Move to ease impact of transfer pricing reforms on SMEs
The Department of Finance is looking at ways to minimise the impact on small and medium sized enterprises (SMEs) here of new rules aimed at stamping out tax-shifting by multinational companies.
The proposals were issued as part of a consultation process that runs until September 13 and were in large part based on the earlier Coffey Report, the in-depth review by economist Séamus Coffey into Ireland's corporate tax code following the Apple tax ruling.
As part of a review of new rules proposed by the Organisation for Economic Cooperation and Development (OECD), the Department has amended proposals for small companies and some non-trading transactions inside companies.
"The extension of transfer-pricing rules to SMEs was not favoured by respondents with a number suggesting if rules were to be extended it should be done with reduced documentation requirements," the Department said in a consultation document.
The exemption for small companies is based on the premise they do not undertake the complicated internal sales done by many large multinational companies, so hitting them with the same rules could impose hefty costs and lengthy documentation needs.
The Department said there was broad understanding in the consultation for the need to extend the transfer-pricing rules to cross-border non-trading transactions within companies, but also "almost universal calls for caution," about extending rules of capital deals and non-trading arrangements.
"The majority of submissions called for capital transactions to remain outside the scope of transfer-pricing rules citing that the existing provisions are sufficient," the Department said.
It proposed that the new rules could be amended to as to exclude capital transactions of less than €25m.
"Capital transactions could be linked to profit shifting but this is also the case for non-trading transactions (interest on loans etc.)," said Mr Coffey in response to the new proposals.
"The submissions seem to favour the introduction of transfer-pricing rules for cross-border non-trading transactions.
On capital transactions the argument is that existing provisions are sufficient without imposing the compliance costs that the formal application of transfer pricing would require," he noted.
Transfer prices are the prices at which multinational firms exchange goods and services internally that should be carried out at the same price as they would be charged to another company.
According to Gabriel Zucman, an economist who specialises in the issue of global tax avoidance, transfer prices can be routinely manipulated by accountants and tax planning is now a central part of business planning for many companies.
The issue surfaced in a major investigation by the US Senate in 2013 when Carl Levin, the then chairman of the Senate Permanent Subcommittee on Investigations, highlighted tax avoidance schemes by Apple that allowed it to shelter billions of dollars in profits from the tax man.
Senator Levin disclosed how a subsidiary company of Apple registered here and controlled from the United States had come to enjoy a "stateless-income" structure and did not pay tax anywhere, commenting that "Ireland has essentially functioned as a tax haven for Apple".
The State has steadily tightened its tax rules to outlaw practices such as the "double Irish" "single malt" tax avoidance schemes and is working with the OECD on new global rules, although critics like Professor Zucman still charge that Ireland is the world's number one tax haven, something the Department denies.
Once the September 13 deadline for the consultation has passed, legislation will be published in the Finance Bill for 2019, which is published some time after the October budget.
"I think the proposed changes are significant. Ireland's existing transfer pricing regime is limited and incomplete," said Mr Coffey of the new rules.
The next stage in creating a new global tax framework comes by 2020 when the OECD, the membership body for rich economies that is charged with overseeing the process, is scheduled to deliver an agreement between its members on the complex issue with the aim of clamping down further on multinationals' profit shifting.