Double taxation and the role of the Irish Competent Authority – Advanced Pricing Agreements
Double taxation and the role of the Irish Competent Authority – Advanced Pricing Agreements
International double taxation may arise where two countries seek to tax the same transactions or activities and whilst double taxation agreements (DTA) may, in principle, resolve these issues, double taxation may not be fully eliminated where two jurisdictions disagree on the basis for taxation.
Multinational organisations with operations in Ireland are increasingly seeking greater certainty as regards matters of double taxation and the transfer pricing arrangements underpinning their cross-border activities. The Irish Competent Authority is the statutory body tasked with engaging with counterparty tax authorities in the resolution of cross-border transfer pricing matters with a connection to Ireland, and a well-functioning and efficient Competent Authority is frequently cited as an imperative for multinationals determining location of investment. One avenue through which taxpayers can seek greater certainty is Advanced Pricing Agreements (or 'APA's').
In this insight, we provide an overview of the APA process including the Irish Competent Authority's role and what a taxpayer can expect from submission of an APA application through to determination. For further detail on the Irish Competent Authority's role in Mutual Agreement Procedure (or 'MAP') processes see our insight.
Basis for APAs
The Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (July 2017) refer to an APA as an agreement that determines, in advance of controlled transactions, an appropriate set of criteria for the determination of the transfer pricing for those transactions over a fixed period of time. Whilst not explicitly called out in Ireland's DTAs, the APA process is essentially a co-operative agreement between the tax administrations in two or more countries defining how future transactions between related taxpayers established in their respective jurisdictions will be taxed with the overarching purpose of negating disputes arising from double taxation.
Prior to the introduction of a formal APA programme on 1 July 2016, Ireland operated an ad-hoc process accepting requests for bilateral assistance where a DTA partner agreed to enter into such negotiations. The process for application and ongoing maintenance of those APAs was led by the treaty partner's rules and associated guidelines. For APA applications made to the Irish Competent Authority after 1 July 2016, the guidelines outlined in relevant guidance of the Irish Revenue Commissioners (Revenue) are applicable1 (Guidelines).
Cases suitable for APAs
The Guidelines cite a number of non-exhaustive factors to be considered in determining an APA application:
significant doubt as regards the transfer pricing methodology to be used and its relation to the arm's length principle.
high likelihood of double taxation arising if there is no APA in place.
application of a bespoke transfer pricing methodology to the transaction(s).
application of the transfer pricing methodology is complex in principle or as regards calculations.
reliable comparables are not readily available and / or significant and complex adjustments are required.
transactions are not hypothetical and are not expected to change throughout the APA.
To be successful, therefore, the transactions to which the APA relates should be complex or involve a high risk of double taxation arising. Routine transactions or transactions which constitute a small proportion of the Irish enterprise’s cross-border transactions will generally not be considered. To an extent borne out by the OECD statistics as they pertain to APAs, our experience informs us that more and more taxpayers are considering the APA route with a view to obtaining a degree of certainty in a changing and dynamic international tax environment.
Process for requesting an APA and outcomes (including 'roll-back')
There are four broad stages to an APA application process:
Pre-filing / pre-application: this is optional and, if availed of, involves a meeting between the taxpayer and the Transfer Pricing Branch of the Competent Authority on an informal basis to discuss the facts of the case (business overview, jurisdictions involved, relevant transactions and proposed methodology, any transfer pricing audits related to those transactions) and establish whether an APA is appropriate.
APA application: two hard copies and an electronic copy (via secured transfer) of the APA application should be sent to the Transfer Pricing Branch of the Competent Authority. This is a detailed application (in English or Irish) that sets out extensively the enterprise's background, the transactions to be covered by the APA including the functional and economic analysis underpinning the transfer pricing methodology proposed, and any audit queries relating to the transactions considered. The method for submission of particular information will be agreed with the Irish Competent Authority at the pre-filing stage and all information should be supplied to both Competent Authorities at the same time.
Evaluation / negotiation: if accepted the Irish Competent Authority will evaluate the application in order to form a view as regards the proposed transfer pricing methodology, comparables, APA term and the assumptions underpinning the proposal. This process of evaluation may involve interviews with taxpayer personnel and the Irish Competent Authority will accommodate joint meetings with treaty partner administrations. The output of the Irish Competent Authority's evaluation is generally issued to the counterparty by way of a position paper for its consideration. The Irish Competent Authority will then proceed to negotiate with the counterparty administration with a view to agreeing the terms of an APA. These are government-to-government negotiations and while the Irish Competent Authority will keep the taxpayer informed, the taxpayer will generally not be in attendance.
