International Tax Planning and Transfer Pricing Planning: Ireland from a US perspective

Autor:Professor Dr. Rainer Zielke
Cargo del Autor:Professor in business economics at Østfold University College, Halden, Norway
Actualizado a:April 2017
 
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Contenido
  • 1 Abstract tax planning
  • 2 Abstract transfer pricing planning
    • 2.1 Introduction
    • 2.2 The low country Ireland in the OECD context
    • 2.3 Transfer pricing rules of Ireland
      • 2.3.1 Country-per-Country (CbC) reporting
      • 2.3.2 Laws and rules
      • 2.3.3 Arm's length principle
      • 2.3.4 Transfer pricing methods
      • 2.3.5 Definition of related companies
      • 2.3.6 Reporting requirements
      • 2.3.7 Documentation requirements
      • 2.3.8 Cost sharing
      • 2.3.9 Business restructuring
      • 2.3.10 Interaction between customs valuation and transfer pricing
      • 2.3.11 Dispute resolution
    • 2.4 Calculation of the case studies in international tax planning between Ireland and the USA
      • 2.4.1 Design of the tables
      • 2.4.2 The treaty Ireland-USA in brief
      • 2.4.3 BEPS Project progress
      • 2.4.4 Ireland in brief
      • 2.4.5 The USA in brief
      • 2.4.6 Design of case studies
      • 2.4.7 Case study 1: Dividends from Ireland to the US
      • 2.4.8 Case study 2: Interests from Ireland to the US
      • 2.4.9 Case study 3: Royalties from Ireland to the US
      • 2.4.10 Case study 4: Management and technical service fees from Ireland to the US
      • 2.4.11 Case study 5: Capital gains with Ireland as asset country to the US as seller country
      • 2.4.12 Case study 6: Dividends from the US to Ireland
      • 2.4.13 Case study 7: Interests from the US to Ireland
      • 2.4.14 Case study 8: Royalties from the US to Ireland
      • 2.4.15 Case study 9: Management and technical service fees from the US to Ireland
      • 2.4.16 Case study 10: Capital gains with the US as asset country and Ireland as seller country
    • 2.5 Concluding remarks
  • 3 Notes
Abstract tax planning

According to the International Monetary Fund, Ireland confirms in 2016 with a gross domestic product (GDP) of US$ 307,917 million the twelfth-highest GDP of the European Union. In Ireland, the standard rate of corporation tax on trading income is 12.50%. Ireland has a classical system for the assessment of corporate profits. Thus, Ireland is a low tax country. Especially for multinational enterprises, it is therefore interesting to realize profits in low taxing countries by means of tax planning measures. Ireland has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting. According to the OECD, Irish economic growth is projected to moderate gradually. The economy, particularly exports and investment, is already being slowed by the prospect of Brexit. Nonetheless, the Irish economy will continue to expand on the back of solid domestic demand and strong employment and wage growth. The fiscal stance is expected to be broadly neutral, exerting a smaller drag on activity than in past years. The government is nevertheless on track to attain its medium-term goal of balancing the budget. Financial conditions will remain supportive overall. This chapter provides a survey on the actual tax law frame conditions in Ireland and practical support in international tax planning and transfer pricing planning between Ireland and the US based on cross border case studies.

Abstract transfer pricing planning

With respect to transfer pricing Ireland applies the arm’s length principle and follows the OECD Guidelines, the following transfer pricing methods are applicable: the comparable uncontrolled price method (CUP), the resale price method, the cost-plus method, the profit split method, and the transactional net margin method. The CUP method is preferred over the other methods, if sufficient data to support the method is available. However, the best method for each transaction must be applied. Companies are regarded as related if one company, directly or indirectly, participates in the management, control or capital of the other company. In the case of shareholding, companies are related if one of them holds more than 50% of the shares in the other company. Companies under mutual control are also regarded as related. There are no specific reporting requirements. Companies are required to keep documentation on transactions with related companies. However, transfer pricing rules are not applicable to SMEs. Cost sharing is allowed and business restructuring possible. There is interaction between customs valuation and transfer pricing. Ireland has no regulations on advance pricing agreements.

Introduction

International tax planning and transfer pricing planning between Ireland, a country of a modern knowledge economy focused on high technology industries and services and the US as most important national economy of the world based on cross-border case studies is of central importance. In addition, the USA confirm with a population of 321 million inhabitants in 2016 3rd place of the most populous countries in the world (4.40% of the world population).

