Irish Revenue published a document explaining the important role that its competent authority (CA) function would play in resolving international tax disputes and ensuring the correct allocation of taxable profits to Ireland.

In today’s global tax environment, transfer pricing is one of the most significant tax issues. As such, when deciding on where to establish and/or expand global operations, multinational enterprises (MNEs) place increasing emphasis on jurisdictions with strong, experienced and well-resourced CA functions.

According to Irish Revenue, when Ireland enters into an income tax treaty with another jurisdiction, it has a legal obligation to provide a CA function to resolve tax disputes that may arise under the treaty. Article 25 mutual arrangement procedure (MAP) of the Model Tax Convention of the Organisation for Economic Co-operation and Development (OECD) provides a mechanism for tax authorities to resolve tax disputes. That article states that CAs “shall endeavour . . . to resolve [disputes] by mutual arrangement with the competent authority of the other Contracting State, with a view to the avoidance of double taxation.”

Irish Revenue is Ireland’s CA, described as the “position, person, or body to whom issues can be addressed to ensure a good faith application of a double tax convention [that is, an income tax treaty] and who will endeavour to resolve such issues in accordance with the applicable tax convention.” Among other things, Ireland’s CA would resolve international transfer pricing disputes.

“Ireland’s position is to support mandatory binding arbitration and this may be achieved through co-operation with other countries that have a similar view,” Irish Revenue stated, adding that its CA function “has expanded significantly” over the past 18 months.

Mutual arrangement procedures

Irish Revenue envisions that the base erosion and profit shifting (BEPS) project of the OECD will lead to a significant increase in transfer pricing disputes, as well as placing more requirements on the CA function as a result of proposed changes under BEPS Action 14. The objective of BEPS Action 14 is to develop solutions to address obstacles that prevent countries from solving treaty-related disputes under the MAP, including the absence of arbitration provisions in most income tax treaties and the fact that access to the MAP and arbitration may be denied in certain cases (for example, where a serious penalty has been applied). As such, Irish Revenue expects an increase in the number of MAPs and requests for advance pricing arrangements (APAs).

Note: Other stakeholders have echoed similar concerns. The question often asked is: Which CA do you want on your side in the event of an international tax dispute?

Irish Revenue observes that MNEs are increasingly seeking certainty with respect to transfer pricing matters. An APA would establish the arrangement between the tax administrations in two or more countries on how future transactions between related taxpayers established in their respective jurisdictions will be taxed.

Irish Revenue does not have a formal bilateral APA program, but intends to evaluate implementing one “to enhance Ireland’s standing as a fair and transparent tax jurisdiction.” It has acknowledged, however, that there are disadvantages that need to be considered.

Arbitration

Four of Ireland’s income tax treaties contain arbitration clauses. In Irish Revenue’s view, mandatory binding arbitration gives taxpayers a guarantee that their case will be resolved within a set time period and that they will not be subject to double taxation.

Even though BEPS Action 14 does not provide for mandatory binding arbitration as a minimum standard or best practice, Irish Revenue believes that “Ireland’s willingness to enter into a multilateral instrument with other countries in favour of mandatory binding arbitration will send a strong message that Ireland is committed to resolving international tax disputes.”

Key considerations

Irish Revenue’s key aims and objectives with respect to the CA function include the following:

  • In the context of MAP negotiations, ensure the correct allocation of profits to Ireland.
  • Continue to ensure that Irish Revenue has a sufficiently resourced and experienced CA team to deal with the inventory of MAP and APA cases.
  • Scope and evaluate the introduction of a formal bilateral APA program.
  • Work with the interested group of countries with respect to the introduction of mandatory binding arbitration.

Looking ahead

The recent Irish Finance Bill contains details of Ireland’s response to Action 13 of the BEPS minimum standard of country-by-country reporting. Under the proposed bill, an Irish headquartered MNE with annual consolidated group revenue in excess of €750 million (US$805 million) will be required to provide Irish Revenue with information for each jurisdiction in which the group operates. Country-by-country reporting will apply for fiscal years starting on or after January 1, 2016, and the report must be filed no later than 12 months after the end of the fiscal year to which it relates.

© 2015