PWC Transfer Pricing Rules— Public Consultation Tax Division Department of Finance Government Buildings Upper Merrion Street Dublin 2

2 April 2019

Dear Sir/Madam,

Subject: Transfer pricing Rules Public Consultation

We are writing to you in response to your invitation for submissions on the Public Consultation document "Ireland's Transfer Pricing Rules" as published by the Department of Finance on 18

February 2019.

First and foremost, we welcome the publication of the Public Consultation document by the Department of Finance. The proposed changes have the potential to impact a significant number of taxpayers, both domestic and international. Undertaking a review of our transfer pricing rules at this time is appropriate given the extent of international tax changes arising from the need to align profit with substance.

We recognise that the publication of this document reflects a continued willingness to engage with stakeholders on important tax policy issues and promotes a business environment characterised by certainty and clarity. Public consultation processes give confidence and foresight to stakeholders as well as providing opportunities to discuss important design features and to mitigate against unforeseen consequences.

A year has passed since we responded to the publication consultation document released following the publication of the "Review of Ireland's Corporate Tax Code". In that time we have seen a number of significant changes to the corporate tax code. Our clients and the market have generally responded well to the changes but continue to stress the need for prior notice of impending changes and new rules. The core theme running through our response below is that of having a tax regime and an ecosystem that is fit for purpose, especially given that this is a time of relentless change. We believe that now is the perfect time to step back and consider how all of the changes are going to impact our

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Feargal O'Rourke (Managing Partner- PricewaterhouseCoopers Ireland)

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Located at Dublin, Cork. Galway, Kilkenny, Limerick. Waterford and Wexford

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PWC regime and determine whether tweaks need to be made to ensure that we remain competitive while also compliant in this new world.

As the leading advisor to a broad base of clients, including indigenous entrepreneurs and family businesses, Irish Pics, start-ups and foreign multinationals, we would like to take this opportunity to draw on our experience and reflect our thoughts and insights with regard to Ireland's transfer pricing rules and how they might be updated in light of the changing international tax environment.

We would welcome the opportunity to discuss the matters outlined below at your convenience.

Yours faithfully

n, Q(

Joe Tynan PricewaterhouseCoopers

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Background to this consultation process

Following the BEPS programme, the OECD have updated the Transfer Pricing Guidelines, and released these in 2017.

Ireland had formally adopted the 2010 Guidelines on the introduction of our transfer pricing rules within Part 35 TCA 1997. The question around whether we would adopt the 2017 Guidelines was included as part of the terms of reference of the "Review of Ireland's Corporation Tax Code' an independent review undertaken by Seamus Coffey and published in 2017 (hereinafter referred to as the "Coffey Report").

The Coffey Report recommended that Ireland should update our transfer pricing rules in line with the 2017 Guidelines. It recommended that transfer pricing rules should be extended to all transactions including non-trading, capital transactions and transactions of SMEs. Furthermore, the report recommended that Ireland adopt the transfer pricing documentation requirements set out as part of BEPS action 13. The report recommended that these changes be made by no later than the end of 2020.

A public consultation process was opened shortly after the release of the Coffey Report where stakeholders could feed back their comments on the key report findings. PwC responded to the public consultation document at that time. Our position on many of the issues discussed at that time remains unchanged, particularly around the timing on the introduction of transfer pricing changes, the additional administrative burden likely to be experienced by taxpayers and the need to reconsider the higher rate of corporation tax.

The publication of the Corporation Tax Roadmap in September 2018 provided a summary of the various corporate tax changes implemented to date and indicated what changes we should expect to see introduced in 2019. The document included a summary of the submissions received as part of the Coffey Report consultation. The range of stakeholder views demonstrated that the extension of transfer pricing rules in Ireland will not be straightforward. It was announced that further public consultation was required and a document would be released in early 2019. This document was published on 18 February 2019 and we now respond to the questions raised therein.

Timeline

The recent approach taken by the Department of Finance to policy making has generally been positively received by our clients and we would again request that this consultation is followed by a feedback statement on the proposed legislative provisions. Given the wide ranging impact of the proposed measures, we believe that such a feedback statement should be published as soon as possible and certainly in the first half of this year where the Department intends to introduce changes as part of Finance Bill 2019.

