Ireland proposes sweeping changes to transfer pricing laws

By Warren Novis, Head of Transfer Pricing, BDO Ireland

Ireland’s transfer pricing rules will be dramatically different come 1 January 2020.  The country’s Department of Finance this week published proposed legislation to modify the transfer pricing rules applicable to businesses in Ireland.

Whilst many proposed amendments reflect current standards set by the OECD, the proposed legislation goes beyond the OECD agenda to include more businesses and transactions previously not in scope for transfer pricing in Ireland.

This proposed legislation is the conclusion to a number of consultations led by the Department of Finance in Ireland since the 2015 conclusion to the OECD BEPS Project. 

Ireland transfer pricing documentation

As expected, the proposed legislation introduces OECD-standard master and local files for larger business, i.e. groups with global turnover above €250 million and local entities with turnover above €50 million.

No formal transfer pricing documentation requirement exists in Ireland today so this legislation will be a new responsibility for some Irish businesses.

2017 OECD standards

The proposed legislation effectively replaces current reference to the 2010 OECD Transfer Pricing Guidelines with the 2017 OECD Transfer Pricing Guidelines, amongst other guidance issued by the OECD in 2018, such as profit splits and Hard-to-Value Intangible Assets.

Re-characterisation

The government brought into legislation a specific element of the 2017 OECD guidelines that permits the tax authority to re-characterize an intra-group arrangement.

This provision can apply where the arrangement is proven to be inconsistent with the underlying substance (i.e., people functions) and to contradict arrangements between independent parties.

Medium-sized enterprises

The draft legislation brings previously exempted medium-sized enterprises operating in Ireland under scope for Ireland’s transfer pricing rules, including documentation obligations.

That said, the proposed legislation significantly reduces the level of documentation required by medium-sized companies. Small and micro organisations remain fully exempt from transfer pricing rules.  It remains unclear as to whether this aspect of the legislation would apply from 1 January 2020.

Capital transactions

The new Ireland transfer pricing rules will apply to intra-group purchases and sales of assets where market value is in excess of €25 million.

 This expansion means that capital gains taxes on the sale of assets and capital allowances (i.e., tax depreciation) on the purchase of assets may be affected if the asset valuation is not compliant with OECD arm’s length standards.

 Non-trading transactions

 Ireland’s transfer pricing rules only apply to income earned or expenses incurred related to a “trade”, which is the company’s main purpose to generate profit. The proposed legislation expands coverage to non-trading transactions where one of the two parties is outside the scope of Irish tax. The draft legislation is expected to impact on certain interest-free loan structures from 1 January 2020.

No more grandfathering exemption

The government is eliminating a long-standing exemption under Ireland’s transfer pricing rules for certain arrangements entered into prior to 1 July 2010.  At the time, this exemption was enacted to ease the compliance burden for business, though it was broadly anticipated that this exemption was only temporary.

Next steps

Business and other stakeholders have until Friday 13 September to provide comments to the Department of Finance.

Following that, the Irish government will publish Finance Bill 2019 during the second half of October (expected to be c. 17 October), which may include further amendments to currently proposed legislation.