The Irish Finance Act 2019 (‘the Finance Act 2019’) was signed on 22 December 2019 and has introduced new laws that will reshape Ireland’s Transfer Pricing Regime. The Finance Act has embraced the latest international tax standards which have resulted in a dramatic change in Irish tax law from 1 January 2020.
Finance Act 2019 is the conclusion to consultations and legislative considerations by the Department of Finance. Most of the legislation takes effect from 1 January 2020, although the expansion of scope to include small and medium-sized enterprises (‘SMEs’) has been deferred to a later date. Ireland’s Revenue Commissioners (‘Revenue’) has, since 2015, conducted audits to enforce transfer pricing legislation, which has been in force since 2011. The breadth of tax law updates introduced by Finance Act 2019 will influence how Revenue seeks to enforce transfer pricing legislation going forward and what documented evidence Irish business is meant to have ready on demand for Revenue inspections.
The new transfer pricing changes are listed below into eight distinct areas;
- Small and Medium Enterprise Exemption;
- Pre-July 2010 Arrangements (“Grandfathered” Arrangements);
- Re-characterisation of an arrangement;
- Excessive Payments and Deemed Distributions;
- 2017 OECD Guidelines;
- New Documentation Obligations;
- Extension to Capital Transactions;
- Extension of the new rules to include Non-Trading Transactions.
Small and Medium Enterprise Exemption
An SME employs fewer than 250 people and has either: (i) turnover not exceeding €50 million, or (ii) balance sheet values of less than €43 million. The legislation proposes to remove the current exemption for these businesses. Medium companies need only apply transfer pricing rules for cross-border arrangements above €1 million. Documentation obligations are also substantially reduced relative to the Master, and Local File framework mentioned earlier.
While it was proposed the transfer pricing rules will be extended to SMEs, the date of implementation is subject to Ministerial Order and will not apply from 1 January 2020.
Pre-July 2010 Arrangements (“Grandfathered” Arrangements)
Grandfathered arrangements agreed before 1 July 2010 are no longer exempt from transfer pricing rules in Ireland. The original purpose of the exemption was to ease the transition burden of transfer pricing compliance. It is not expected that many ongoing transactions in Ireland continue to claim this exemption, and hence few businesses, if any, will be affected by this change.
Re-characterisation of an Arrangement
Finance Act 2019 contains additional provisions aimed at curtailing the tax benefits of artificial arrangements. A provision allows Revenue to re-characterise an intragroup arrangement if it is demonstrated that the arrangement: (i) lacks the required substance (e.g. relevant people functions), and (ii) conflicts with commercial arrangements of independent parties.
Excessive Payment and Deemed Distributions
Where an Irish business pays an amount more than the arm’s length amount in connection with an intragroup transaction, then the legislation will deem the excess payment to be a distribution subject to a potential withholding tax unless an exemption is available.
2017 OECD Guidelines
Ireland’s transfer pricing regime will reflect the 2017 OECD Guidelines as a basis for determining the arm’s length price for intra-group transactions. Finance Act 2019 adopts the accepted practice into Irish domestic tax law, which previously referenced a 2010 version of the OECD Guidelines.
New Documentation Obligations
Larger businesses operating in Ireland must prepare an OECD standard Master and Local Files to evidence their compliance with transfer pricing rules.
An Irish business of any size will have an annual obligation to prepare a Local File if it is a member of a global group that has a turnover greater than €50 million. An Irish business will have a further Master File obligation if it is a member of a global group that has a turnover greater than €250 million. The Master File is a group-wide document that introduces a tax authority to the business, its transfer pricing policies and capital structure.
The Local File is a detailed document seeking to prove that all material intra-group transactions were executed using the arm’s lengths pricing. Businesses have 30 days to submit documentation to Revenue upon request, whereas three months was afforded previously. Failure to prepare and submit the required documentation will attract penalties of €25,000 or greater for larger businesses; or €4,000 for those companies under the €50 million threshold.
Businesses in scope for documentation requirements should bridge gaps with existing documentation to align with the latest OECD standards. A critical new item in the Local File is to reconcile transfer pricing policies to statutory accounts of the Irish entity.
Extension to Capital Transactions
Intra-group sales and purchases of assets will be subject to Ireland’s transfer pricing rules if the market value of the assets is more than €25 million. If valuations of those assets do not satisfy the OECD arm’s length standards, then Irish businesses can be exposed to further capital gains tax on sales or reduced capital allowance relief (i.e., tax depreciation) on acquisitions.
While Ireland’s tax regime contains pre-existing provisions about capital transactions, the extension of transfer pricing rules adds prescribed documentation obligations and compliance requirements for asset transfer transactions. In specific conditions, other provisions in tax legislation supersede transfer pricing rules, thereby, removing the arm’s length value requirement for pricing the relevant assets.
Extension of the New Rules to include Non-Trading Transactions
Transfer pricing rules in Ireland only apply to income earned or expenses incurred related to trade, i.e. in general terms, profits subject to the 12.5% tax rate. Transfer pricing rules will apply to Irish entities that are subject to tax, with a few exemptions. There has been pressure to discourage a form of non-trading transaction, referred to as Interest-Free Loans, granted by Irish companies to non-Irish affiliates. These arrangements can yield tax savings outside Ireland. Certain businesses now have until 31 December 2019 to identify and to execute their preferred alternative arrangement to the interest-free, intra-group lending that was the target of this legislation. Finance Act 2019 exempts non-trading transactions involving two parties both subject to Irish taxation, i.e. wholly domestic transactions, provided the arrangement has no tax avoidance motive or benefit.
The next steps?
Serious consideration needs to be afforded to the new legislative changes introduced in the Finance Act 2019 in respect of Transfer Pricing. The new rules are likely to impact all areas of Irish businesses in some manner and will undoubtedly need to be considered when implementing any new structures, inter-group transactions or cross bordered arrangements.
If you have any questions about the above, or if you would like to discuss this topic further, please contact a member of the Mazars corporate tax team below: -