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Pwe Key Considerations

Ireland's Competent Authority

One key concern that needs to be borne in mind as these guidelines are adopted by Ireland and other jurisdictions is the likelihood of a significant increase in tax controversy and disputes. This was recognised by the OECD when it included Action 14 in the BEPS action plan. As such, it is important that Ireland has an experienced, well-resourced and robust competent authority.

One of the reasons that multinational groups choose to locate in Ireland is our competitive corporate tax regime and the sense of certainty that is gained from Ireland's approach to policy making. A competitive tax system, however, is only as attractive as its ability to protect its tax base and thereby the positions taken by taxpayers.

We welcome the significant investment that has been made in the Competent Authority function over the last few years and we hope that this will continue in order to ensure that Ireland is able to robustly defend Ireland's tax base and the positions taken by our taxpayers. Our clients tell us that a strong, well-resourced competent authority is a critical factor that is considered when investment decisions are made. As a country which markets itself as a world class location in which to do business, it is critically important for Ireland to ensure that we have a best in class Competent Authority. Furthermore, given the potentially significant investments that are being and will be made in Ireland over the coming months and years it is critical the investment in resources should continue.

Extension of TP to non-trading transactions

The extension of transfer pricing to non-trading transactions is likely to cause significant complexity and double taxation. We believe that this change offers Ireland the opportunity to revise our regime to ensure it is fit for purpose for a modern BEPS compliant competitive world. As such it is our view that the categories of income taxed at the 25% rate should be reconsidered and that a mechanism for deductibility in non-trading scenarios would need to be devised - these two measures should ensure that mismatches do not arise. Finally, if it is the intention to extend the rules from 1 January 2020, in order to provide certainty to taxpayers and to ensure that they have sufficient time to avoid unintended consequences, we believe that a transitional period until i January 2021 should apply to all existing non-trading transactions.

A regime that is fit for purpose

The changes that will be brought about as a result of these significant amendments to our tax system offer the ideal opportunity for Ireland to review the regime as a whole. In addition to the suggestions above in relation to the 25% rate we would also argue that the 33% CGT rate could be ring fenced further thereby allowing the opportunity for certain trading assets to be taxed at the 12.5% trading rate. Furthermore the other roadmap items listed by the Department last September should continue to be consulted on as we continue this path of reform.

SMEs

In line with our current position and that of many other EU countries we do not believe that transfer pricing should be extended to SMEs as the BEPS risk is not commensurate with the additional taxpayer burden.

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PWC Responses to consultation questions

1. Incorporation of the OECD 2017 Guidelines into Irish legislation

It is intended that Irish transfer pricing legislation will be amended to include a direct reference to the 2017 OED Transfer Pricing Guidelines. Do you consider that this proposed course of action will give rise to any specific issues?

Introduction of the Guidelines

Actions 8-10 and Action 13 of the OECD BEPS plan are key features of the 2017 Transfer Pricing Guidelines ("TPG 2017") to which Ireland is strongly committed. The adoption of the TPG 2017 by Ireland is necessary to give effect to international best practice in the area. Guidance on the application of the rules and the anticipated timelines for introducing same would be welcome.

Some parts of Actions 8-10 continue to be worked on and drafted (for example the incorporation of the forthcoming OECD financial transactions paper which interacts with Chapter I of the TPG 2017).

Bearing this in mind, the manner in which the guidelines are to be introduced in Ireland is important. The simplest manner for implementation is through referencing the TPG 2017 in effect at the date of the Finance Bill publication in Part 35 of the TCA 1997 which currently refers to the TPG 2010. This allows the opportunity to consult on any further changes to these guidelines and prevents a situation where Ireland adopts OECD amendments without further consultation.

We understand that some countries, on adopting the guidelines, have added their own elements in addition to the general requirements. We do not think that this would be beneficial from a certainty perspective in Ireland and that the guidelines should be adopted on a prima facie basis. Taxpayers should have advance sight of the requirements stemming from the TPG 2017 implementation and be given a clear timeframe for when the rules are expected to apply, i.e. they should not have a retrospective aspect to them. Anything to be introduced outside the standard rules needs to be particularly well flagged.

