Transfer Pricing Adjustments - The Current Irish Landscape
September, 21st 2017
The work of the OECD, the EU State aid investigations, public perception and the hunt for public funds by various Governments, mean that transfer pricing disputes will likely increase over the coming years. At any given time, multinational companies are now the subject of transfer pricing audits in numerous jurisdictions, with the potential for related transfer pricing adjustments. Taxpayers need to determine the appropriate allocation of their resources in prevention (developing and documenting transfer pricing policies, seeking advance pricing agreements ("APAs") and defence (dealing with transfer pricing audits globally). Country by country reporting and exchange of information provisions also mean that group arrangements cannot be dealt with in isolation and global tax departments need to develop a holistic and centralised view to transfer pricing policies adopted, and any transfer pricing adjustments agreed with tax authorities.
Irish taxpayers within multinational groups are increasingly involved in the new wave of transfer pricing disputes. In that respect, these taxpayers need to consider (i) their compliance with the Irish transfer pricing rules to avoid an Irish transfer pricing adjustment; and (ii) the ability to seek relief for, or avoid, adjustments by other tax authorities that ultimately impact on the Irish tax position.
Irish domestic transfer pricing rules
Ireland introduced formal transfer pricing rules in 2010 which, broadly, apply an arm's length standard to trading transactions between associated companies. The arm's length standard is to be construed in accordance with the OECD Transfer Pricing Guidelines. Ireland has not yet adopted the changes to the OECD Transfer Pricing Guidelines proposed by the report on Actions 8 – 10 (Transfer Pricing) of the OECD BEPS project, but it is expected that these will be incorporated into Irish law shortly.
The Irish Revenue Commissioners have also put in place the necessary structures to audit compliance with the Irish transfer pricing rules by establishing a standalone transfer pricing unit. Compliance with the transfer pricing rules was initially examined through relatively informal transfer pricing compliance reviews. However, the transfer pricing unit has now moved to conducting formal transfer pricing audits, with the potential for resulting Irish transfer pricing adjustments.
Irish taxpayers therefore need to review their intra-group arrangements to confirm the applicability of the Irish transfer pricing rules, and where applicable, ensure compliance with the arm's length standard. Taxpayers should have documentation available to support the pricing policies adopted. Compliance with either the EU or OECD transfer pricing documentation standards will be sufficient to meet this standard and the documentation does not need to be held in Ireland. While there is no specific legislative requirement to have contemporaneous documentation prepared, Irish Revenue have indicated that they would expect the relevant documentation to be in place at the time the taxpayer files the corporation tax return for the period in question (ie, 9 months after the end of the accounting period). The standard of documentation will be an influencing factor in determining the penalties (if any) to be applied on a transfer pricing adjustment identified in a subsequent audit.
An assessment to additional tax made pursuant to the Irish transfer pricing rules can be appealed by taxpayers in the normal manner applying to all Irish tax disputes. In the first instance, assessments are appealed to the Irish Tax Appeals Commission, with the ability to further appeal to higher courts. Given the relative infancy of the formal Irish transfer pricing rules there has been no court decisions on the rules at this point in time.
Foreign transfer pricing adjustments
Increased audit activity globally has resulted in increased transfer pricing adjustments. Irish taxpayers who are parties to arrangements that are the subject of such adjustments must then seek a corresponding adjustment against Irish taxation to avoid economic double taxation.
Irish tax legislation prohibits the taking of deductions for increased payments to associated companies arising from a transfer pricing adjustment for which relief may be available under a double taxation agreement ("DTA") (or similar adjustments where a DTA is not in place). Irish taxpayers cannot, therefore, simply put the adjustment through the current year accounts and claim a deduction. Rather, Irish taxpayers can only secure a corresponding adjustment, and avoid economic double taxation, pursuant to Ireland's international agreements. Broadly, taxpayers can request:
a) correlative relief where the relevant DTA contains an article equivalent to Article 9 of the OECD Model Convention ("Article 9");
b) relief under the Mutual Agreement Procedure ("MAP") Article of the relevant DTA (all of Ireland's DTAs contain a MAP Article); or
c) relief under the European Arbitration Convention.
