1. Rules Governing Transfer Pricing
1.1 Statutes and Regulations
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 substantially amended by the Finance Act 2019 and then further amended by the Finance Act 2020, the Finance Act 2021 and the Finance Act 2022. Prior to the Finance Act 2019, transactions agreed before 1 July 2010 were outside the scope of the TP Rules; however, with effect for chargeable periods commencing on or after 1 January 2020, the TP Rules apply to transactions agreed before this date.
The Finance Act 2022 updated the definition of "transfer pricing guidelines" to refer to the 2022 version of the OECD Transfer Pricing Guidelines (the "TP Guidelines"), which incorporates the OECD's Revised Guidance on the Transactional Profit Split Method, Guidance for Tax Administrations on the Application of the Approach to Hard-to-Value Intangibles and Transfer Pricing Guidance on Financial Transactions.
Therefore, with effect from chargeable periods commencing on or after 1 January 2023, the TP Rules provide that the "arm's length amount" is to be determined in accordance with the 2022 version of 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 brief, the TP Rules provide that, 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 gains or overstated allowable losses or expenses – ie, the transaction was not at arm's length – the Irish Revenue Commissioners ("Revenue") may make an adjustment for tax purposes.
Revenue issued an updated version of their guidance on the TP Rules in December 2022 to provide clarity to taxpayers on the practical application of the TP Rules. Revenue issued further guidance in December 2023 regarding transfer pricing documentation requests. The guidance issued in December 2023 largely reiterates the existing statutory requirements and the processes set out in the Code of Practice for Revenue Compliance Interventions. However, it highlights the emphasis placed on transfer pricing documentation by Revenue and, from a taxpayer perspective, the importance of preparing robust transfer pricing documentation within the statutory time limits.
The guidance also serves as a reminder that compliance with the TP Rules can form part of Co-Operative Compliance Framework (CCF) annual risk review meetings. Where this is the case, the Revenue team may request a taxpayer's transfer pricing documentation as part of the CCF annual risk review meeting. The CCF is a co-operative framework for larger taxpayers that are typically within the scope of transfer pricing rules. The framework involves the taxpayers engaging regularly with Revenue to manage tax compliance on an ongoing basis.
1.2 Current Regime and Recent Changes Overview of Recent Changes
Ireland did not have an extensive transfer pricing regime prior to the introduction of the TP Rules as inserted by the Finance Act 2010.
The TP Rules were significantly altered by the Finance Act 2019, which implemented some important changes including:
- extension of the TP Rules to capture nontrading transactions (save for certain Irish-toIrish transactions) and certain capital transactions (where the market value exceeds EUR25 million);
- removal of grandfathering provisions relating to transactions that occurred prior to 1 July 2010; and
- the introduction of formalised documentation requirements for taxpayers in line with the requirements of the TP Guidelines (eg, a master file and local file in line with the TP Guidelines for certain taxpayers).
On 8 December 2021, Ireland's Minister for Finance signed a statutory instrument to formally incorporate into Irish law the OECD's 2020 guidance on the transfer pricing of financial transactions. Prior to this, the OECD's guidance on financial transactions had not yet been formally incorporated into Ireland's TP Rules. As noted, the OECD's latest edition of its TP Guidelines, issued on 20 January 2022, incorporates all supplemental guidance issued by the OECD subsequent to the 2017 edition of the TP Guidelines, and this is the version to be applied with respect to chargeable periods commencing on or after 1 January 2023.
The Finance Act 2021 introduced into the Irish TP Rules the application of the OECD development mechanisms (ie, the "authorised OECD approach") for the attribution of income to a permanent establishment of a non-resident company operating in Ireland for accounting periods commencing on or after 1 January 2022.
For accounting periods commencing on or after 1 January 2022, income attributable to a permanent establishment of a non-resident company operating in Ireland is to be computed as the amount of income which the permanent establishment would have earned if it were a separate and independent company engaged in the same or similar activities and under the same or similar conditions, taking into account the functions performed, assets used and risks assumed by the notionally separate company and the other parts of the non-resident company. In giving effect to the notionally separate company approach, the new rules are to be construed in so far as possible in a way that is consistent with Article 7(2) of the OECD Model and the guidance contained in the OECD Attribution of Profits to Permanent Establishments Report.
The Irish-to-Irish Exemption
The TP Rules apply to all transactions unless the transaction falls within the scope of the Irish-toIrish transaction exemption. This exemption was introduced in the Finance Act 2019; however, the introduced exemption gave rise to interpretative difficulties regarding its application. A number of amendments to the Irish-to-Irish exemption were included in the Finance Act 2020, though as these also gave rise to interpretative difficulties, they were ultimately never implemented. The Finance Act 2021 addressed the interpretative difficulties for chargeable periods commencing on or after 1 January 2022.
The treatment of Irish-to-Irish transactions has a separate rule as a result of Ireland's dual-rate system. Ireland operates two corporation tax rates:
- a 12.5% rate applies to trading transactions; and
- a 25% rate applies to non-trading transactions.
For example, interest on an intercompany balance could be taxable at 25% as non-trading income in one group company and deductible at 12.5% (or not at all) in another group company. Therefore, the rule for Irish-to-Irish transactions ensures that the TP Rules do not give rise to negative tax arbitrage within the Irish tax system.
Accordingly, for the Irish-to-Irish exemption to be satisfied:
- each party's Irish tax computation must take account of any consideration payable/receivable;
- where there is no consideration, each party's Irish tax computation must take account of the consideration if any were charged;
- the supplier to the transaction (eg, a lender under a loan agreement) must not have entered into the transaction in the course of a trade; and
- neither party to the transaction can be a "Section 110" company (ie, a securitisation company qualifying for treatment under Section 110 of Ireland's tax code).
Where an acquirer to a transaction (eg, a borrower under a loan agreement) cannot satisfy the hypothetical test in the second condition above, there is a further carve-out which examines the activities of the acquirer in the course of entering into the transaction. The carve-out looks at whether such activities give rise to, or are capable of giving rise to, taxable profits, gains or losses (including tax-exempt dividends) for the acquirer, directly or indirectly.
Updated Revenue Guidance was introduced to provide further clarity on the relevant provisions. Helpfully, the Revenue Guidance confirms that, for chargeable periods which commenced on or after 1 January 2020 and before 1 January 2022,
Revenue will accept returns which are filed in accordance with the Irish-to-Irish exemption in accordance with the Finance Act 2021. The clarified exemption is a welcome development on the initial iteration of the exemption and should provide greater certainty to taxpayers going forward.
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Originally Published by Chambers And Partners
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