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2. Removal of the exemption for arrangements in place since pre July 2010

It is intended to extend the transfer pricing legislation to arrangements the terms of which were agreed before 1 July 2010, commencing from 1 January 2020. Do you consider that this proposed course of action will give rise to any specific issues?

Our response to the Coffey consultation in January 2018 outlined that business in Ireland relied on the "grandfathering" provisions and consequently would not have prepared transfer pricing documentation for pre 1 July 2010 arrangements in accordance with those provisions.

Our position remains unchanged. Dispensing with the "grandfathering" provisions completely would require comprehensive guidance as to how transfer pricing should be applied to long term intercompany transactions. For example, should the price to be applied reflect (i) arm's length terms and pricing at the date of inception of the transaction or (2) arm's length terms and pricing at the date of the removal of the grandfathering provisions.

Some arrangements, in particular long term loans entered into pie 1 July 2010 with a term outstanding and other long standing financial transactions, should be carved out from the general requirement to adhere to transfer pricing requirements and allowed to run their intended course.

Guidance will be key in assisting taxpayers with determining what would happen in the transition from grandfathering to no-grandfathering, and for adequate notice regarding the date of commencement of these changes. For example, regarding documentation, taxpayers will need to know whether their documentation needs to reflect the arrangement pie-transfer pricing or merely from the date the transfer pricing rules apply to the arrangement (we recommend the latter). It is necessary to specifically address concerns for long term arrangements.

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PWC 3. Extension of transfer pricing rules to SMEs

(i) Do you consider that transfer pricing legislation should be extended to small and medium enterprises?

Our strong recommendation is that the rules are not extended to SMEs as we do not feel the risks of base erosion, the increased administrative burden and the questionable exchequer returns are sufficient to justify such an imposition on many of Ireland's most important taxpayers.

Key to this is knowing what constitutes, and more importantly what does not constitute, an SME. We have outlined our thoughts on the parameters of the SME definition below. A tailored definition of SME is important to achieving the aims of BEPS Actions 8-10 and 13 without imposing undue hardship on taxpayers.

Meaning of an SME

At present, businesses that fall within the European Commission Recommendation 2003/361/EC (6th May 2003) concerning the definition of micro, small and medium sized enterprises ("SMEs") are currently not required to prepare transfer pricing documentation. The continued use of the SME definition in 2003/361/EC is in keeping with the common understanding within the EU and, unless modified further by the EC more broadly, is the most appropriate common means of defining the size of SMEs and whether or not transfer pricing rules should apply to them.

For clarity, the definition states that a company should be considered an SME if it has less than 250

staff, a turnover not exceeding €50ln or a balance sheet value not greater than €43m. This definition represents a wide range of Irish taxpayers.

The United Kingdom excludes SMEs from transfer pricing rules as a general rule. The UK, like Ireland, uses the current ELI definition for SMEs as a means of defining the scope of the exclusion (INTM 412080). However, it includes specific exceptions (per HMRC Manual INTM412070) to that definition of an SME:

• An exception that covers countries with which the UK does not have a Double Taxation treaty, and requires the enterprise to be specifically subject to transfer pricing rules in its transactions with these countries.

• Where a transfer pricing notice is issued to an SME by HMRC advising it is subject to the UK transfer pricing rules.

• Where an enterprise elects to be subject to the UK transfer pricing rules. • Where the SME is party to a Patent Box related claim.

The UK approach of adopting the standard definition with specific modifications allows taxpayers, or the tax authorities as the case may be, the flexibility to opt-in to the transfer pricing legislation depending on the particular circumstances.

While we believe that transfer pricing should not apply to any SMEs, if it is the decision that the rules should extend to some SMEs, we believe that applying a similar model as the UK would be the

PWC preferred approach. This is on the basis that SMEs are generally exempt from the rules while the modified SME definition allows a tax authority the power to deny the SME status where a genuine risk of aggressive tax planning or BEPS risk is thought to exist.

