Revenue Note for Guidance

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Revenue Note for Guidance

25A Attribution of profits to a branch

Summary

This section provides for the application of an OECD-developed mechanism, known as the ‘Authorised OCED Approach’, for the attribution of income to a branch or agency of non-resident companies carrying on a trade in the State through such a branch or agency and applies for chargeable periods commencing on or after 1 January 2022.

The ‘Authorised OECD Approach’ seeks to attribute to a branch (or agency) the profits that it would have earned at arm’s length if it were a legally distinct and separate enterprise performing the same or similar functions under the same or similar conditions. Therefore, it incorporates separate entity and arm’s length principles. The aim of the ‘Authorised OECD Approach’ is to apply to intra-company ‘dealings’ the transfer pricing principles that apply to inter-company transactions.

Details

Definitions

(1) Key definitions include:

“authorised OECD approach guidance” means the guidance on the attribution of profits to permanent establishments set out in the 2010 Report on the Attribution of Profits to Permanent Establishments approved for publication by the Council of the OECD on 22 July 2010, supplemented by the whole or part of such additional guidance on the attribution of profits to permanent establishments, published by the OECD on or after the date of the passing of the Finance Act 2021, as may be designated by the Minister for Finance.

“Article 7 of the OECD Model Tax Convention” means the provisions contained in Article 7 of the Model Tax Convention on Income and on Capital published by the OECD on 21 November 2017.

“branch”, in relation to a company which is not resident in the State, means a branch or agency through which the company carries on a trade in the State.

“medium enterprise” and “small enterprise”, for the purposes of the section, have the same meaning as that provided for by section 835F, and “small or medium-sized enterprise” shall be construed accordingly. The definitions of “medium enterprise” and “small enterprise” in section 835F are closely based on the category of micro, small and medium-sized enterprises as set out in the Annex to the EU Commission Recommendation of 6 May 2003. A small enterprise is an enterprise that, on a group basis, employs fewer than 50 employees and whose annual turnover and/or annual total assets does not exceed €10 million. A medium enterprise is an enterprise that, on a group basis, employs fewer than 250 employees and which has an annual turnover not exceeding €50 million and/or annual total assets not exceeding €43 million and which is not a small enterprise as defined. Certain modifications to the definitions contained in the Annex apply for the purposes of defining a medium enterprise and a small enterprise in an Irish context

Application of the authorised OECD approach

(2) For the purposes of section 25(2) the ‘relevant branch income’ shall be an amount that is attributable to the branch in accordance with subsections (3) and (4). ‘Relevant branch income’ is the amount of any trading income arising directly or indirectly through or from a branch and any income from property or rights used by, or held by or for, the branch.

(3) Subsection (3) is derived from Article 7(2) of the OECD Model Tax Convention. Under this provision, the branch is effectively hypothesised as a separate company independent of the company of which it is a part. Dealings are recognised between the branch and the other parts of the company. The relevant branch income attributable to the branch is the income it would have earned in respect of such dealings if it were treated as a separate and independent company engaged in the same or similar activities under the same or similar conditions, while taking into account the functions performed, assets used and risks assumed by the company (of which the branch is a part), through the branch and through other parts of the company.

(4)(a) For the purposes of attributing relevant branch income to a branch, subsection (3) shall be construed to ensure, as far as is practicable, consistency between—

  • the effect which is to be given to subsection (3), and
  • regardless of whether such double taxation relief arrangements actually apply, the effect which would be given if double taxation relief arrangements incorporating paragraph 2 of Article 7 of the OECD Model Tax Convention were to be applied, in accordance with the authorised OECD approach guidance, to the computation of so much of the profits as are attributable to the branch that comprise relevant branch income.

(4)(b) For the purpose of determining the effect which would be given if double taxation relief arrangements incorporating paragraph 2 of Article 7 of the OECD Model Tax Convention were to be applied, in accordance with the authorised OECD approach guidance, references to ‘Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations’ and ‘the Guidelines’ in the authorised OECD approach guidance shall be construed, as far as is practicable, as references to the transfer pricing guidelines within the meaning of section 835D.

Relevant branch records documentation requirements

Subsection (7) contains the documentation requirements to be satisfied.

(7)(a) A non-resident company carrying on a trade in the State through a branch or agency is obliged to have available such records as may reasonably be required for the purposes of determining whether the relevant branch income of the company has been computed in accordance with this section. These records are referred to as ‘relevant branch records’ in the section.

