Double taxation – Correlative Adjustment
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.
Taxpayers have a choice of potential reliefs in the event of a foreign initiated adjustment that seeks to tax profits that have already been taxed in Ireland. This can include bilateral relief by way of mutual agreement procedure assistance (MAP) as between the authorities or unilateral relief by way of correlative adjustment. In this insight, we provide an overview of the process for seeking correlative relief from the Irish Revenue Commissioners (Revenue) in respect of a foreign initiated adjustment and what a taxpayer can expect when pursuing that route for the purpose of obtaining relief from double taxation. For further detail on the MAP process see our insight.
Legal basis for Correlative Adjustment
From an Irish perspective, taxpayers cannot take a tax deduction for foreign-initiated transfer pricing adjustments by way of self-assessment. As regards correlative relief, to be available there must be a DTA in place between Ireland and the treaty partner. Relief is then claimed by reference to the equivalent of Article 9 (Associated Enterprises) of the OECD Model Tax Convention on Income and on Capital (MTC). Article 9 MTC authorises the adjustment of profits of a company if, as a result of non-arm's length conditions between it and an associated company, the profits of the first company differ from arm's length profits, resulting in economic double taxation (as both companies are taxed on the same profits). Where correlative relief is granted, the non-adjusting jurisdiction essentially accepts the foreign initiated adjustment and provides unilateral relief directly to the taxpayer in its jurisdiction.
Basis for determination
Irish Revenue Guidance1 indicates that in order for the Irish tax authorities to grant relief they need to be comfortable that the foreign-initiated adjustment is an adjustment from a non-arm's length profit to an arm's length profit; and appropriate in principle and as regards amount. The Irish tax authorities will not permit relief for:
- secondary adjustments; or
- interest on unpaid taxes and statutory penalties
The first component of the test above – an assertion that the previous profit was not arm's length and the proposed profit is so - is potentially problematic and this is particularly the case in a situation where the prior position was underpinned by transfer pricing documentation.
Method for claiming and information required
Pursuant to section 864(1) Taxes Consolidation Act 1997 claims for correlative adjustment are made using Form CA1 (with appropriate information / documentation) for submission to (1) Revenue Division / Branch dealing with the company's affairs; and (2) Revenue International Tax Division Transfer Pricing Branch. To grant relief Revenue require all relevant information to be submitted, including any information provided to the other jurisdiction. This includes, for example:
- Details of the association between the relevant enterprises and the transfer pricing policy between them pre-audit in the other jurisdiction.
- A description of the elements of the transfer pricing policy not considered arm's length (explaining the reasons why) and any rebuttals made against that.
- A description of the process for final agreement with the other jurisdiction and the fundamentals of that agreement.
- A description of how effect was given to the adjustment.
- Confirmation as to whether any portion of the adjustment relates to secondary adjustments, interest on unpaid taxes or penalties.
- Confirmation as to whether any previous or subsequent years are to be audited where there is prospect of similar issues arising.
- Confirmation as to whether any audits are being undertaken by other countries that may also impact the Irish associated enterprise.
Outcomes of the correlative adjustment process
There are a number of potential outcomes where a correlative adjustment claim is made:
- Full / partial acceptance: Revenue may grant full or partial unilateral relief in which case Revenue (via the Irish Competent Authority) will contact the treaty partner tax administration (via its Competent Authority) to confirm that the amount of tax subject to the claim has been paid in that jurisdiction. The taxpayer should then submit revised computations with Revenue amending assessments and making any resultant repayments.
- Rejection: Revenue may reject the claim wholly or partially in which case Revenue will set out the basis for the determination.
Interaction with MAP and appeal process
Where there is full or partial rejection of a correlative relief claim, the taxpayer can appeal that determination to the Tax Appeals Commission (TAC) within the standard 30 day appeal period. For more information on the TAC process see our insight.
Alternatively, the taxpayer can seek assistance via MAP although that request is subject to the appropriate time limit (generally 3 years from the action of the contracting state giving rise to double taxation but this can vary depending on the path to resolution sought). Helpfully a taxpayer has the option to submit a protective MAP request in which case the Irish Competent Authority will hold that request for future examination upon further notice from the taxpayer, thereby protecting the taxpayer from time limit issues as it pertains to MAP.
Recommendations where a taxpayer has a foreign-initiated adjustment / audit
Our experience – which is borne out by the statistics – is an overarching preference by Revenue for taxpayers to seek relief on a bilateral basis via MAP, see our insight on MAP. Connected to this is the two-fold threshold (described above) to support correlative relief claims.
It is advisable for taxpayers to seek input at as early a stage as possible when in receipt of a foreign-initiated adjustment or indeed in the course of a foreign audit during which positions may be taken that may have implications for a group's Irish operations and the availability of avenues for resolution.
Our team are available to discuss questions related to international tax disputes and relief from double taxation as and when required. For more information on this please contact Amelia O'Beirne, Partner, Bryan Hughes, Senior Associate, or any member of A&L Goodbody's Tax Disputes and Enquiries team.
 Irish Revenue Tax and Duty Manual Part 35-02-09
Date published: 24 May 2023