New laws to close tax loophole used by multinationals

TRANSFER PRICING:NEW LAWS designed to close a loophole used by multinationals to cut their tax bills could leave Irish companies facing increased compliance costs, one expert warned yesterday.

This year’s Finance Bill introduces provisions that will regulate transfer pricing, a practice used by multinationals to exploit the benefits of countries with low corporate taxes. The new laws will take effect from the beginning of next year.

Transfer pricing is where a branch of a company in a high-tax jurisdiction sells goods at a low or discounted price to a branch in a low-tax location, which then sells them on at a profit, thus cutting its tax bill.

The Republic’s tax code deals with it in only a limited way and the new rules will bring it into line with trading partners such as the EU and US.

The high number of multi-nationals operating in the Republic, allied to its 12.5 per cent corporate tax rate, means trading partners are concerned that companies are using operations here to siphon away revenues from their tax authorities.

However, Turlough Galvin, head of Dublin legal firm Matheson Ormsby Prentice’s tax group, said the new laws could force big domestic companies to shoulder extra compliance costs.

Mr Galvin explained that, under EU law, any member state that introduces transfer pricing laws has to apply them internationally and domestically.

As result of this, he argued that Irish companies with branches in more than one location in the Republic could have to implement transfer pricing policies for transactions between individual branches and subsidiaries, even though they can’t benefit from the practice.

Along with finished goods, transfer pricing can apply to components, patents, services or anything that contributes to a finished product that is then sold on.

The Department of Finance said the new system, based on the market price of the goods in question, would bring the Republic into line with trading partners.

Department officials also stressed that the measure was not designed to raise any revenue.

Tax advisers predicted the provisions would have a limited impact on multinationals, which are key sources of employment and investment in the Republic.

Dan McSwiney, transfer pricing director with accountancy and consultancy firm Ernst Young, said multinationals from countries that already have a regime in place would see little change.

“Many multinationals already have documentation in place to support intercompany pricing arrangements,” he said.

“However, companies must now review all existing arrangements . . . and decide on the need for remedial action if any.”

The American Chamber of Commerce in Ireland, which represents 600 US multinationals that employ 100,000 people in the Republic, welcomed the measure.