The Finance Act 2010 introduces new rules in relation to transfer pricing, most notably the requirement that a company must have transfer pricing documentation available. Gavin McGuire details the application of the rules.
The term 'transfer pricing' refers to the prices which associated companies charge for the supply of goods, services, finance and assets to each other. The basic premise is that the price charged to an associated party should be the same as the price charged to a third party for the same supply.
Who is Affected?
The rules apply to all companies including groups of companies where the company/group employs more than 250 employees, and has either a turnover of more than €50 million, or assets of greater than €43 million.
Where a number of companies are directly related or controlled by the same person, and they meet these thresholds, then the rules will also apply to them. The term 'control' refers to the ability of a person to direct that the affairs of the company are conducted in accordance with the wishes of that person. Generally speaking, companies will be connected where one company has a 50% interest, either directly or indirectly in the other company.
What Transactions are Affected?
A transaction will be affected where it involves the supply and acquisition of goods, services, money or intangibles between associated parties, and is undertaken as part of a trading activity. The transaction need only be a trading activity for one of the parties involved to come within the scope of the rules.
Non-trading activities, such as the leasing of property, are not affected. There are 'opt-out' provisions in relation to the transfer of development land. The legislation applies to both domestic and cross border transactions.
When Will the Legislation Take Effect?
The rules will apply for accounting periods of companies commencing on or after 1 January 2011. Transactions entered into prior to 1 July 2010 do not come within the scope of the legislation. If an agreement entered into before 1 July is amended on or after this date this transaction will come within the scope of the new rules.
The Main Features of the Legislation
'The Arm's Length Principle'
The new rules recognise 'the arm's length principle', that is, that intra group prices/charges should be equivalent to those that would be charged between independent persons dealing at arm's length in otherwise similar circumstances. The arm's length principle will apply where...