information provided by Ireland under these processes. Ireland is rated "compliant" in terms of the exchange of information between tax authorities.
Ireland’s bilateral advance pricing agreement (APA) programme has been effective since 1 July 2016. It replaced Revenue’s ad hoc APA approach. The formalised APA programme provides certainty and clarity to taxpayers when applying for and operating under a bilateral APA. Revenue has also published and recently updated guidelines on bilateral APAs.
Bilateral APAs are, in practice, more common than multilateral APAs. Revenue has confirmed that it will not enter into unilateral APAs.
Revenue administers the programme for APAs in Ireland. In its Role of the Competent Authority guide, Revenue emphasises its importance in relation to APAs.
There is co-ordination between the APA process and MAPs. Access to the APA programme is subject to the MAP terms in the applicable double tax treaty.
In relation to the negotiation of APAs, Revenue adheres to the best practice set out in Communication 2007/71 on Guidelines for Advance Pricing Agreements within the EU and the accompanying report.
The types of taxpayers who can apply for an APA are limited to a company tax resident in Ireland or a permanent establishment of a non-resident country.
Revenue will, in practice, only accept a request for an APA for transactions in which a significant amount of Irish tax is potentially at issue, a fundamental principle is being considered, or if the transaction is complex or involves a high likelihood of double taxation arising in the absence of an APA.
A taxpayer’s APA request should be submitted before an audit process begins, and in advance of the first accounting period to be covered by the APA. However, Revenue, in its guidance, states that it will agree to an APA that covers a prior accounting period, a "rollback period".
There is no fee payable for applying for or concluding an APA.
An APA will be granted for a specific period, typically for three to five years. The APA period cannot exceed five years (excluding rollback periods).
Where APAs have been sought for transactions that are already occurring, rollback periods may be applied by Revenue.
The TP Rules provide that taxpayers must prepare transfer pricing documentation. There is currently no requirement to file transfer pricing documentation with Revenue. However, the TP Rules contain provisions for penalties that apply where a taxpayer fails to provide Revenue with transfer pricing documentation following a request from Revenue.
A penalty of EUR4,000 will apply where a taxpayer fails to provide Revenue with its transfer pricing documentation within 30 days of a written request by Revenue. If the taxpayer is of such a size that they are required to prepare a local file, the penalty is increased from EUR4,000 to EUR25,000 and EUR100 for each day the failure continues. The increased penalty applies to failure to provide any of the transfer pricing documentation, as opposed to a failure to provide the local file specifically.
In the event of a transfer pricing adjustment, this will not give rise to other tax-geared penalties contained in the TCA where:
The TP Rules require the preparation of a master file and local file in accordance with the OECD Guidelines for taxpayers meeting certain thresholds. The requirement under the TCA to submit a country-by-country report applies to Irish-headquartered MNEs or MNE groups with annual consolidated group revenue of EUR750 million or more.
Ireland’s TP Rules are closely aligned with the TP Guidelines. The TP Rules explicitly state that they are to be construed in accordance with the TP Guidelines. Moreover, the Minister for Finance may designate that the TP Rules be construed in accordance with further OECD guidance.
Ireland’s TP Rules fully apply the arm’s-length principle in accordance with the TP Guidelines and do not recognise the use of a formulary approach, for example.
Ireland is fully engaged in the BEPS project, which has clearly influenced many of the changes in the Irish tax and transfer pricing landscape in recent years.
The TP Rules align with the requirements set out in the TP Guidelines, as amended by the work of the BEPS project.
Country-by-country reporting requirements under BEPS Action 13 form one of the four BEPS minimum standards. Ireland enacted new country-by-country reporting regulations (SI No 629 of 2015) to implement the recommendations as set out in the BEPS Action 13 Final Report.
The TP Rules have introduced the requirement for taxpayers to prepare and maintain a master file and local file, as recommended under BEPS Action 13.
Ireland has committed to implementing the BEPS Action 14 Final Report: Making Dispute Resolution Mechanisms More Effective minimum standard, and having this standard reviewed by other member states. Ireland’s peer-reviewed report on this matter was published in August 2018. Moreover, Ireland, as a member of the EU, is subject to the EU dispute resolution directive (Council Directive (EU) 2017/1852). The directive was transposed into Irish law in 2019 and provides taxpayers with the right to request a so-called EU MAP between member states. A taxpayer has three years in which to request a MAP and if initiated, all other related MAPs (ie, one commenced under the relevant double taxation agreement, or DTA) must be concluded.
