Ireland introduces transfer pricing rules - Mazars - Ireland

The introduction of transfer pricing rules in this year’s Finance Bill was inevitable given the maturity of the Irish tax system, the favourable corporate tax rate and the increasing level of scrutiny being brought to bear by fiscal authorities on measures that encourage profit shifting.

While Ireland did not until now have any formal transfer pricing rules, the arm’s length principle for transactions between connected parties has long been a feature of the Irish tax system. These rules bring Ireland into line with international tax standards in this area.

Main features of new rules

The rules come into force from 1 January 2011 for all arrangements agreed on or after 1 July 2010.

They will only apply to large companies and to trading operations involving the supply and acquisition of goods, services money or intangible assets. Income from passive activities such as rents, royalties and interest are excluded where such income is taxed at the 25% corporate tax rate. For most cases of interest- free inter-company loans, the new rules should not apply. The measures provide for an upward adjustment where sales are understated or expenses overstated in transactions between associated entities. The arm’s length test should be applied according to OECD transfer pricing principles.

The rules do not apply to small or medium-sized companies. The cut-off point is where there are less that 250 employees and either turnover is less than €50 million or assets are less than €43 million. Documentation will be required and must be prepared on a timely basis. There should be no need for incremental documentation where it already exists for the counterparty. Only specially authorised officials are empowered to make transfer pricing enquires and the Bill has no special measures dealing with penalties.

The cash flow implications of adjustments can be mitigated in the case of transactions between related parties where both are subject to tax in Ireland. The rules apply to both domestic and international transactions, to comply with EU requirements.

Planning

There is an opportunity to put arrangements in place or to review existing arrangements before 1 July 2010 as such arrangements will not come within the scope of the new rules. Future plans should be reviewed to see what agreements are likely over the coming year as it may be possible to put these in place before 1 July 2010.

Conclusion

These measures are seen as broadly positive from an Irish viewpoint. They should give support to multinationals with Irish operations and to the Irish Revenue Authorities in defending requests for transfer pricing adjustments that they consider to lie outside of the normal OECD guidelines. Far from deterring multinationals for whom transfer pricing is a permanent and necessary business consideration, this new regime should enhance Ireland’s suitability as a location for international business.

For further information, please contact members of our Transfer Pricing Team, Noel Cunningham or Aisling Curran or call 01 4494400.