In addition to Ireland and the UK; Sweden, Finland and Estonia also follow 2003/361/EC definition.

Other countries adopt varying thresholds for documentation (Denmark, Germany, Spain, Portugal and Latvia) and/or a simplified transfer pricing return schedule included with the annual tax filing (France, Belgium, Czechia and Slovakia).

(ii) What level of documentation do you feel would be appropriate to require SMEs to maintain to demonstrate compliance with transfer pricing rules?

To reiterate our position, we do not feel that applying the transfer pricing rules or documentation requirements, is appropriate for SMEs based on the low risk of aggressive tax planning they assume.

(iii) If transfer pricing rules are extended to SMEs, what other measures might be considered to mitigate the compliance burden for SMEs?

See above.

(iv) What particular issues do you consider might arise from the application of transfer pricing rules to SME transactions with effect from 1 January 2020?

Taxpayers are dealing with a plethora of changes to the Irish corporate tax code in 2019 following BEPS, the EU's Anti-Tax Avoidance Directive ("ATAD") and sector specific changes such as PAYE Real Time Reporting. The result of these changes is that taxpayers have to quickly get to grips with their new obligations which often involve a time and financial investment.

Adding to the pressure felt by taxpayers is the knowledge that still further changes are on the horizon via the implementation of ATAD interest limitation rules, Brexit uncertainties and emergency measures, adoption of the MLI and CCCTB to name but a few. These changes place serious pressure on SMEs in terms of time and resources.

We would expect that the implementation of the various anti-avoidance measures set out above would reduce the risks of profit shifting. Extending transfer pricing rules to these entities is not likely to have a good cost-benefit outcome, it will be difficult to police and the documentation requirements on taxpayers would be unjustified.

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pwc 4. Extending Transfer Pricing Rules to non-Trading Income and Capital

Transactions

It is intended to extend the transfer pricing rules to non-trading income chargeable to tax under Case III, Case IV and Case V of Schedule D where such an extension would reduce the risk of aggressive tax planning as recommended by the Coffey Review. (i) Are there are issues which may arise through the extension of transfer pricing rules to non-trading income and how may any such issues be resolved?

Policy overview - opportunity for real change

The extension of the transfer pricing rules to non-trading transactions would represent a very significant change to the Irish corporate tax system.

If introduced in isolation, it would give rise to significant issues for taxpayers, increased uncertainty around business models and result in unforeseen consequences which we have detailed below. However, by extending the transfer pricing rules as part of a suite of reforms, aimed at modernising our tax regime, it is possible to make a real impact on Ireland's corporate tax code to ensure that our regime is fit for purpose in a changing world.

The various changes we have seen in the tax code in recent years have generally been reactionary as a result of various international agreements. The changes were primarily driven by international tax reform measures and EU directive implementation. These changes have been and will be positive as a whole as they reduce BEPS risks and prevent aggressive tax planning.

However, and in line with the corporation tax roadmap, we think that the time has come to look at the corporate tax code in a holistic fashion and knit together the changes made to date while allowing scope to supplement the rules in the coming years to ensure our system is both competitive and remains in line with international norms and best practices. The implementation of this and other significant changes to our tax regime offers the best opportunity to review and modernise our tax code where required. At a broader level, this is an opportune time to step back and consider whether any of the key features of tax regimes in other countries could be implemented in Ireland.

The extension of transfer pricing to non-trading transactions will lead to significant complexities in the Irish tax system and without further reform to our tax system could result in inequitable outcomes and in many cases double taxation. For example where there is currently an outstanding balance between a non-trading company and a trading company, upon the introduction of transfer pricing the trading company would be taxed on the interest income it imputes at 25% but an equal and opposite deduction would not be available in the non-trading company. We have, in Appendix 1, provided further clarity on some of the potential issues that will arise if transfer pricing rules are extended to non-trading transactions without making the necessary changes to the infrastructure of our tax code. In order to deal with these potential issues we believe there are four key considerations that need to be borne in mind in relation to these proposed changes:

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1. A tax system with three rates of tax. 2. The deductibility of expenses in non-trading scenarios.

