Recently Ireland’s Revenue Authorities released Part 35A-01-01 and Part 35a-01-02 of their Tax & Duty Manual (the “Tax Manual”), which deal with Transfer Pricing and Transfer Pricing Documentation Obligations, respectively. These new section in the Tax Manual are aimed at providing guidance to Irish taxpayers on the application of the Arm’s Length Principle and the new transfer pricing rules introduced by Finance Bill 2019.
Background
Ireland’s Finance Bill 2019 introduced significant changes to the Irish transfer pricing rules, principally updating the Irish legislation to refer to the 2017 OECD Transfer Pricing Guidelines, widening the scope of Irish transfer pricing rules to include non-trading and certain capital transactions, removing grandfathering, and adopting the documentation requirements as set out in the OECD BEPS Action 13 on Transfer Pricing Documentation.
In order to clarify the application of the new rules, Irish Revenue Authorities have released on February 2021 the following section in the Tax Manual:
- Part 35A-01-01 – Transfer Pricing
- Part 35A-01-02 – Transfer Pricing Documentation Obligations
- Part 35A-01-03 – Guidelines on Low Value Intra-Group Services for tax years commencing on or after 1 January 2020 (for the tax years, a section is included in Part 35A-01-01)
Adaptation to the 2017 OECD Transfer Pricing Guidelines
An important and significant change in lrish TP regime is the adaptation to the 2017 OECD TP Guidelines. This adaptation is not only limited to the TP documentation obligations (Master File & Local File approach), but also incorporated the Guidance on Hard-to-Value Intangibles and the revised guidance on the application of the Transactional Profit Split Method.
In line with the 2017 OECD TP Guidelines, the accurate delineation of the arrangements and accordingly the substance of related-party transactions will be in the center of the transfer pricing analysis. The Tax and Duty Manual confirms that intercompany transactions can be disregarded and, if appropriate, replaced by an alternative transaction where the identified arrangement – viewed in its totality – differs from an arrangement that would have been entered into by independent parties under similar circumstances. However, the Tax and Duty Manual explicitly states that such a re-characterization may be considered only in exceptional circumstances, which aligns the legislation with the 2017 OECD TP Guidelines.
Additionally, the 2017 OECD TP Guidelines places significant emphasis on aligning substance with value creation. This includes the introduction of the so-called DEMPE (Development, Enhancement, Maintenance, Protection, Exploitation) functions relating to intangible property, and guidance around the appropriate allocation of risk between related parties and its impact on the allocation of profits.
Transfer pricing documentation requirements
Finance Act 2019 introduced BEPS Action 13-compliant documentation requirements (Master File and Local File) into Irish law. The requirement to prepare the files is subject to de minimis group turnover-based thresholds (€250m for Master File and €50m for Local Files).
Further to the description of the minimum content requirements of transfer pricing reports, the Tax and Duty Manual explains how frequently those should be revised. lt clarifies that transfer pricing documentation may be carried forward from one year to the next to the extent that facts and circumstances are materially unchanged, but information showing how the transfer pricing policy was applied in each period should be updated annually.
The Tax and Duty Manual also clarifies that Irish Revenue generally will expect a full benchmarking analysis to be prepared every three years and for the financials of the accepted comparables to be updated or refreshed at least annually, for a Transactional Net Margin Method (TNMM).
Importantly, the Tax and Duty Manual gives further background on the application of penalties should a taxpayer fail to meet the above requirements and elaborates on how it can be demonstrated that reasonable efforts have been made to avail of the penalty protection measures.
The Manual also clarifies that the previous guidance on low value intra-group services (Revenue eBrief No. 37/18) now has been superseded by the guidance in Section D of Chapter VII of the 2017 OECD Guidelines for accounting years commencing on or after January 1, 2020, both in terms of the applicable mark-up (5%) and the documentation requirements.
Finally, the Tax and Duty Manual identifies and discusses several simplification measures intended to help minimize the burden of compliance on taxpayers, including the aggregation of smaller transactions, the use of a single «Country File» instead of several entity-level local files, and the use of transfer pricing documentation prepared by counter-parties and held outside of lreland.
Debt capacity
The Tax and Duty Manual gives guidance on application of the «Transfer Pricing Guidance on Financial Transactions,” published by the OECD in February 2020, which will form part of the OECD Transfer Pricing Guidelines. Irish Revenue (at section 4.4.2 of the Tax and Duty Manual) confirms that «while this guidance has not yet been implemented into lrish law and is subject to a future Ministerial Order, it will be considered as best practice by Revenue when analysing transfer pricing issues associated with financial transactions.» Additionally, Revenue is of the opinion that the guidance provides direction on how to apply the approach set out in Chapter 1, D.1 of the 2017 OECD Guidelines to Financial Transactions.
