Finance Monthly hears from our next thought leader Peter Vale who talks us through the trends and complexities of the Irish Transfer Pricing system. Peter is an international tax partner with Grant Thornton Dublin, with over 20 years’ experience in international corporate tax structuring and planning. His client portfolio includes Irish and oversees listed multinationals and indigenous Irish companies. Peter’s clients span the technology, life sciences, distribution, energy and retail sectors.
Can you explain how does the Irish transfer pricing system works? What type of documentation does a company have to prepare?
Transfer pricing (TP) rules were introduced in Ireland in 2010. The Irish rules follow the OECD Transfer Pricing guidelines. For transactions, in place preceding the introduction of the Irish TP rules, the pricing on these is grandfathered and outside the scope of the Irish rules.
The rules apply to the pricing of intra-group domestic and international trading transactions for large groups, with an exemption for small and medium-sized enterprises.
Under the legislation, companies are obliged to retain such records as it may reasonably be required to demonstrate that the income has been computed at arm’s length. The documentation must be prepared on a “timely basis”, although not necessarily contemporaneously. Where TP documentation support is already in place in the counterparty jurisdiction, it is acceptable for the Irish company to rely on this documentation, rather than having to prepare separate documentation itself. However, for confidentiality, some groups have a preference to prepare separate Irish documentation.
What are the potential penalties for companies if they fail to submit accurate information transfer pricing? Is there an appeal process?
Transfer pricing is governed by the full interest and penalties regime applicable within the Irish direct taxes acts.
Where income is understated or expenses are overstated, there will be an adjustment made to substitute the arm’s length price for the actual price used. There is generally no provision in the Irish rules to allow for downward TP adjustments.
How can companies mitigate their tax liability with regards to transfer pricing?
The various OECD endorsed methodologies available for calculating arms-length pricing by their nature allow for a range of possible outcomes. Companies should carefully consider their selection of the methodology that is most suitable to the transaction concerned. The stronger the TP support that is prepared in advance of a transaction, with a wide sample of third party comparables, the better the company’s chance of withstanding any subsequent challenge by the tax authorities.
However, as tax authorities worldwide get more sophisticated in their dealings on transfer pricing, the opportunities for using transfer pricing as a tax planning tool has become more limited, and this is being seen in a number of high profile transfer pricing related settlements internationally.
Can you give the readers of FM an overview of the latest and most significant updates relating to Irish transfer pricing legislation?
The recent OECD BEPS initiative has put a spotlight internationally on transfer pricing, with an onus on a closer alignment of profits with the location of economic value creation. This requires an in-depth assessment of the business processes and the organisational model, and an understanding of the people functions within an organisation, and where risk is taken and managed.
The Irish Government has welcomed the BEPS proposals, and has been among the first to introduce CbCR rules, whilst also signalling an intention to adopt the latest OECD TP guidelines, possibly as early as this autumn.
Additionally, as part of the dispute resolution proposals within BEPS, the Irish Revenue Commissioners have introduced a formal bilateral Advance Pricing Agreement (‘APA’) programme. A bilateral APA is a binding agreement between two tax administrations and the taxpayers concerned, negotiated under the relevant Double Taxation Agreement and which governs the treatment for tax purposes of future transactions between associated taxpayers. This welcome programme will provide an added degree of comfort for taxpayers entering into cross-border transactions and hopefully avoid protracted TP audits on the back-end.
What role does technology play in transfer pricing and how feasible is this for corporations to adopt
The use of technology allows improved data gathering, enhanced quality of information and the ability to manage workflow and compliance requirements more efficiently. Where organisations are appropriately exploiting modern technology in the management of their international transactions, this should increase financial reporting accuracy and timing, and reduce financial statement and tax audit risk.
Additionally, the BEPS requirement for Country by Country Reporting of a group’s financial affairs will rely heavily on a group’s technological and financial systems for the additional data required to be reported. Such CbCR reporting will be due during 2017 in respect of 2016 results, and it is therefore critical that organisations start to prepare early for these added reporting requirements, and developing their systems accordingly.