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Gavin Ryle explains why the Finance Bill 2010 will improve Ireland's position globally.

The Finance Bill 2010, published on February 4th, comes at a pivotal time for the Irish economy. There is a recognition of the need to use tax policy to foster enterprise and employment as a prelude to Ireland galvanising itself to take advantage of a recovering global economy.

However, there is also the need to protect the tax base from further erosion. Clearly these can be divergent objectives however the Government appears to be achieving the right balance with measures to boost Ireland's attractiveness to foreign investors.  

New transfer pricing rules

The introduction of transfer pricing rules brings the Irish tax regime into line with international norms. In this regard, this development will uphold Ireland's status as an onshore, well regulated and transparent low-tax regime.

It should be noted that even before the Finance Bill, Irish firms engaged in international transactions with group companies have typically been aware that the price for a transaction needed to meet an "arm's length" standard to comply with the transfer pricing rules of the other country. Therefore, the introduction of equivalent transfer pricing rules into the Irish system is not expected to result in any change to the underlying pricing.

The new Irish transfer pricing regime includes many features expected of a jurisdiction introducing transfer pricing rules for the first time. But two aspects of the draft legislation are expected to grab the attention of multinationals in Ireland:

• The new regime is confined to related party dealings that are taxable at Ireland's corporate tax rate of 12.5% (ie, trading transactions).
• A so-called "grandfather" clause is included whereby arrangements entered into between related parties prior to July 1st 2010 are excluded from the new regime.

Given these limitations on the scope of the new rules, it will be important for multinationals in Ireland to know where they stand before July 1st, this year. The grandfather clause creates a short lived opportunity for multinationals to consider whether terms of existing inter-company agreements are flexible enough to avoid the need to amend the agreements after July 1st so that they continue to fall outside the scope of the Irish transfer pricing rules.

Additionally, for arrangements not yet formalised, multinationals should consider putting in place inter-company agreements prior to July, particularly for complex and uncertain arrangements, in order for these arrangements to also fall outside the scope of the Irish transfer pricing rules.

Other features of the new regime include:

1. It endorses the arm's length principle and the OECD's transfer pricing guidelines.

2. Scope is confined to related party dealings, involving the supply and acquisition of goods, services, money and intangible assets.

3. The new regime will come into effect for accounting periods commencing on or after January 1st, 2011.

4. It will apply to domestic and international related party arrangements.

5. There will be an exemption for small and medium enterprises.

While there is limited guidance provided in the Bill in relation to the documentation requirements associated with the new regime, it is understood that it is not the intention of Irish tax authorities to implement contemporaneous or onerous transfer pricing documentation requirements on taxpayers. Further guidance will need to be issued by the authorities in due course.

For many multinationals, the most substantive change may be that the new transfer pricing regulations provide them with a legislative reason to evaluate and justify the levels of profits in Ireland. This will help multinationals support and defend the level of income and expenses being attributed to their Irish operations. In this regard, it can be seen as a broadly positive development for multinationals in Ireland.

Measures to boost attractiveness

The Bill contains a number of measures to boost Ireland's attractiveness to foreign investors. Some significant changes to the intellectual property regime include expanding the list of qualifying intangible assets to include applications for legal protection (eg, applications for grant or registration of brands, trademarks, patents, copyright, etc). In addition, the definition of know-how has been amended to bring it broadly in line with that in the OECD model tax treaty. The research and development tax credit has also been amended to allow some flexibility in calculating the qualifying expenditure incurred in the base period (ie, 2003) in particular circumstances.

Proposals to enhance the intellectual property regime and the research and development tax credit will be received positively by indigenous and multinational corporations alike and better position Ireland Inc to attract mobile investment in this area.

The ability to attract key talent is also an essential part of the package. This has become a significant concern in recent years, with Ireland lagging behind the competition.  Some welcome changes are proposed in the Bill but they do not, at this stage, appear to go far enough.

The Bill also includes measures to strengthen Ireland's competitive edge in the international funds industry, in particular, in the area of Islamic finance. The Bill has proposed changes which will see Irish tax and financial law accommodating the principles of Sharia law. Ireland is already a very active participant in this space with 20% of the Islamic funds market outside the Middle East located in Ireland. These measures are likely to facilitate Ireland positioning itself as the jurisdiction of choice within the EU for the location of investment management firms and investment funds.

The Bill also introduces measures to further ease the administrative burden on taxpayers. There are numerous exemptions from dividend withholding tax and the process to establish an entitlement to an exemption has been eased with the introduction of a self assessment system and can be viewed as a positive development for taxpayers.

Conclusion

As the global economy restructures itself, there are opportunities emerging for Ireland Inc to act as a high-value platform for regional hubs in international services, financial services and asset management. The measures announced in Finance Bill 2010 will provide stimulus to allow business grasp those opportunities.

Gavin Ryle is transfer pricing partner at PricewaterhouseCoopers Ireland.

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