3. The interaction of the extension of our transfer pricing rules with other areas of reform.

4. The timing of the proposed changes.

We have dealt with each of the above in turn below.

A tax system with three rates of tax

In a modern BEPS compliant system we question the continued need for three rates (12.5%, 25% and 33%) of tax to which corporate entities can be subjected. In most of our competitor jurisdictions, there is one flat rate of corporate tax that deals with "trading" income, passive income and gains. As a result the complexity of having three separate rates puts us at a distinct disadvantage compared to our competitors.

The 25% rate was originally introduced to ensure that this higher rate of tax applied to certain categories of income including excepted trades, rental income and purely passive income. However, the implementation of BEPS Actions including the better alignment of profits with substance through DEMPE/risk control functions, anti-treaty shopping measures and the MLI means that we are less likely to see instances of material passive income.

When the 25% rate was introduced in 20001, it was 5.4 basis points lower than the OECD average2. However, we live in a very different tax environment and now the 25% rate is 3.1 basis points higher than the OECD average rate. This gap is also likely to rise as our competitors for FDI investment are continuously reducing their rates of corporation tax. The 25% tax rate applied to c. €4b11 of income receipts in 2017 (the most recent year for which figures are available), resulted in c. €ibn of corporate tax3. Removing the 25% rate of tax therefore would result in a cost to the exchequer of €500m (this income would now be taxable at 12.5%). We understand that this would likely not be an affordable step change and we also recognise that there may be sound policy arguments for maintaining the 25% rate for certain specific income categories. We would, however, imagine that the majority of the income taxed at 25% is not indeed tax raised on purely passive activities and is more likely income raised from specific income categories that are taxed at the 25% rate including Case V rental income and excepted trades. Maintaining the 25% rate of tax for these income categories could ensure that the policy concerns around these areas are still addressed, the vast majority of the exchequer income is maintained while also simplifying the tax system for corporate entities upon the extension of transfer pricing to non-trading transactions.

1 https://webarchive.oireachtas .ie/parliament/ media/ committees/finance/ report --- global-corporate-

taxation-final.pdf 2 https://stats.oecd.org/Index.aspx?DataSetCode=CTS

— CIT

3 Based on the Revenue report "Corporation Tax 2017 Payments and 2016 Returns", published in April 2018, available at https: //www.revenue.ie/en/corporate/documents/research/ct-analysis-2018. pdf

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Pwe The deductibility of expenses in non-trading scenarios

The concept of trading is fundamental to the Irish taxation system but as can be seen from the non-exhaustive list of examples in Appendix 1, the extension of transfer pricing to non-trading transactions could lead to double taxation due to the restrictions on deductibility in non-trading scenarios. As such the deductibility of related costs against non-trading income needs to be considered to maintain equity for taxpayers operating in a non-trading environment.

At a high level, where non-trading income is generated and is subject to tax in Ireland, the expenses generated in earning that income should be deductible for tax purposes at the same tax rate. As there is no mechanism by which to allow for this in the legislation, this is only achievable where the higher tax rate is removed, all income is taxable at one sustainable tax rate and a mechanism for deductibility is introduced for non-trading scenarios.

As there are sound policy reasons to maintain the concept of trading, and indeed the removal of same would result in significantly more issues, it will be necessary to determine a mechanism whereby imputed interest/charges on non-trading transactions are deductible for the recipient of the service/loan/brand name etc. This will be a critical element in ensuring that the unintended consequences of the expansion of transfer pricing to non-trading transactions are avoided.

The interaction of the extension of our transfer pricing rules with other areas of reform

Ireland is currently on a path of reform in line with BEPS and EU measures and to take account of the recommendations stemming from the Coffey report. For example interest restriction rules are due to come into force in Ireland no later than i January 2024 in line with ATAD Article 4. We have already expressed our thoughts on the preferred way to introduce these rules as part of a recent consultation process. There is significant crossover between the application of transfer pricing to non-trading transactions with these proposed changes and as we mentioned in our other submissions, the opportunity now arises to review our existing interest deduction rules to allow for a clear and unambiguous set of rules that will align with the 30% EBITDA cap and prevent the inherent risks of base erosion.

