KPMG partner Conor O’Sullivan (pictured) analyses the complex Budget provisions on transfer pricing

Transfer Pricing

The minister reiterated previous commitments to undertake a review of Ireland’s transfer pricing (TP) regime during 2019. Any changes arising from the review will likely take effect from 1 January 2020. The changes will include formally adopting the OECD’s 2017 TP Guidelines. Ireland currently applies the OECD 2010 TP guidelines under domestic legislation. 

The public consultation will give further consideration to a number of TP matters including:

• Extending Ireland’s TP to non-trading and capital transactions (although for the latter there are already relevant provisions in effect);
• Ending the exclusion from TP of arrangements in place prior to 1 July 2010 under existing grandfathering provisions;
• Whether the TP rules should be applied to SMEs and if so, what de minimus thresholds should apply, including possibly reduced documentation requirements e.g. related to the preparation and filing of the Master File and Local File;
• If the new OECD 2017 TP Guidelines should be applied to past transactions;
• obligations relating to TP documentation;
• Any additional changes to Ireland’s tax regime that may be needed to ensure TP rules are fully effective in ensuring tax is paid where value is created;
• The potential introduction of TP rules to the taxation of branches in Ireland, in line with the Authorised OECD Approach.

There is a commitment from policy makers that any changes will be made in a careful, considered manner as one coherent package. 

What Will The Changes Mean?

Reform of the Irish transfer pricing rules could have a significant impact on taxpayers. 

In Association with

Applying transfer pricing requirements to non-trading transactions would impact many intra-group financing arrangements and arrangements for licensing intangible property. Given the difference in tax rates with non-trading income being taxed at 25%, this could give rise to unexpected and inequitable tax liabilities on domestic arrangements. 

Businesses should review and identify group arrangements (whether domestic or cross-border) where transfer pricing adjustments are not made because the transaction is non-trading. Alternatives to existing (intra-group arrangements) might include centralising intra-group arrangements and related infrastructure, and carrying on intra-group lending, treasury and other support activities as an Irish trade taxed at 12.5%.

Adoption of the 2017 OECD TP guidelines could affect the transfer pricing of intangible assets, the split of profits in a global supply chain and the allocation of profits to branches. 

Those guidelines, when dealing with transfer pricing for intangibles, provide greater clarity on attributing profits to the value added by key decision-makers. Understanding where decision-makers are located and how key risks are controlled is an important step in understanding if the approach to the recognition of profits in a particular local jurisdiction is appropriate. 

In practice, the 2017 OECD TP Guidelines are automatically applied in relation to any international transfer pricing matters that are the subject of dispute resolution mechanisms under relevant double tax treaties. Any retrospective implementation to past transactions would be largely unnecessary.

CFC legislation is to be introduced from 1 January 2019 which will potentially impose a charge to Irish tax on the income of foreign subsidiaries in certain restrictive circumstances. This charge can apply where significant people functions related to the underlying assets/income are exercised in Ireland and where the essential purpose of the arrangements is a tax advantage. 

While the CFC provisions should not have broad application, where they do apply, the identification of these significant functions and the calculation of any potential amount chargeable to tax is to be determined based on OECD transfer pricing principles.

Extending transfer pricing and documentation requirements for SMEs could create a significant and unnecessary administrative burden for Irish business. Many countries apply a generous de minimus threshold to minimise this risk. 

It is also intended to enact regulations to give effect to the EU Dispute Resolution Directive, thereby allowing taxpayers an additional forum for resolving intra-EU disputes on transfer pricing. This can be a very effective approach in practice to resolving difficult and protracted disputes and has been applied successfully in other countries. 

Transfer pricing is without doubt the single biggest area of potential dispute and source of controversy for many taxpayers. The revision and clarification of OECD transfer pricing principles in certain key areas has been at the very core of international tax changes. It is clear the reform of Ireland’s transfer pricing regime will significantly impact upon Irish based businesses.