(7)(b) Subsection (7)(b) provides that the relevant branch records shall include –

  • a description of the business of the company, including its organisational structure, business strategy and key competitors,
  • a description of the business of the branch, including its organisational structure, business strategy and key competitors,
  • a functional and factual analysis which contains such information as may reasonably be required for the purposes of determining—
    • the existence, characterisation and terms of any dealings between the branch and other parts of the company, and
    • the appropriate attribution of assets, risks and free capital to the branch,
  • calculations supporting the attribution of free capital to the branch based on the functional and factual analysis referred to above,
  • in relation to each of the dealings between the branch and other parts of the company, accounting records and contemporaneous documents which support the existence of such dealings,
  • a description of the transfer pricing method used in respect of each of the dealings between the branch and other parts of the company and the reasons for selecting the transfer pricing method,
  • details of the tested party used, if applicable, and an explanation of the reasons for selection,
  • in respect of each of the dealings between the branch and other parts of the company, a list and a description of selected comparable uncontrolled transactions (internal or external), if any, and information on relevant financial indicators for independent enterprises relied on in attributing the relevant branch income to the branch, including a description of the comparable search methodology and the source of such information, and
  • in respect of each of the dealings between the branch and other parts of the company, information and allocation schedules showing how the transfer pricing method has been used to determine the relevant branch income attributable to the branch.

(7)(c) For the purposes of subsection (7) references to ‘functional and factual analysis’ and ‘free capital’ shall be construed in accordance with the authorised OECD approach guidance, and ‘transfer pricing method’, ‘tested party’, ‘selected comparable uncontrolled transactions (internal or external)’, ‘relevant financial indicators for independent enterprises’ and ‘comparable search methodology’ shall be construed in accordance with the transfer pricing guidelines (within the meaning of section 835D).

(8) Relevant branch records documentation must be prepared by a company no later than the date on which a tax return for the chargeable period is required to be delivered and must be provided to Revenue within 30 days of a request by a Revenue officer made in writing.

Exclusions from relevant branch records documentation requirements

(7)(d) Companies which are small enterprises for an accounting period are not required to maintain relevant branch records in respect of that accounting period. In addition, companies which are medium-sized enterprises for an accounting period and the relevant branch income attributable to the branch of the company in that accounting period is less than €250,000 are also not required to maintain relevant branch records for such accounting periods.

Penalties

(9) Where a company fails to comply with a request to provide relevant branch records within 30 days of a written request, a fixed penalty of €4,000 will apply.

Where the company is not a small or medium-sized enterprise, the fixed penalty is increased from €4,000 to €25,000 plus €100 for each day that the failure continues.

Relevant branch adjustment

Subsection (10) provides for protection from tax geared penalties, provided certain conditions are satisfied.

(10)(a) “Relevant branch adjustment” means the amount of any difference between–

  • the amount of chargeable profits included in a return delivered by or on behalf of a company on or before the specified return date for an accounting period, and
  • the amount of chargeable profits that should have been included in the return delivered by or on behalf of the company on or before the specified return date for the accounting period,

which arose by virtue of the chargeable profits, included in the return delivered by or on behalf of the company, not being computed in accordance with this section.

(10)(b) A relevant branch adjustment will not be taken into account in determining whether a penalty referred to in section 1077F(2) for a careless default applies to the company (or in computing the amount of such a penalty) where the company –

  • (10)(c) has fulfilled the requirements of the section to prepare, and provides upon request, relevant branch records within the specified timeframes; and
  • the records provided are accurate and demonstrate that, notwithstanding the relevant branch adjustment, the company has made a reasonable effort to comply with the requirements of this section in determining the relevant branch income attributable to the branch.

(11) The rules in section 886(3) and 886(4) that apply in respect of the obligation to keep certain records also apply to relevant branch records.

Exclusion certain life assurance business

(12) This section shall not apply to so much of the trade of an overseas life assurance company (within the meaning of section 706) as is life assurance business written on or before 31 December 2000, which is taxable under an aggregate system known as the I-E (or income less expenses) system business i.e. not new basis business (within the meaning of section 730A).

Small and Medium-sized enterprises (“SMEs”)

This section does not currently apply to a company for an accounting period where the company is a small or medium-sized enterprise for that accounting period. Section 25A shall apply to a small or medium-sized enterprise for accounting periods commencing on or after such day as the Minister for Finance may appoint by order.

Relevant Date: Finance Act 2021