Robert Dowds (Dublin Mid West, Labour)
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Question 112: To ask the Minister for Finance the action being taken to address the issue of the use of transfer pricing to reduce tax paid here by multinational corporations; and if he will make a statement on the matter. [30811/11]

Michael Noonan (Limerick City, Fine Gael)
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With effect from the start of this year, codified provisions in relation to transfer pricing address any understatement of profits for Irish tax purposes. These provisions confirm that, for trading transactions between associated persons, the OECD "arm's-length" standard of pricing must apply. Arm's length prices are those that would be agreed by independent parties. If the amount payable under the terms of a transaction between associated persons is greater than the arm's length amount and reduces the profit, then the arm's length amount will be deemed to be the amount payable in substitution for the actual amount. If the amount receivable under a transaction is less than the arm's length amount and reduces the profits, then the arm's length amount will be deemed to be the amount receivable in substitution for the actual amount. Media reports have incorrectly suggested that highly profitable companies make arrangements using transfer pricing to reduce their payment of Irish corporation tax, effectively bringing the Irish tax rate below 12.5%.

Arm's-length payments incurred, for the use of assets owned outside the State by an associated foreign company, will reduce the profits of the Irish company concerned. The reports mistakenly attribute to Ireland profits that, in fact, represent the return due to assets owned in other jurisdictions by group companies resident in those jurisdictions. Group companies resident in Ireland pay 12.5% corporation tax on their profits arising here. However, by relating this corporation tax not only to the profits of the Irish-resident companies but, instead, to both those profits and the profits of foreign-resident companies (which are not profits chargeable to Irish corporation tax), these reports produce an average tax rate for the companies concerned that is lower than 12.5% and an inference that Irish profits are not being charged.

Multinational groups, with subsidiaries in other countries as well as in Ireland, incur bona fide expenditures that are paid to foreign group members and reduce Irish profits. This may reduce the average rate of tax for the total profits of the Irish and foreign-resident subsidiaries taken together. Nevertheless, the Irish profits are being charged and the rate of tax actually paid on the profits of Irish-resident subsidiaries is the full 12.5%.