Paschal Donohoe (Dublin Central, Fine Gael)
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I am sure they are. Dealing with the rationale for what we are doing, the committee may recall hat last year I brought forward some amendments to transfer pricing and these garnered quite a reaction. It became evident that legitimate business activities that many Irish companies are involved in were going to get caught up in the sweep of changes that we were looking to make and that was not our intention. We recognised that certain legitimate domestic non-trading arrangements were not specifically provided for within the revised exclusion I had brought forward in last year’s Finance Bill. The non-exclusion of certain bona fide domestic non-trading transactions may have been problematic for certain Irish businesses who have intra-group arrangements and are subject to transfer pricing rules. As a result, section 15 of the Finance Act 2020 was made subject to a commencement order. This was to allow my officials, in consultation with officials of the Revenue Commissioners, sufficient time to further consider, prior to commencing the legislation, the scope and application of the section.

Following this process, section 27 of this year’s Bill substitutes a new section for section 835E of the Taxes Consolidation Act 1997. It has a number of important modifications compared to the section that we provided for in the Finance Act 2019. It will remove any doubt that the exclusion applies to the specific arrangement that falls within the provision as opposed to the wider activities of the entities involved. It also provides for an exclusion from the application of transfer pricing rules to the computation of non-trading income in certain circumstances. Provided certain conditions are satisfied, the exclusion will apply in respect of a transaction between certain associated persons who are both chargeable to tax in the State on the profits or gains or losses arising from the transaction, or who would be so chargeable if there were any. Where the supplier meets this requirement but the acquirer does not, the exclusion will only apply where the acquirer is chargeable to tax on any profits or gains or losses arising from its relevant activities, or would be so chargeable if there were any, and is resident in the State.

In addition to containing a similar anti-avoidance provision to that which was included in section 835E, as introduced by Finance Act 2019, which related to scenarios involving certain back-to-back arrangements, I have also included further anti-avoidance measures.

The exclusion will only apply where an arrangement has been entered into for legitimate commercial reasons. It will not apply where the main purpose, in the view of the Revenue Commissioners, is the avoidance of tax or where, due to the existence of the arrangement, a deduction or some form of relief for the purposes of tax would be available to the acquirer which is greater than the actual consideration payable under the arrangement.

As regards the orphan tax issue raised by Deputy Mairéad Farrell, transfer pricing rules apply in respect of transactions involving two persons who are associated. For the purposes of the rules, two persons are associated if one person participates in the management, control or capital of another person, or the same person is participating in the management, control or capital of both persons. To qualify for the exclusion, both parties to the transaction must be a qualifying person. Under the existing legislation and the new legislation, a qualifying company within the meaning of section 110 is specifically precluded from being a qualifying person. This means that a non-trading transaction entered into with an associated company that is a section 110 company cannot avail of the exclusion and transfer pricing rules will apply. The short answer is that the orphan companies to which the Deputy referred will not be able to benefit from this change.