The TP Rules do not attempt to deal with specific areas of discussion on the application of the arm’s-length principle. Rather, the TP Rules incorporate the TP Guidelines and questions regarding the appropriate allocation of risk will be determined based on the application of the TP Guidelines to the particular scenario, including a review of the contractual terms underpinning the arrangement, such as guaranteeing a return for a particular entity in an arrangement.
The transfer pricing legislation does not rely on or reference the United Nations Practical Manual on Transfer Pricing.
The TP Rules do not specifically provide for any safe harbours. However, as the TP Guidelines are explicitly incorporated into the TP Rules, Chapter VII of the TP Guidelines on "low value intra-group services" also form part of the TP Rules. In this context, Revenue follows the guidance contained in Chapter VII of the TP Guidelines when determining an arm’s-length charge for such services. Revenue notes in its guidance that it will accept a mark-up of 5% of the cost base of a low-value intra-group service without requiring a taxpayer to carry out a benchmarking study to support the rate.
DAC 6 contains the requirement that arrangements involving the use of unilateral safe harbour rules will be reportable and subject to automatic exchange of information. DAC 6 has been implemented in Ireland and arrangements from 1 July 2020 are reportable. Revenue has published guidance on the implementation of DAC 6 in Ireland.
The TP Rules do not specifically refer to location savings and there is no Revenue guidance or established practice in this regard.
The TP Rules provide that certain arrangements between associated Irish entities should not be subject to the TP Rules. In order to qualify for the exemption, both parties to an arrangement must be Irish taxpayers and one or both must not enter the transaction in the course of a trade. Where one party enters the transaction in the course of a trade, the TP Rules will apply to that party; however, the TP Rules do not extend to the counterparty provided the counterparty qualifies for the exemption. The Finance Act 2020 amended the exemption to provide for clearer application to certain qualifying loan arrangements between Irish suppliers and acquirers. The updated exemption is subject to a ministerial commencement order and, as such, the exemption as introduced pursuant to the Finance Act 2019 continues to apply. The legislation implementing this exemption is complex and is causing some confusion in practice as to the ambit of the exemption.
Small and medium-sized enterprises (SMEs) are technically within the scope of the TP Rules; however, the relevant legislative provisions, applying the TP Rules to SMEs, must first be commenced by the Minister for Finance. In this regard, SMEs are not currently subject to the TP Rules. The definition of SMEs is based on the EU Commission Recommendation of 6 May 2003 (OJ No L124, 20 May 2003) and includes groups of companies where the groups employ less than 250 employees and either have a turnover of less than EUR50 million or assets of less than EUR43 million. The economic interests of controlling shareholders are also taken into account when applying this test.
The TP Rules do not give a definition for customs duty and there is no general legislation or guidance from Revenue on the co-ordination between transfer pricing and customs valuation. Therefore, the TP Rules apply in the same manner as they do to other related-party transactions.
Customs duty is based primarily on the value of the goods, as well as the origin and type of goods. The value of the goods will usually be determined by the transaction value; ie, the invoice price plus cost of transport, insurance, and other payments to be made. If the transaction value is not available, Revenue provides a hierarchy of other valuation methods.
A transfer pricing adjustment may present facts that affect a valuation for customs duty purposes, and in those cases the customs authorities should be notified.
Revenue is ultimately responsible for tax and customs duty in Ireland, and therefore where issues arise, Revenue may make further enquiries.
Revenue has established a "transfer pricing unit" (TPU). The TPU will conduct reviews of taxpayers’ transfer pricing by way of an "aspect query" or formal audit.
An aspect query is used to target a specific risk reported on Revenue’s risk review system. The TPU will request detailed information on the taxpayer’s business to support its transfer pricing self-assessment. The TPU may conduct functional interviews as part of this process. It operates similar to a formal audit, but is not regarded as equivalent as it is intended to be more collaborative in nature. Nevertheless, either the aspect query or audit process may result in an amended assessment to tax in Ireland.
