Introduction Of Transfer Pricing Rules - Perception Is Everything!

Introduction

The Irish Finance Bill 2010 (the "Bill") which was recently published proposes the insertion of a new Part 35A into the Taxes Consolidation Act 1997 ("TCA 97") which provides for the introduction of limited transfer pricing ("TP") measures. The Bill is due to be enacted by 9th April 2010.

The principle of arm's length pricing, which is central to the concept of TP, has been part of Irish tax law for many years despite the absence of specific TP measures (with the exception of manufacturing relief). For example the "wholly and exclusively" test contained in Section 81 TCA 97 would operate to deny a tax deduction for an amount of a payment between connected parties in excess of the arm's length amount. In addition tax law as interpreted by the courts has permitted an upward adjustment to profits to reflect the arm's length price in certain cases.

The official line is that the new TP measures are designed to align Ireland with best international practice by formally adopting the OECD Transfer Pricing Guidelines, while at the same time removing the uncertainty regarding the application of internationally accepted transfer pricing standards in Ireland. The new measures are also in accordance with the Irish Tax Authorities long standing and stated approach of addressing TP issues in accordance with OECD guidelines.

When applicable, the effect of the new measures will (in certain cases) increase understated receipts and reduce overstated expenses of companies and branches in Ireland. The sole aim of the measures is to increase profits which have been understated in Ireland (although most international groups have not to date used Ireland in a manner to minimize profits arising in Ireland – indeed quite the opposite!). Reading between the lines, the introduction of these proposed TP measures is not to raise revenues for the Irish Tax Authorities but for Ireland to be able to run with the herd at an OECD level and not to be in the vulnerable position of standing by itself with no TP rules.

In addition, there are some important exclusions from the new TP measures and a generous grandfathering rule which are explained below.

The Proposed New Measures

The proposed new TP rules apply to any arrangement involving the supply and acquisition of goods, services, money or intangible assets, where at the time of the supply and acquisition, the person making the supply and the person making the acquisition are associated and the profits or gains...