While many FSIs are not required to charge VAT, this means that they cannot deduct VAT incurred on the associated business related expenses. This gives rise to significant irrecoverable VAT costs for FSIs - for which VAT is an above-the line cost.
With a standard Irish VAT rate currently at 23% (temporarily 21% for 6 months from 1 September 2020), this could mean an additional 1 - 3% VAT cost for businesses moving to Ireland from the UK.
Prepare for change
A number of areas will change irrespective of the outcome of the UK/EU negotiations bringing many tax consequences, with VAT costings and both VAT and transfer pricing processes falling firmly into that category. Tax teams need to prioritize Brexit implications and make sure that VAT and transfer pricing is integrated into business decision making.
Key post-Brexit VAT impacts for FSIs from 1 January 2021
We have outlined some of the key VAT impacts arising as a result of Brexit that FSI businesses moving to Ireland should consider:
VAT treatment of income streams: In many cases, the definition of what constitutes exempt FSI services is not applied uniformly across the EU. As such, businesses should ensure they are applying the appropriate (and optimal) Irish VAT position to new business arrangements.
Input VAT recovery: Consideration needs to be given to what process changes are required to accommodate the new VAT accounting/ input tax recovery rules under Irish law. If certain business operations are transferred to Ireland, the impact on input tax recovery of costs for the wider corporate group would need to be evaluated.
Specified supplies: FSI’s will also need to evaluate how the UK’s third country status may impact VAT recovery. In particular, how will the specified supplies rules interact with services provided to / from the UK when the transition period ends?
VAT rulings: Businesses relying on VAT rulings or partial exemption special methods implemented in the UK may need to seek similar comfort from Irish Revenue by way of a formal technical submission.
EU case law / Anti-avoidance: Consideration will be required with regard to the interaction of EU provisions and case law with Irish VAT law and practice (caselaw such as Skandia, Ocean Finance, Morgan Stanley, Aspiro).
Systems and data: VAT systems, processes and data need to be reviewed and updates scheduled to allow sufficient lead time for implementation.
Cross border services: Changes to where functions are carried out, assets are employed and risks are borne is likely to evolve over time. How the tax team interacts with the business operations on local regulatory and legal requirements is crucial. For example:
• Regulatory position – how do substance, staff requirements etc. impact service delivery and therefore VAT (e.g. will the requirements change over time)?
• Legal agreements – are services akin to back office / technology which could create a VAT charge or are services akin to intermediary services which could potentially be VAT exempt?
Why should FSIs consider Transfer Pricing?
VAT should also not be considered in isolation. With changes to transactions, particularly cross-border, transfer pricing will be of increased significance. Issues such as the provision of composite supplies, understanding which services/products are VAT-exempt and the interplay between Vat and transfer pricing with regard to the bundling / unbundling of services should all be assessed as part of any new TP operating model.
Transfer pricing implications are important not only with regard to the initial transfer of business/activities to Ireland (determining what an arm’s-length price would be for any transferred functions, risks, or assets) but also with regard to the cross-border reorganisation of transactions/services provided between those connected parties on an ongoing basis and ensuring these are conducted at an arm’s length.
Any post restructuring changes to service flows will need to be cognisant of transfer pricing, for instance transactions that may previously have been UK – UK, and have now become cross border will be subject to transfer pricing regulations both in the UK and Ireland. Given this, the pricing of these services and transactions should be considered and appropriately documented particularly in light of Irish Revenue’s increased scrutiny in this area, and given the recent updating of Ireland’s transfer pricing rules in Finance Act 2019 which took effect from 1 January 2020.
Key Transfer Pricing Changes
Some of the key changes introduced include:
• Aligning domestic Irish transfer pricing law with the 2017 OECD Transfer Pricing Guidelines which include critical changes on how profits should be recognised.
• Extension of domestic transfer pricing rules to non-trading and capital transactions.
• New two-tier transfer pricing documentation in the form of a Master File and Local File are required where certain group thresholds are met.
• New penalty regime for non-compliance with transfer pricing documentation requirements of €25,000 in certain circumstances.
• Removal of the “grandfathering” exemption where certain related party transactions entered into before 1 July 2010 could fall outside Ireland’s transfer pricing regime
The changes represent the most fundamental amendments to Ireland’s transfer pricing laws since 2011. FSIs and in particular those businesses which have moved to Ireland from the UK should be aware of these changes and they should be considered carefully.
As the clock is ticking on Brexit, and the likelihood of a “hard Brexit” becomes ever more realistic FSI’s should use the remaining time to determine how to minimise potential Brexit Irish VAT consequences while ensuring Irish transfer pricing documentation is robust going forward. Now is the time to take some proactive steps to manage the indirect tax and transfer pricing risks arising from Brexit. To minimize exposure, FSIs can benefit from a carefully designed, implemented, and documented approach to VAT and transfer pricing risks.