Initial impressions
At a glance, the initial headlines surrounding the introduction of a domestic transfer pricing regime, seems unlikely to attract foreign direct investment (FDI) for Ireland.
However, given the efforts of the G20 on the exchange of information and tax transparency initiatives generally, the decision of Ireland to introduce domestic transfer pricing was not unexpected.
While some commentators see the legislation as a negative, this ignores the fact that two of Ireland’s largest trading partners, the US and the UK both have similar domestic legislation, thus it is a day to day reality for most Irish quoted plc’s and multinationals to be engaging in transfer pricing and the related obligations around documentation.
At a glance
Therefore, what incentives/amendments has Ireland introduced to remain high on the global agenda for FDI, and in particular, the knowledge economy?
It has been well flagged previously around Ireland’s efforts to attract FDI, particularly through an amortisation scheme for IP, research and development (“R&D”) credits, a 12.5% corporate tax rate, a full participation exemption for the disposal of trading subsidiaries and onshore dividend pooling.
However, the main amendments/incentives proposed in the Bill include:
1. Transfer pricing
The legislation introduces the “arms length” concept into domestic Irish legislation between associated parties (which are trading) being aligned to the OECD Transfer Pricing guidelines, but with exemptions around small or medium sized business (i.e. a turnover of less than €50 million). The legislation will:
- Cover domestic or international “trading” transactions entered into between associated entities
- Not apply to contracts or terms and conditions agreed before 1 July 2010
- Require that transactions (under the legislation) are entered into “at arm’s length”
- Apply the principles in the OECD Transfer Pricing Guidelines, when determining if a transaction has been entered into “at arm’s length”
- Not apply to small or medium sized enterprises (i.e. less than 250 employees and either turnover of less than, €50million or assets of less than €43million); and
- Contain no detailed documentation requirements. Where transactions are covered from the other side e.g. for a transaction between a US parent and its Irish subsidiary, if US transfer pricing documentation has been prepared, additional Irish specific documentation should not be required
Whilst an in depth analysis is beyond the scope of this article, the features will go a long way towards providing US-based multinationals with comfort that the new Irish regulations will not pose unwelcome burdens in terms of documentation or create a necessity to review existing global policies to bring such companies into conformity with domestic Irish requirements.
2. Holding company regime
As highlighted above, Ireland has sought to position itself as an attractive location for the establishment of holding companies. This has been strengthened by recent amendments around onshore dividend pooling, including:
- Dividends paid out of trading profits of a company resident in a non-treaty country will now be subject to corporation tax in Ireland at the 12.5% rate (subject to certain criteria). Previously such dividends were taxed as passive income at the 25% rate
- The rules for identifying the underlying profits out of which foreign dividends are paid have been simplified, facilitating the identification of trading profits to enable the lower 12.5% tax rate apply to these dividends; and
- A broad exemption has been introduced from corporation tax on foreign dividends received by an Irish company, where the Irish company holds less than 5% of the share capital of the foreign company (again subject to certain criteria)
3. Intellectual property regime
Following the introduction in May 2009 of an IP regime, which provides for a tax deduction for capital expenditure (incurred after May 7 2009) on the acquisition of qualifying IP assets for trade purposes, the Bill contains a number of significant changes to this regime, which increases its attractiveness.
Definition of IP
The list of qualifying intangible assets is being expanded to include applications for legal protection (e.g. applications for the grant or registration of brands, trademarks, patents, copyright, etc) and know-how.
Clawback period
The clawback period for allowances granted where qualifying IP is subsequently disposed of has been reduced from fifteen to ten years.
4. R&D tax credits
Successive Finance Acts have been improving the scheme for tax credits on qualifying expenditure for R&D credits. A favourable R&D tax credit regime is key to attracting future high value industries to Ireland. The Bill introduced measures to the Irish R&D regime, including certain flexibility in respect of the calculation of the R&D tax credit and proposed legislation to clarify situations where a company incurs R&D expenditure but has not yet commenced to trade.
5. Royalty payments
In a welcome introduction, foreign tax credit relief will be granted to all trading companies against withholding tax suffered on royalty income coming from non-tax treaty countries. Previously this relief was only granted to manufacturing companies. In addition to this, royalty payments may be paid without deduction of withholding tax where the recipient is located in an EU or a tax-treaty country.
6. Remittance basis
The current incentive scheme in respect of foreign employees undertaking assignments in Ireland is being extended to include employees who are nationals of EU and EEA countries (other than Irish domiciled individuals), who come to live and work in Ireland on or after 1 January 2010. The requirement for the Irish employment to be for at least three years is to be reduced to one year and the relief applies from 1 January 2010.
Summary
Given the familiarity with transfer pricing all US multinationals have, it is a case of business as usual on that front with the success of all other incentives and amendments being dependant on the ability to maintain and target investment for Ireland Inc.