The timing of the proposed changes

If it is intended to extend transfer pricing to non-trading transactions from 1 January 2020, we would recommend that at a minimum a transition period for existing non-trading arrangements that are in place prior to the enactment of the legislation are provided with a transition period until 1 January 2021 to ensure that they have sufficient time to ensure that all arrangements are compliant with the proposed new rules.

(ii) Do you believe that the current market value rules are sufficient so that capital transactions do not need to be subject to separate transfer pricing rules?

Sufficient safeguards exist within our domestic legislation so as to ensure capital assets transfer at market value. The legislation already provides that market value is to be used in connection with the

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disposal of capital assets between related parties (s547-s549 TCA 1997) and within the capital allowances rules such as within S312 (special provisions on certain sales). If transfer pricing rules were extended to capital transactions, the ring-fencing of connected parties losses under 5549 TCA 1997 would no longer be justifiable and we understand that this serves as an important anti-avoidance measure.

Additionally, the legislation includes other sections such as s623 TCA 1997, which provides that where group relief applied to a prior intra-group transaction, and the chargeable company leaves the group while still holding the asset, this triggers a market value rebasing at the date of the original transfer.

If there are any uncertainties or discrepancies in the definition of Market Value under OECD principles and Irish domestic legislation, they should be addressed by way of guidance without the need for widespread extension of transfer pricing rules. Given the existing domestic legislation, the BEPS risk on these transactions is low. Where capital assets are transferred, we suggest that taxpayers may use valuations and equivalent documentation to support market value queries arising as has been the case for CGT historically, rather than creating a separate/new requirement for documentation.

(iii) Could these rules be supplemented by additional documentation requirements?

Similar documentation requirements should apply to all types of transaction from a reporting obligation perspective to assist in the uniform application of the rules by taxpayers.

Allowing the use of "other" documents such as valuations prepared to support the market value on inter-group transactions at the date of sale within local files rather than having to prepare a separate economic analysis would be welcome.

Transactions involving the use of a tax relief, for example, s.626B TCA 1997 should not be subject to transfer pricing documentation as this imparts an unjustified administrative burden on the taxpayer. Most taxpayers would document these and similar transactions so as to record the economic justification of the transaction, the gain that would have applied but for the relief and the history to the transaction which we think is sufficient in this respect.

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5. Extending Transfer Pricing Documentation

(1) What particular issues do you consider might arise if the enhanced documentation requirements were to apply from i January 2020?

By reference to the contents of Chapter V of the TPG 2017 (including Annex I and Annex II to Chapter V), the update of Ireland's Transfer Pricing rules to incorporate TPG 2017 implicitly introduces enhanced transfer pricing documentation requirements for taxpayers in Ireland.

Many of the issues that may arise if enhanced documentation requirements are introduced have been mentioned already in earlier comments. The below is a summary of the various issues that are likely to arise:

• Timing of introduction - in light of the significant corporate tax changes already and yet to be implemented, it should be borne in mind that companies are struggling to achieve certainty on both the operation and the administrative burdens of such new rules. To give taxpayers the chance to address their extended obligations, the enhanced transfer pricing documentation requirements that come with the introduction of TPG 2017 into Ireland's transfer pricing legislation should be extended no earlier than 1 January 2021.

• Adopt without modification - when TPG 2017 are introduced into Ireland's transfer pricing legislation, we recommend that the requirements of Chapter V Transfer Pricing Documentation are adopted without any modification. Where TPG 2017 are adopted with local specifics, this results in an additional burden for taxpayers involved in foreign transactions where the counterparty has lesser documentation requirements. In this regard, Section 835F, TCA 1997 would need to be updated as a result of the adoption of TPG 2017.

• Penalties - companies compliant with the transfer pricing documentation rules should have certainty on the specific penalties, if any, arising from:

o the failure to prepare the transfer pricing documentation on a timely basis; and o additional tax liabilities derived from transfer pricing adjustments where Revenue

disagree with the transfer pricing policies adopted by a taxpayer. This issue should also be dealt with in Section 835F which currently makes reference to Section 886, TCA 1997.

