Domestic exemptions from transfer pricing rules – welcome clarification

Finance Act 2019 provided for an exemption to transfer pricing rules for certain domestic non-trading transactions.

However, uncertainty arose as to the application of the exemption, in particular to transactions that did not include consideration passing (e.g. interest-free loans or the rent-free use of property between connected parties). This led to a re-drafting of the section relating to the matter in the Finance Act 2020. Nevertheless, due to the uncertainty and concerns raised by a number of professional bodies and practitioners on its re-drafting, the commencement of the section was made subject to ministerial order.  This has never been made which meant that the principles set out in Finance Act 2019 have remained in force since 01 January 2020.

Finance Bill 2021 includes draft legislation intended to provide clarity on the scope of the exemption for non-trading Ireland to Ireland transactions (trading transactions remain subject to transfer pricing rules).

Key points relating to the exemption

The draft legislation proposes the following:

  • Certain non-trading domestic transactions will be exempt from the scope of Irish transfer pricing provided both parties are chargeable to Irish tax in respect of the transaction or would be chargeable to Irish tax if consideration was charged/passed. Consideration is not required to be exchanged in order for the exemption to apply.
  • The supplier can avail of the exemption if any consideration, received or receivable, would be chargeable under Schedule D, Case III to V i.e. the higher rate of corporation tax.
  • The acquirer can avail of the exemption if any consideration, paid or payable, would be either be deductible in computing profits of the acquirer or chargeable to corporation tax under Schedule D.
  • A number of anti-avoidance provisions apply to the exemption such as the exemption will only apply to:
    • an arrangement entered into for bona fide commercial reasons or
    • an arrangement where the main purpose or one of the main purposes, of the arrangement is not the avoidance of tax.
  • It should be noted that where the exemption is availed of, documentation should be kept to support the basis of the exemption.

The amended exemption will apply for chargeable periods beginning on or after 01 January 2022. There is still uncertainty as to the scope of the exemption for accounting periods which commenced prior to this date.

It should be noted that Finance Bill 2021 has not been signed into law and therefore the above is subject to change.

Attribution of profits to an Irish branch

The Authorised OECD approach (AOA) seeks to attribute to a permanent establishment or branch the profits that it would have earned at arm’s length if it were a separate company, i.e. the branch and the remainder of the company would be treated as distinct entities for tax purposes.

The new AOA provisions inserted by Finance Bill 2021 will apply these transfer pricing rules for the attribution of income to an Irish branch of a non-resident company to accounting periods beginning on or after 01 January 2022.  The implementation of the AOA in respect of small and medium enterprises is subject to ministerial order, which is keeping in line with Ireland’s general transfer pricing rules.

A company carrying on a trade-in Ireland via a branch will be required to keep records detailing various items including but not limited to:

  • The business of the branch and its organisational structure
  • The attribution of assets, capital and risk to the branch
  • A description of the transfer pricing methods used in respect of transactions between branch and the remainder of the company.

Penalties may apply where there is a failure to provide branch records to Revenue on request.

The requirement to keep records as outlined above will not apply where the company is a small enterprise or where the company is a medium enterprise and the income attributable to the branch is less than €250,000 in the accounting period.

If you have any questions in relation to the above, or if you would like to discuss this topic further, please contact a member of the Mazars corporate tax team below:

Staff Member

Position

Email

Telephone

Cormac Kelleher

Tax Partner

ckelleher@mazars.ie

01 449 4456

Aisling Curran

International and Corporate Tax Senior Manager

acurran@mazars.ie

01 449 6439

 

December 2021