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Analysis - Special Feature
Transfer Pricing documentation to support targeted Revenue interventions
Transfer pricing audits have been one of the highest yielding areas for Revenue compliance interventions in recent years and in-scope corporates need to pay heed to the latest guidance around TP documentation writes Deloitte’s Richard Lombard. He analyses the changed operational policy and says now is the time for corporates to review their own policies to ensure their TP documentation remains fit for purpose.

On 18 December 2023, Irish Revenue issued a Tax and Duty Manual (Part 35A-01-05) outlining their operational policy for requesting a transfer pricing local file and master file as part of their transfer pricing risk assessment/appraisal process.

Background on Irish Transfer Pricing Audits
Based on statistics published by Revenue in their annual reports, transfer pricing has been amongst the highest yielding areas in recent years. Transfer pricing audits generated a yield of €240.8m and a restriction in trading losses of €752.8m (tax effect €94.1m) in 2022. This accounted for 30% of the total compliance yield in Ireland in 2022, up from 17% in 2020.

Irish Revenue has two dedicated transfer pricing audit branches in the Large Corporates Division (“LCD”) with nationwide responsibility for conducting risk-driven transfer pricing audits and other transfer pricing compliance interventions.

Prior to selecting cases for audit, the Transfer Pricing Audit Branches will seek to conduct a transfer pricing risk assessment/appraisal before deciding on whether they wish to open a level 2 compliance intervention (i.e., a transfer pricing audit or risk review).
Richard Lombard
Richard Lombard


Operational Policy of the TP Audit Branches
Revenue have clarified the following within Tax and Duty Manual (Part 35A-01-05):
• That the Transfer Pricing Audit Branches may request a local file and/or a master file when conducting a transfer pricing risk assessment/appraisal to better identify potential transfer pricing risks and make an informed decision about whether there is sufficient risk to open a Level 2 compliance intervention (i.e., audit or risk review). In line with Irish TP legislation, a taxpayer will have a period of 30 days to provide this information to avoid a fixed penalty for non-compliance (i.e., €25,000 plus €100 for each day on which this failure continues).
• That a request for a local file and/or a master file as part of a transfer pricing risk assessment will be recorded by Revenue as a Level 1 Compliance Intervention under the Compliance Intervention Framework, as set out in the Code of Practice for Revenue Compliance Interventions. A taxpayer will therefore retain the ability to address compliance matters through a self-correction or by making an unprompted qualifying disclosure until further action is taken by Revenue (e.g., a level 2 intervention is subsequently opened).
• While compliance with Irish transfer pricing rules may be examined as part of an annual risk review meeting under the Co-Operative Compliance Framework (“CCF”), the TP Audit Branches reserve the right to select transactions for a TP audit including in respect of any taxpayer within the CCF.
• As a Transfer Pricing Compliance Reviews (“TPCR”) may involve further work for taxpayers’, compared to only providing a copy of their master file and local file, the requested 3-month period for a TPCR should be considered separately from the 30-day period to furnish a local file and/or master file under Irish TP rules.

Key Takeaways
• This operational policy signals that a Transfer Pricing Audit Branch will likely seek to review a taxpayer’s local file and master file before selecting cases for a transfer pricing audit. Revenue expect that this will facilitate more targeted risk-based transfer pricing interventions.
• The clarification that a request for a local file and/or master file during a transfer pricing risk assessment/appraisal will be recorded as a Level 1 Compliance Intervention removes any ambiguity that may have existed as to whether such a request would need to be recorded by Revenue as a Level 2 Compliance Intervention (which would have reduced a taxpayer’s ability to address compliance matters through a self-correction or by making an unprompted qualifying disclosure).
• Where a Level 1 request is received for a local file and/or master file, it would be advisable that a taxpayer reassesses their transfer pricing policies in relation to all open periods to identify whether there are any issues that should be self-corrected or disclosed by way of an unprompted disclosure before a decision is taken by a Transfer Pricing Audit Branch on whether they wish to open a level 2 compliance intervention.
• A taxpayer within scope of CCF is not immune to a level 2 compliance intervention by the TP Audit Branches in respect of transfer pricing issues. Further, where transfer pricing is examined as part of an annual risk review meeting, it would be advisable for a taxpayer to meaningfully engage and fully cooperate with Revenue to ensure that any transfer pricing issues remain within the CCF review process (i.e., as a level 1 compliance intervention).

Conclusion
Transfer Pricing interventions have become increasingly resource intensive in recent years and can divert precious resources away from core business activities. Revenue’s operational policy highlights the importance of maintaining robust TP documentation as a first line of defence that may influence whether a case is selected for a transfer pricing audit and provide protection from penalties. We would suggest that all taxpayers within scope of Irish TP rules should critically review whether their TP documentation is fit for purpose and provides meaningful protection in the event of Revenue scrutiny.

This article appeared in the March 2024 edition of the Irish Tax Monitor.