Formal agreement: where the parties agree the terms of an APA the Irish Competent Authority will notify the taxpayer within 30 days of the determination meeting with the counterparty administration, and will generally request the taxpayer's response as regards those terms within 30 days. Where the terms depart from the taxpayer’s expectations there can be engagement as regards potential modifications. If ultimately the taxpayer does not agree the terms of the APA they may withdraw from the APA process. If the taxpayer agrees the terms of the APA, an authorised signatory will sign an agreement with the Irish Competent Authority which sets out the terms of the APA as agreed between the Competent Authorities.
Alternatively the Competent Authorities may not be able to reach agreement in which case they will notify the taxpayer within 30 days of the determination meeting with the counterparty administration. The Irish Competent Authority is not obliged to engage further with the other Competent Authority where either / both of the parties believe agreement cannot be reached. However, if a taxpayer is dissatisfied with a decision made by the Irish Competent Authority in relation to an APA request, its formal application or any aspect of the APA it is entitled to make a complaint and have the decision reviewed in accordance with the Revenue's Complaint and Review Procedures.
Where granted, an APA will cover a specific period of time, typically between 3 – 5 years (excluding roll-back). The Irish Competent Authority will provide for the roll-back of APAs in certain cases. This is subject to the applicable time limits of the jurisdictions involved and dependent on the relevant circumstances underpinning the terms of the APA having equal validity across the roll-back period. Regard will also be had to audits / enquiries in respect of the impacted periods and whether there are judicial proceedings ongoing as regards those periods.
Ongoing maintenance of an APA
Where an APA is in place, the taxpayer must file an annual report with the appropriate Revenue office and the Transfer Pricing Branch of the Irish Competent Authority by the due date for filing the annual corporate income tax return for the applicable entity. This includes:
A statement that the taxpayer has complied with the terms of the APA (including ongoing validity of the assumptions).
Financial data comparing the actual results for the covered transaction(s) with the targeted arm's length result agreed in the APA.
Compensating adjustments to stay within the targeted arm's length range agreed in the APA.
Details of any requests to modify, renew or cancel the APA.
Identification and correction of any incorrect / incomplete information submitted to the Irish Competent Authority which could have a material impact on the terms of the agreed APA.
Where a taxpayer provides additional information to the counterparty administration as part of its annual reporting in that jurisdiction, the taxpayer should notify the Transfer Pricing Branch of the Irish Competent Authority regarding same and provide the information / documentation if requested.
In the event a taxpayer does not comply with the terms of an APA the Irish Competent Authority may consult with its counterpart on the appropriate action to take. This can include revoking / cancelling the APA or revising the APA:
Revocation: the taxpayer is treated as if the APA was not agreed such that the APA terms are treated as not being effective for the period of the APA. This can apply where there are misrepresentations, mistakes or omissions in the information submitted, a failure to comply with a material term or conditions of the APA, or revocation / cancellation of the APA by the other Competent Authority.
Cancellation: the taxpayer is treated as if the APA was not agreed with effect from the effective date of cancellation, that date being determined by reference to the event that led to the cancellation. This event can include the matters outlined above with respect to full revocation in addition to (i) the critical assumptions underpinning the APA being materially incorrect or there being a material departure from those terms; (ii) change in the tax law or double taxation treaty; (iii) failure to conclude a revised APA in a situation where matters have arisen which otherwise require the revision of an APA (see below).
Revision: the revised APA indicates the date from which the revision is effective – driven by a change in the critical assumptions underpinning the APA or a change in tax law or a double taxation treaty impacting the terms of the APA – and from which the terms of the original APA are no longer effective.
The Irish Competent Authority will accommodate renewal of an APA but this is dependent on the other Competent Authority’s consent and the taxpayer being able to demonstrate that the critical assumptions contained in the original APA continue to apply.
Where an APA involves more than two jurisdictions, the Irish Competent Authority will consider entering into a series of bilateral APAs as a way of dealing with such multilateral scenarios. This process can include conducting multilateral meetings with other Competent Authorities.