An appeal against a transfer pricing adjustment is made in the same manner as appeals against other tax assessments. An appeal is made to the Tax Appeals Commission (TAC) against the assessment under the relevant provisions of the TCA. TAC decisions are final unless the case is stated to the High Court on a point of law. Cases cannot be brought before the High Court on questions of fact. Appeals from the High Court are made to the Court of Appeal, and from there to the Supreme Court. As of the date of this chapter, there have been no published decisions of TAC on the TP Rules (and, therefore, no decisions from the higher courts either).
A taxpayer does not have to pay the disputed tax before making an appeal to TAC. However, if the taxpayer does not pay the tax and subsequently loses the appeal, they will be subject to interest, and possible penalties, on a late payment.
No transfer pricing dispute has been heard by TAC or the Irish courts as yet, and therefore there is no developed domestic judicial precedent system on transfer pricing. However, the TPU is actively involved in a number of transfer pricing audits and it is inevitable that a case will come before the courts in due course.
There are no significant court rulings on transfer pricing in Ireland.
The TP Rules do not restrict outbound payments relating to uncontrolled transactions.
However, other provisions of the TCA provide that payments such as royalties or interest may be subject to Irish withholding tax (WHT) unless an exemption is available. The TCA provides for broad exemptions from WHT, such as where the payments are between group members or where the payments are made to a recipient that is resident in a jurisdiction with which Ireland has concluded a double tax treaty. Moreover, some of Ireland’s double tax treaties provide that no WHT or a reduced rate of WHT applies to certain payments.
The TP Rules apply in the normal manner to outbound payments between associated entities and the same WHT considerations as detailed in 15.1 Restrictions on Outbound Payments Relating to Uncontrolled Transactions also apply.
A taxpayer will be denied a deduction for any payments made to a connected person resident outside of Ireland in the context of a transfer pricing adjustment made to the connected person’s profits. This rule applies both to payments to double tax treaty jurisdictions and non-double tax treaty jurisdictions. A deduction will only be allowed where relief is obtained under the relevant DTA.
Information submitted to Revenue in connection with an APA or transfer pricing audit is treated as confidential. Revenue publishes certain aggregated statistics in its annual report on APAs, and also provides statistics to the European Commission on APAs in Ireland. This information may be made public by the European Commission, but reported in such a way that does not identify the taxpayer. Revenue’s annual report also contains aggregated statistical information on the number of transfer pricing audits conducted and the outcomes. Revenue noted in its 2019 annual report that 24 transfer pricing audits had been initiated by the end of 2019; as at the date of publication, figures for 2020 had not yet been released.
Revenue will apply the general guidance in the TP Guidelines in determining the appropriate use of comparables. In practice, Revenue would not support the use of secret comparables, which aligns with the TP Guidelines.
The OECD has published guidance on the transfer pricing implications of the COVID-19 pandemic. As the TP Rules and Revenue’s approach to transfer pricing is closely aligned with that of the OECD, this guidance will likely inform the response to the changing landscape in Ireland as a result of the pandemic. Revenue has not published guidance on the specific impact of COVID-19 on the TP Rules.
There continues to be increasing audit and compliance intervention activity in Ireland irrespective of COVID-19 as Revenue works remotely to continue its investigation activities.
Revenue has implemented a number of policies or approaches with the intention of relieving some of the challenges that the COVID-19 pandemic has placed on businesses. For example, suspension on interest for late payments for taxes for SMEs, debt warehousing schemes for tax liabilities and reduction of the rate of VAT.
Revenue also extended the filing deadline for tax returns for 2019. Where returns were filed late, Revenue clarified that penalties will not apply where returns are late due to COVID-19. Revenue will also waive interest for late payment in certain instances, on a case-by-case basis.
Revenue has provided updated restrictions in relation to the tax residency status of individuals in Ireland who are unable to move jurisdiction due to COVID-19, and also where an individual is unable to return to Ireland for tax purposes.
Revenue has revised and amended its guidance on audits and investigations. Revenue will conduct certain enquiries remotely where possible, and visits to premises will only be made where unavoidable and COVID-19 guidelines can be adhered to. Aspect queries by the TPU will generally operate as normal.
Audits and aspect queries by Revenue have not stalled. However, Revenue has recently updated its guidance on the operation of these functions to account for the COVID-19 pandemic. Where possible, operations will be conducted remotely and on-site investigations will be limited. This may create administrative delays with the progress of audits.