• Timing of preparation - given that many taxpayers in Ireland are familiar with preparing transfer pricing documentation reports for other jurisdictions in a manner contemporaneous with the filing of the corporate income tax return in those jurisdictions, clarity as to whether such a filing requirement will be introduced in Ireland would be welcomed.

• Detailed guidance - while not a legislative issue, there are a number of technical and practical aspects to the preparation of transfer pricing documentation as set out in TPG 2017 where detailed guidance from Revenue is important, such as:

o requirements on the frequency of update the Irish transfer pricing documentation report(s);

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o benchmarking requirements (covering such issues as the use local comparables versus pan-European comparable sets, the use of weighted averages versus arithmetic calculations in assessing the range of outcomes, the use of multi-year calculations for the tested party/comparables, etc.); and

o In relation to the form and content of the transfer pricing documentation, guidance on expectations and best practice.

(ii) Are there any circumstances in which the documentation requirements should be reduced or limited in specific respects?

Our view is that consideration should be given to reduced / limited transfer pricing documentation requirements for related party transactions where there is a low risk of base erosion or aggressive tax planning such that implementing detailed transfer pricing documentation requirements would be unduly burdensome.

Many of these have already been referred to earlier in this submission, but the below is a summary of such circumstances:

• Continued SME exemption; • Transactions below a De Minimis value and / or transactions entered into by companies whose

revenues, employees or assets are below a De Minirnis amount; • Legislative confirmation that transactions involving low-value-adding services do not need to

be documented (building upon the very helpful eBrief 37/18); and • Intra-Ireland transactions.

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6. Application of the Authorised OECD Approach to branch profit attribution.

(1) Do you consider that the Authorised OECD Approach to attribution of branch profits would be an appropriate approach to adopt into Irish law?

Yes, the AOA is widely accepted in OECD countries and provides clear principles of how profit should be allocated to branches and PEs. It has been used and accepted by Irish Revenue in a number of cases that we are aware, and to have it formally in legislation would provide clarity to the taxpayer. The use of the AOA is frequently seen across the financial services industries and its industry specific chapters form the basis of approaching the transfer pricing analysis of many non-branch structures/transactions. Formal adoption further adds weight to the transfer pricing approaches and considerations for the banking, global trading, insurance, etc industries. Consideration is required as to how anti-hybrid rules will interact where branches are involved and where deductions may be denied under anti-hybrid rules.

(ii) If the Authorised OECD Approach is adopted in Irish law, what documentation requirements should apply?

Based on the similarities on the approach, the requirements shall be similar to the general transfer pricing documentation requirements.

(iii) Is there an alternative approach that should be considered in this context?

We do not believe there is an alternative approach that should be considered.

(iv) Are there any industry or sector-specific considerations that should be borne in mind, particularly in relation to financial and insurance companies, in relation to branch profit attribution?

Given that some countries (e.g. Germany) have specific national legislation regarding the determination of a Key Enterprise Risk Taking (KERT) function and subsequent attribution of profits in certain industries (e.g. seen in the insurance and banking industries), consideration should be taken as to whether the AOA should also be adopted into tax treaties after it is rolled out in direct legislation. This allows Revenue greater negotiating power in an APA or MAP situation as to the adoption of the AOA.

(u) Are there any special considerations required in respect of SMEs?

Based on the similarities on the approach, the requirements shall be similar to the general transfer pricing requirements.

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7. Any other issues?

Are there any other issues which you believe should be considered as part of the reform of Ireland's transfer pricing legislation?

Transfer Pricing objectives under s.81 TCA 1997

While the transfer pricing rules were heretofore not applicable in the case of SMEs, Revenue, via the existing legislation, has had the ability to challenge taxpayers under the sections covering the general deduction rules (within S81 TCA 1997) or "Control over Residents" (within S1036 TCA 1997) on transactions undertaken between related parties. To the extent that an intragroup payment was not seen by Revenue as being incurred wholly and exclusively for trading purposes, a deduction could be denied for the payment. Continuing to apply this approach would ensure that the risk of base erosion is negated and does away with the extensive documentation requirements.

