Carthy welcomes clear signal from Commission on transfer pricing laws
Sinn Féin MEP Matt Carthy has welcomed a clear signal from the European Commission regarding what Ireland’s new transfer pricing regime should look like in order to meet required international standards.
Carthy, a member of the European Parliament’s Economic and Monetary Affairs Committee, said: “I wrote to Commissioner Vestager following the publication of a report on Apple in July, which demonstrated the role of Irish tax law in enabling Apple to continue to avoid paying massive amounts of tax even after its 2014-2015 restructure prompted by the state aid investigation.
“One of the issues I raised was Ireland’s weak system of transfer pricing, which is supposed to guarantee that intra-group transactions within a company happen in the same way that a transaction between two unrelated enterprises would – at arm’s length. This is a crucial principle used to prevent profit-shifting, but it requires strong regulation in order to work effectively.
“In her response to me, Commissioner Vestager reiterates the finding of the state aid case – that our current transfer pricing legislation does not apply to the profits attributed to an Irish branch of a non-resident company. This is one factor that makes our transfer pricing laws so exceptionally weak.
“The other key weakness in our current transfer pricing legislation is that it is ‘one-way’ – it only examines the profitability of the Irish-resident company engaged in the transaction. Because most profit-shifting involving Ireland involves inflating the profits booked here, not the other way around, our transfer pricing legislation is extremely ineffective at actually preventing tax avoidance.
“In her response, Ms Vestager also makes a clear statement of what is needed for us to meet the required international standards on combating tax avoidance when we undergo the revision of these laws.
“Specifically, the Commission has noted that ‘every transfer pricing arrangement should be based on a functional analysis that analyses the functions performed by both parties to the intra-group transaction being priced’ in order to meet the OECD’s new standards.
“I welcome the Finance Minister’s commitment to reviewing our transfer pricing laws in the corporation tax roadmap published by his department earlier this month. Several options have been put on the table for consultation.
“This statement makes it crystal clear that the revised legislation must apply to the profits attributed to an Irish branch of a non-resident company, and also that our transfer pricing regime must become ‘two-way’, empowering Revenue to examine transactions where it believes profits are being overstated in Ireland, in order to meet the required international standards.” ENDS
Note to editors
The reply from Commissioner Vestager to Matt Carthy, and the MEP’s written question are below.
19 September 2018
Answer given by Ms Vestager on behalf of the European Commission
Ireland’s transfer pricing legislation, as introduced by Section 42 of the Finance Act 2010, only concerns the pricing of intra-group transactions (i.e. transactions between companies belonging to the same multinational corporate group). That legislation does not apply to the attribution of profit to an Irish branch of a non-resident company, which was the subject-matter of the 2016 Apple Decision.
To the extent that legislation results in transfer prices for transactions between companies belonging to the same multinational corporate group that approximate prices negotiated at arm’s length by independent companies on the market, its application should not give rise to the grant of state aid.
According to the best practice transfer pricing rules laid down in the Organisation for Economic Cooperation and Development (OECD) Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, every transfer pricing arrangement should be based on a functional analysis that analyses the functions performed (taking into account the assets used and risks assumed) by both parties to the intra-group transaction being priced. A proper functional analysis also determines the most appropriate transfer pricing method to apply to a particular intra-group transaction.
Question to the Commission from Matt Carthy
Subject: Ireland’s transfer pricing regime
Ireland’s transfer pricing regime as it applied to Apple was a key aspect of Irish law criticised by the Commission in its state aid ruling on Ireland of 2016. Ireland’s 2010 transfer pricing legislation is based on the ‘one-way’ transaction net margin method and only examines the profitability of the Irish-resident company engaged in the transaction.
The Commission’s ruling suggests that the use of this method may not effectively ensure that transactions between related parties are entered into on an arms-length basis as required by Article 107(1) of the TFEU as interpreted by the European Court of Justice, and that it did not achieve this in the case of the Apple tax rulings by Revenue.
Does the Commission view the existing transfer pricing legislation in Ireland as an instrument that is capable of ensuring that the arms-length principle is maintained in transactions between related parties?
How does this legislation compare to best practice transfer pricing legislation?