According to the International Monetary Fund, [1] Ireland confirms in 2016 with a gross domestic product (GDP) of US$ 307,917 million the twelfth-highest GDP of the European Union. In Ireland, the standard rate of corporation tax on trading income is 12.50%. Ireland has a classical system for the assessment of corporate profits. Thus, Ireland is a low tax country. Especially for multinational enterprises, it is therefore interesting to realize profits in low taxing countries by means of tax planning measures. Ireland has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting.

According to the OECD, [2] Irish economic growth is projected to moderate gradually. The economy, particularly exports and investment, is already being slowed by the prospect of Brexit. Nonetheless, the Irish economy will continue to expand on the back of solid domestic demand and strong employment and wage growth. The fiscal stance is expected to be broadly neutral, exerting a smaller drag on activity than in past years. The government is nevertheless on track to attain its medium-term goal of balancing the budget. Financial conditions will remain supportive overall. Structural reforms should prioritize making economic growth more inclusive by getting more people back into work and revamping the tax and benefit system. Public investment remains low and direct taxes rose following the crisis. Ireland has gained fiscal space through strong growth and low interest costs, providing room to roll back some of the measures taken after the crisis. The welcome six-year plan on infrastructure investment for 2016-21 will raise public investment back towards its pre-crisis level. The universal social charge, an income levy introduced after the crisis, should be reduced as planned.

According to Orbitax, [3] (Daily Tax News Digest of 28 December 2016), on 21 December 2016, Irish Revenue published eBrief No. 101/16 [4]concerning updates to the Universal Social Charge (USC) Tax and Duty Manual to reflect the changes of rates and rate bands announced in Budget 2016. The updated rates and bands are: 0.5% on the first EUR 12,012; 2.5% on the next EUR 6,760; 5% on the next EUR 51,272; and 8% on the balance. These new rates and rate bands apply for the tax year 2017 and subsequent years.

The pivotal question is therefore, how groups of affiliated companies with group companies in Ireland and in the US can – before the background of ant-avoidance legislation and other tax law frame conditions – optimize their strategies of international tax planning based on cross-border case studies.

Therefore and first of all the high low tax country Ireland is to be reviewed in the OECD context (see section 2) – also with respect to the transfer pricing rules of Ireland (see section 3), and constructive hereon 10 case studies in international tax planning between Ireland and the US are to be calculated (see section 4). Finally the results of this survey are to be compiled in concluding remarks (see section 5), especially with respect to the deduction of strategies in international tax planning between Ireland and the US.

This article had been written based on the following sources:

  • Orbitax[5], Orbitax Country Analysis Ireland and USA, Orbitax Cross-Border Calculation Tools, Orbitax Transfer Pricing Tool,
  • the Irish Income Tax Act, [6]
  • the Irish Tax Reform 2017, [7]
  • the US Internal Revenue Code, [8] and
  • the Double Taxation Convention between Ireland and the USA signed 28 July 1997 and effective from 1 January 1998. [9]
The low country Ireland in the OECD context

International tax planning and transfer pricing planning between Ireland and the US based on cross-border case studies is of central importance. In Ireland, the standard rate of corporation tax on trading income is 12.50%. Ireland has a classical system for the assessment of corporate profits. Thus, Ireland is a low tax country. Ireland has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting.

Between OECD Member States, especially Ireland and the US, and other countries and also within the OECD there exists – also in 2016 – a considerable tax differential. Here from there results the incentive to international tax planning and to shift the taxable basis into lower taxing OECD Member States and other countries outside the OECD. Primary parameters of the corporate income tax burden of any country are the statutory corporate income tax rates. [10] Furthermore in many OECD Member States there are – in addition to the statutory corporate income tax rates – further corporate income taxes, especially on the level of subordinated regional administration bodies. Consequential and following the concept of Gerd Rose[11] there can be calculated combined tax rates for any country, that applied to one (uniform) taxable basis, result in the tax burden of the related country. The combined corporate income tax rates of countries with several taxes can then be compared with countries that just apply a single corporate income tax rate. In addition, an average rate for the whole OECD can be calculated.

In 2016, Ireland has a combined tax rate of 12.50%. Within the OECD, the corporate income tax rates range between 12.50% in case...

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