Taxpayers are required to keep documents that support entries in their tax returns for a period of 6 years under the current rules and as such, we believe that the practice of documentation already exists. SMEs, when undertaking transactions involving significant values, would generally document the details of the transaction to a reasonable standard in the anticipation of a Revenue intervention.

Close Company Surcharge

To the extent that non-trading income is required to be treated as taxable income as a result of extended transfer pricing rules (which we feel should be taxed at 12.5% - see Question 4), care needs to be taken to ensure that this income is not further taxed under the close company rules. A carve out is needed to ensure that where a company has undistributed estate and investment income by virtue of recording additional income under transfer pricing rules, that this income is not surchargeable.

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PWC Appendix 1 - Additional considerations in relation to the complexities that will arise upon the extension of transfer pricing to non-trading transactions

Non-trading income

If we consider the stated objective of extending these rules, as set out under the Corporation Tax Roadmap, is to tackle aggressive tax planning, the question naturally arises whether the transfer pricing rules should apply only to transactions which can give rise to aggressive tax planning? This would significantly reduce the administrative burden for Irish groups which for legal/payroll/administrative reasons share resources and assets (i.e. employees, premises, fixed/intangible assets). Any transactions which cannot result in profit shifting into or out of Ireland and ultimately aggressive tax planning should be excluded from the TP rules.

S.iio companies

We would recommend that specific consideration is given to the application of transfer pricing rules to S.iio companies in light of the fact that S.iio TCA 1997 already contains a bargain made at arm's length requirements and detailed anti-avoidance provisions to prevent tax avoidance and aggressive tax planning.

Payments for group relief

The application of transfer pricing rules to non-trading transactions may lead to issues regarding the surrender of group losses from one related party to another (commonly referred to as "Group Relief'). A number of groups facilitate a payment between group companies for such relief.

In many instances, the group relief recipient may not generate income / be in a position to pay for group relief. As such, the group relief may be surrendered for nil or a payment is agreed upon which will be left outstanding as an inter-company balance. If transfer pricing rules are extended to apply to these situations, it will mean that all group relief surrenders will need to be undertaken in return for market value consideration and interest will be imputed on any outstanding balances. Issues may arise regarding the ability to pay for the group relief but also in the case of interest where there is a mismatch in tax treatment on such interest (i.e. where accrued interest arises in the hands of the surrendering company taxable at 25% but no deduction may be available for the recipient company).

It is not clear that current legislation, which neutralises the tax impact on payments for group relief, would be extended to potential interest accruing on the late payment of group relief.

Loan Guarantee Agreements/ "Section 17 Guarantees"

Parent companies commonly guarantee a loan agreement for related entities or subsidiaries where they take on debt. The risk involved with the guarantee does not always translate into a fee to the debtor (generally a subsidiary company) and there are a range of reasons why no fee can be charged.

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Payments required to be made on foot of such arrangements would fall within the scope of non-trading income under Case IV of Schedule D in the hands of the parent or guarantor and would be taxed at 25%. The potential for a mismatch between pick up and deduction in such instances is great.

Other common transactions

Commonly occurring costs in group company situations are management service fees and secondee arrangements which generally relate to payments made by subsidiaries to a parent company (though this is not always the case) for the provision of services by employees of the parent or use of the parent's assets or know-how.

In group scenarios, IP assets such as brands, customer lists etc. may be held by one Irish group company and frequently used by other Irish group companies. Unless the company holding the underlying asset can demonstrate that it is actively trading with regard to the asset, the tax arising on licensing fees would be subject to tax at 25%. On the other hand, the company making use of the asset is only allowed to take a tax deduction (at 12.5%) where it is trading in its own capacity. As a result, a mismatch in tax rates and deductibility of the expense could arise.

Additional considerations

We suggest that the extended transfer pricing rules apply only where a De Minimis amount is breached which would reduce the compliance and administrative burden on taxpayers. This could be applied on a transaction value basis.

In some countries (e.g. Spain and Hungary), rules require for all intercompany transfers of assets to be documented. We do not believe there is value in such an approach. The introduction of these rules at a basic level would result in an incommensurate administrative burden, particularly where documentation is required to be maintained.

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