Accordingly, in addition to seeking to price interest rates in accordance with the arm’s-length principle, MNE groups must be able to demonstrate that the debt capacity of the borrower and serviceability tests have been considered. The Tax and Duty Manual clarifies that this requirement is relevant for any interest deductions taken in financiat years ending after January 1, 2020, regardless of when the loan originated. The Tax and Duty Manual also notes that the debt capacity of a borrower should be considered at the time the arrangement was entered, which may raise similar challenges in relation to historical intercompany debt balances.
The Tax and Duty Manual also clarifies that for loans qualifying under section 247 of the Taxes Consolidation Act 1997 (TCA), debt capacity and serviceability tests will apply where the interest relates to, and is paid in, an accounting year ending after January 1, 2020 (i.e., it will not apply to interest accrued in prior periods and paid on or after January 1, 2020).
Capital transactions
Finance Bill 2019 also extended transfer pricing rules to capital transactions from 1st January 2020, but only where the capital expenditure incurred on an asset or the market value of an asset exceeds €25 million. The exclusion is subject to an anti-avoidance provision intended to prevent fragmenting an asset into separate assets to avoid the €25 million threshold. The Tax and Duty Manual clarifies that the transfer pricing rules apply where the event giving rise to the balancing allowance or balancing charge occurs on or after January 1, 2020 (irrespective of when the related expenditure was incurred).
Non-trading transactions
One significant change put forward by Finance Bill 2019 was the extension of transfer pricing rules to non-trading arrangements. According to the new rules, non-trading transactions (except for a limited range of domestic transactions) are subject to transfer pricing rules from 1st January 2020. However, during the application of the new legislation, several practical questions have arisen that the Tax and Duty Manual attempts to clarify to provide additional guidance to taxpayers.
One of the most complex areas of the new transfer pricing rules proved to be the application of the domestic exemption provided for non-trading transactions. The Tax and Duty Manual clarifies that this exclusion does not include all domestic non-trading transactions. A non-trading transaction will be excluded from the new transfer pricing rules only if it meets certain, specific criteria, and the exclusion is itself also subject to anti-avoidance provisions.
The extension of transfer pricing rules to non-trading transactions has brought historic intercompany debt balances within the Irish transfer pricing regulations that to this point had been disregarded. Given the historic nature of these loan balances, the Tax and Duty Manual acknowledges the potential difficulties in tracing their origins and confirms that where it is not possible to trace the origin of each movement, the balance should be treated as arising from the earliest date for which reliable information is available.
Grandfathered transactions
When first introduced in 2010, transfer pricing legislation did not apply in respect of transactions the terms of which were agreed before 1st July 2010 (i.e., ‘grandfathered transactions’). Finance Act 2019 extends transfer pricing rules to previously grandfathered transactions for tax years beginning on or after 1st January 2020. While these transactions are subject to transfer pricing rules, exemptions from the documentation requirements are discussed in section 8.12 of the Tax and Duty Manual apply.
The Tax and Duty Manual notes that transfer pricing documentation requirements do not apply to pre-July 2010 arrangements if both the supplier and the acquirer are «qualifying relevant persons»; therefore, the exemption from documentation requirement would only apply in limited instances.
Small and medium enterprises (SMEs) simplification
In relation to SMEs, Finance Bill 2019 kept micro and small enterprises outside the scope of transfer pricing rules but set out the option for medium enterprises to be brought in under the rules through a future Ministerial arder. The Tax and Duty Manual clarifies the definition of SMEs as well as the specific requirements of the new rules and the exemption applicable for medium enterprises once the Ministerial arder is issued. These requirements include the medium enterprise to have transfer pricing documentation in place for a «relevant arrangement.»
A relevant arrangement is an arrangement between a medium enterprise andan associated person who is nota qualifying relevant person (as per the non-trading transactions paragraph above) and the consideration exceeds €1 million. A relevant arrangement also includes an arrangement between a medium enterprise and an associated person who is not lrish resident, where that arrangement involves the disposal or acquisition of a chargeable asset for the purposes of chargeable gains, the asset has a market value exceeding €25 million, and the asset ceases to be a chargeable asset in the case of a disposal or was not a chargeable asset befare its acquisition in the case of an acquisition.
The transfer pricing documentation required where there is a relevant arrangement is reduced and simplified, as compared to the transfer pricing documentation required to be provided by larger enterprises.
A medium enterprise will be required to have the following transfer pricing documentation available:
- A description of the business of the medium enterprise, including its organizational structure, business strategy, and key competitors, and, in relation to each relevant arrangement.
- A copy of all relevant agreements.
- A description of the transfer pricing method used and the reasons the method was selected, along with the evidence to support the price selected as being an arm’s-length amount.
- The amount of consideration payable or receivable under the arrangement; and
- A description of the functions performed, risks assumed, and assets employed.
