The key aspects of the 'Ireland to Ireland' Transfer Pricing measures introduced in Finance Bill 2021 are as follows:
- Repeal and replacement of existing s835E measure governing 'Ireland to Ireland' exclusion from transfer pricing rules on non-trading transactions.
- Principles-based approach which is clearer in scope than predecessor versions giving clarity and increased certainty to taxpayers.
- Exclusion only applies to bona fide commercial transactions.
- Application of provision to the broad range of bona fide commercial transactions that arise within groups will be more readily possible than it has been heretofore.
- Applies to chargeable periods commencing on or after 1 January 2021.
The key aspects of the AOA Transfer Pricing measures introduced in Finance Bill 2021
- Introduction of the AOA for the attribution of income to a branch of a non-resident company operating in the State.
- Brings certainty to taxpayers on the basis for allocating income and expenses to branches, and aligns Irish legislation with international practice.
Analysis of changes to 'Ireland to Ireland' exclusion
Background to Finance Bill 2021 change to s835E
Transfer pricing on non-trading transactions was introduced in Finance Act 2019 (FA 19) and has been in force for periods which commenced on or after 1 January 2020. One of the measures introduced as part of those FA19 changes was section 835E TCA 1997 (section 835E). Section 835E in effect disapplied the transfer pricing rules for certain non-trading 'Ireland-to-Ireland' transactions. It has been an important relieving measure and is of relevance to companies that have non-arm's length transactions (e.g. where no consideration charged) between members of their Irish group and who need to rely on the domestic exclusion from transfer pricing rules to those transactions.
From the outset there have been difficulties in determining the precise scope and effect of the original FA19 version of section 835E. Efforts were made last year in Finance Act 2020 (FA20) to address some of those issues by proposing the deletion of the FA19 version of section 835E and replacing it with an entirely new version of the measure. However, the proposed replacement version of Section 835E as introduced in FA20 itself had significant shortcomings which, if introduced, would have meant that many bona fide circumstances that should in principle have been covered by the exclusion would not have been.
In light of this, the FA20 replacement version of section 835E was made subject to a Commencement Order. The FA20 version of section 835E was never commenced which has meant that the FA19 version of section 835E has remained in force since 1 January 2020 to present day. The reason for making the FA20 version of section 835E subject to a Commencement Order last year was to allow the Department of Finance time to consider the effects of the FA20 measure, if introduced. Instead of commencing the FA20 version of s835E, the decision has been taken to now introduce a full revision of s835E in Finance Bill 2021, the details of which are set out below.
Finance Bill 2021 version of s835E
The replacement version of s835E as proposed in the Bill is welcome as it is clearer in scope than the existing version of the measure and it is capable of being applied with a greater degree of certainty to a wider range of transactions than its predecessor. The measure, as proposed in the Bill, takes a principles-based approach in disapplying transfer pricing rules to 'Ireland to Ireland' transactions. Broadly speaking, for the measure to have scope to apply to a transaction the following circumstances should exist for both the supplier and the acquirer, as relevant:
- The supplier under a non-arm's length arrangement must be chargeable to tax under Schedule D (other than under Case I or Case II) or would be so chargeable on profits from the arrangement in question if consideration was receivable. Therefore, it is clear that no income needs to be receivable as the test is a hypothetical profits test that assesses the position as if consideration was receivable. Those circumstances must exist for the supplier for the duration of the chargeable period for the supplier to qualify.
- The acquirer can qualify in respect of an arrangement in two potential ways as follows:
- Route 1: If a deduction is available in respect of the consideration (or would be available if consideration was payable under the arrangement) in computing profits of the acquirer. This route to s835E treatment would likely be used by acquirers that are acquiring the supply under the arrangement (e.g. a loan or the use of property) for trading purposes or for Case V purposes and capable of taking a deduction for any consideration payable (e.g. interest or rent). There is no requirement for consideration to actually be payable or deducted in computing profits, it is a hypothetical test in relation to deductibility.
- Route 2: An acquirer that does not qualify under route 1 (e.g. an acquirer that would not get a deduction in computing profits) can still potentially qualify provided any profits, gains or losses of that acquirer arising directly or indirectly from its "relevant activities" are, or if there were any, would be chargeable to corporation tax under Schedule D for the chargeable period, or would be chargeable to corporation tax but for section 129 TCA 1997. Therefore, to qualify under route 2, there will be no need for any dividends or other income to actually be received or chargeable in a particular period by any such acquirer from its relevant activities given that this is a hypothetical profits test.This route to S835E treatment for acquirers would likely be used by acquirers that are holding companies that do not have access to route 1.
- The circumstances under either route 1 or route 2, as relevant, may need to exist for the acquirer for the duration of the chargeable period for that acquirer to qualify.
The general principle underlying the proposed measure is that where both the supplier and acquirer are within the charge to Irish tax on their profits (or would be chargeable but for s129) then s835E treatment should be available.
There are two anti-avoidance safeguards built into the measure. The relieving measure will only apply to an arrangement entered into for bona fide commercial reasons. Furthermore, the relieving measure will not apply where the main purpose, or one of the main purposes, of the arrangement is the avoidance of tax.
The proposed version of s835E is set to be a welcome revision to the design of a measure the policy intent of which is to ensure tax neutrality for transactions that do not impact on the overall Irish tax base.
Analysis of Branch Transfer Pricing changes
A new Section 25A has been introduced into TCA 1997 to provide for the application of the OECD developed mechanism known as the AOA to attributing income to a branch of a non-resident company operating in the State. Specifically, the AOA refers to the OECD's guidance on the attribution of profits to Permanent Establishments approved for publication on 22 July 2010.
