Revenue's €748M Transfer Pricing Crackdown
Revenue's €748M Transfer Pricing Crackdown
Please comment on Revenue's recent engagement with taxpayers around transfer pricing matters and transfer pricing considerations for MNEs.
Contributor: Katie Auld, Director, Transfer Pricing & Global Value Chain
Current audit trends
In the period 2015 to the end of 2023, the Revenue Commissioners (“Revenue”) initiated 58 transfer pricing compliance interventions. Of the 33 interventions that have been finalised, €748 million was yielded. Approximately €233 million of this amount was due to interest and penalties, while a restriction in trading losses of €952 million represents a corporate tax impact of €119 million. Revenue’s key focus areas include losses related to Irish subsidiaries performing R&D for group affiliates, management service fees, intercompany financing provided by Irish entities, and business restructurings and/or changes to the transfer pricing framework.
In addition, tax authorities have substantially increased their review of intercompany financing arrangements. They are analysing whether the quantum of debt is consistent with the arm’s length principle and whether it is aligned with the borrower’s business strategy. Cash pooling arrangements are now heavily scrutinised and those that lack clear economic rationale are being challenged. Functional capacity is paramount as the ability to control, understand and manage the associated financial risks justifies the intercompany arrangements.
Taxpayers should consider proactively compiling proper documentation including justification for losses of its R&D entity (if any), records demonstrating the benefit received by the Irish subsidiary related to management services (e.g., board meeting notes, presentations, cost savings analyses, etc.), debt capacity analyses and interest rate benchmarking analyses that support the terms of intercompany financing arrangements, and business rationale for restructuring and/or changes to the transfer pricing framework. Another area of potential enquiry involves continuous losses for low-risk entities. If entities are deemed low-risk, their profile may be called into question if they record consistent losses.
Recent case
The Tax Appeals Commission delivered its first decision on a transfer pricing case last year. In this specific case, the remuneration for the Irish subsidiary was cost reimbursement plus a markup. Revenue argued that the Irish subsidiary incorrectly excluded the cost related to the stock-based awards provided to Irish employees by the US parent. Revenue made the argument the stock-based awards should be included in the cost base. Yet, the Tax Appeals Commission sided with the taxpayer that stock-based awards are notional costs and should not be included in the cost base for mark-up purposes. This decision deviates from the viewpoints of other tax authorities. In the HMRC internal manual, the example specifically states that the cost base should include the stock options of the UK service provider, and it goes so far as to mention the cost base is potentially more important than the markup. However, other jurisdictions that do not allow tax deductions for stock-based awards may follow an inconsistent approach dependent on whether the costs are inbound or outbound.
Transfer pricing adjustments
In light of the recent tariffs imposed by the US government, the importance of transfer pricing adjustments has been significantly heightened as transfer pricing adjustments may also result in customs implications. It is best practice to consider transfer pricing adjustments during the year and any necessary true-ups before closing the financial statements. If this is not feasible and an adjustment must be made after the closing of the financial statements to obtain an arm’s length result, it may create additional compliance requirements. For example, in the US, a book-tax difference must be listed on Schedule M of the US tax return. In the US, importers have options to report transfer pricing adjustments to the Customs & Border Patrol (CBP). When an importer files an entry summary while certain elements remain undeterminable, the entry summary is flagged, thereby providing CBP a "notice of intent" to file a “Reconciliation”. Generally, the Reconciliation is due within 12 months of the earliest entry import date for certain trade agreements, or within 21 months of the earliest entry summary date for all other issues. In the US, upward and downward customs adjustments are acceptable.
Data exchange
Taxpayers should be aware of data exchange among tax authorities. Revenue have exchanged Country-by-Country data with at least 62 jurisdictions. Country-by-Country data includes revenue, profit, taxes paid and accrued by country as well as other economic factors. This information is utilised for high-level transfer pricing risk assessments and evaluation of other Base Erosion and Profit Shifting (BEPS) related risks.
Advance Pricing Agreement
In the current environment, more taxpayers are seeking transfer pricing certainty by obtaining an Advance Pricing Agreement (APA). A bilateral APA is between two tax administrations involving a set of transactions over a certain period of time. Essentially, an APA confirms the tax treatment of the covered transactions for the tax administrations and the taxpayers for the future period. APAs are used prospectively to avoid potential disputes. Alternatively, taxpayers may seek relief from double taxation via Mutual Agreement Procedure (MAP) assistance which is not a formal ruling but may be less time-intensive than an APA. MAP proceedings focus on resolving ongoing disputes.