Irish Revenue recently published guidance (the "MAP Guidance") outlining their approach to requests for corresponding adjustments and MAP, the related documentation requirements and relevant procedures to be followed in different circumstances. The MAP Guidance also specifically acknowledges that Ireland will accept correlative relief claims in the context of treaties which do not contain the Article 9(2) language, which is in line with the OECD recommendations on Action 14 of the BEPS project.
For both correlative relief and MAP requests taxpayers are expected to provide sufficient information to allow the Irish Revenue Commissioner's fully consider the request for relief and this would include underlying contracts, transfer pricing documentation, settlement agreements and an overview of the arguments raised by the taxpayer and foreign tax authority. The guidance highlights the importance of submitting a full and complete request in order to stop the clock on any relevant time limits in DTAs. Taxpayers must also undertake to provide any additional information requested by Irish Revenue in a timely manner.
In the context of correlative relief requests (in which the taxpayer is essentially seeking unilateral relief pursuant to Article 9 without engaging in a MAP process), taxpayers need to be in a position to demonstrate why the pricing agreed with the foreign tax authority represents an arm's length amount. Care needs to be taken when agreeing negotiated settlements with foreign tax authorities to ensure that any final agreement is based on a principled arm's length approach that can be demonstrated to the Irish Revenue Commissioners.
While additional resources have been allocated to the Irish Revenue Commissioners to deal with requests for relief from double taxation arising from transfer pricing adjustments, taxpayers should anticipate that the process may take at least 2 years (and may be longer in complex cases).
Ireland has adopted the recommendations in the Report on Action 14 (Dispute Resolution) of the OECD BEPS project. It is hoped that a broad based adoption of these recommendations globally, together with the peer review, will lead to a more efficient process to resolving transfer pricing disputes. In particular, Ireland was one of the few countries that adopted the mandatory binding arbitration provisions in the OECD Multi-lateral Instrument, indicating Ireland's desire to make the process more efficient.
Advance Pricing Agreements
Taxpayers are looking to APAs in order to provide certainty for material intra-group trading relationships. The Irish Competent Authority has always been open to entering into bilateral advance pricing agreements. Historically this was through the application of the relevant Mutual Agreement Procedure article in the relevant DTA. In 2016, Ireland adopted a formal Advance Pricing Agreement programme ("APA Guidance"). Ireland will consider requests for both bi-lateral and multi-lateral APAs, but there is no provision for unilateral APAs.
The APA Guidance specifies the documentation and information that must be provided to the Irish Competent Authority in order to consider a request for an APA. The Irish Competent Authority is not obliged to accept a request for an APA. In practice, it can be helpful to hold a pre-filing meeting for complex APA requests to allow the taxpayer and the Irish Competent Authority to identify any high level issues which can then be dealt with in the subsequent formal APA request.
In theory the ability to obtain the agreement of two tax authorities on the pricing for a material intra-group trading relationship should provide the certainty that tax and finance departments are seeking. In practice, however, the APA process can be lengthy and the period to which the APA relates can be well under way by the time an agreement (if any) is reached.
Ireland is simply a part of this new global emphasis on transfer pricing. There is now the potential for transfer pricing adjustments to be raised by the Irish Revenue Commissioners. While taxpayers seeking relief in Ireland in respect of an adjustment by a foreign tax authority should expect a robust and careful examination of such requests to ensure that it complies with the arm's length standard and Ireland's obligations under the relevant DTA. For its part, Ireland is seeking to constructively engage in the OECD processes, and adopt the various recommendations of the BEPS project in relation to cross-border tax disputes (including mandatory binding arbitration), to ensure that a common global standard on transfer pricing matters is adopted and applied efficiently.