Section 25A is effective for covered taxpayers, effective from 1 January 2022. Several countries have already adopted the AOA on attributing income to a branch in order to bring consistency and certainty around how income of a non-resident operating through a branch is computed and taxed in the relevant State. This is a welcome move for non-resident taxpayers, as it brings long awaited certainty for their relevant income arising in their Irish branch(es). This further confirms Ireland's endeavour to facilitate doing business in Ireland and harmonise its tax rules with global best practices. This also brings to rest any prior uncertainty amongst taxpayers on the methodology for determining the arm's length price of covered transactions of non-resident companies operating through a branch model in Ireland.
A branch, for the purpose of this section, has been defined as "a branch or agency through which the company [not resident in the State] carries on a trade in the State". At face value, the Bill has excluded any non-trading income of the branch for the purpose of this section, although this will become clearer on further analysis of the section.
Under the new section, companies are required to compute the 'relevant branch income' as the amount of trading income arising through or from a branch from any property or rights used or held either by or for the branch are required to be computed as if it were a separate and independent company i.e., taking a separate entity approach which hypothesises the branch and other parts of the company as two separate and distinct entities for tax purposes. This attribution of relevant branch income shall be done in accordance with the AOA.
Exemption from this section has been extended to the trade of an overseas life assurance company under certain circumstances, any non-trading income, companies which are "small" enterprises, and companies which are "medium" enterprises but where the relevant branch income attributed by such medium enterprises in the relevant accounting period in question is less than €250,000.
Section 25A extends the transfer pricing documentation requirements introduced as part of Finance Act 2019, as applicable to companies for accounting periods commencing on or after 1 January 2020 to branches, in order to assist in ensuring relevant branch income has been computed in accordance with section 25A. This now brings branches as defined in this section somewhat to parity with the Irish resident companies, which are subject to the new transfer pricing regime introduced as part of Finance Act 2019. The documentation that needs to be maintained by a branch must be contemporaneous and has to be prepared in the form of "relevant branch records". Such records shall be prepared no later than the specified return date for the accounting period concerned and has to be provided to the Revenue Commissioners within 30 days from the date of the request. An inclusive definition of 'relevant branch records' has been introduced in Section 25A and is similar to the Local File requirements in the Irish TP legislation, read in conjunction with the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations issued in 2017 ("OECD Guidelines"). The 'relevant branch records' includes, description of the company and its branch, organisation structure, business strategy and and key competitors, a functional and factual analysis of the branch, transfer pricing methodology used in respect of the dealings between the branch and other parts of the company, accounting records, a list and description of selected uncontrolled transactions used for the purposes of benchmarking the covered transactions between the branch and other parts of the company. It is important to mention that this information includes calculations supporting the attribution of free capital to the relevant branch.
It should be noted that most of the defined terms in Section 25A originate either from the OECD Guidelines or the AOA.
Penalties can apply where there is failure to comply with a request to provide relevant branch records to the Revenue Commissioners. These penalties amount to €4,000 for medium companies which attribute income of less than €250,000 to the branch, and €25,000 to companies which do not meet the definition of either a small enterprise or a medium enterprise which attributes income less than €250,000 to the branch. The penalty shall be further extended by €100 for each day on which the failure continues. However, the relevant taxpayer i.e., in this case the branch in the State, shall be protected from tax-geared penalties where it has maintained appropriate branch records, prepares relevant branch records which are complete and accurate and provides these records to the Revenue Commissioners on a timely basis within the stipulated period, and demonstrates that, notwithstanding the relevant branch adjustment, the company has made reasonable efforts to comply with this section in determining the relevant branch income that it attributes to its Irish branch.
What does this mean for your business?
'Ireland to Ireland' changes
The clarity afforded by the principles based approach of the replacement s835E measure means that the provision is set to become fit for purpose in achieving its policy aim as it should be more readily applicable to the wide range of bona fide non-arm's length transactions that take place between Irish resident entities within groups, including the following:
- Bona fide interest free financing between group members (e.g. parent to sub, sub to parent, sub to sub) whether the borrowing company is a trader, a holding company or a Case V company.
- Free use of property (e.g. factory or office premises) used by other group members.
- Use of brands or IP (where royalty income would be non-trading) by group members on royalty-free terms.
Adoption of the AOA to branch profit attribution
The adoption of the AOA was flagged in the Minister's Budget day speech and is another step in aligning the Irish tax code with new international norms. The measures introduced on supporting Transfer Pricing documentation and on penalties are consistent with provisions already in the legislation for intragroup transactions. There is now greater parity for enterprises operating in the State through a company or through a branch in terms of the transfer pricing legislative framework.
We are here to help you
PwC and representative bodies made significant efforts to engage with Revenue and the Department of Finance on the shortcomings of the existing s835E measures and we welcome the fact that the legitimate concerns of taxpayers have been considered in the design and approach to the proposed replacement version of s835E. We will continue to engage on the matter during the next stages of the legislative process. We have a lot of experience in interpreting and applying the pre-existing measures and are ready to assist you in assessing how the revised rules impact on your business.
We also engaged in the Department of Finance's public consultation on the application of the AOA to the attribution of profits to branches of non-resident companies, and are pleased to see many of our comments reflected in the draft legislation. If you would like to understand how the adoption of the AOA might impact your business, we would be happy to discuss.