Ireland consults on adoption of authorized OECD approach for attributing profits to branches

By Doug Connolly, MNE Tax

Ireland’s Department of Finance on March 16 launched a public consultation on its proposal to adopt into Irish law the “authorized OECD approach” for the attribution of profits to branches of non-resident companies. The intent is to include the new rules on the taxation of branches in Finance Bill 2021.

The consultation document includes some examples of what Irish legislation adopting the OECD approach might look like, and it seeks feedback on policy and technical issues. Ireland’s Minister of Finance will take the responses to the consultation into account in considering updates to the rules. It is anticipated that the provisions, once enacted, would apply for chargeable periods beginning on or after January 1, 2022.

In general, the Irish government is seeking to bring its legislation governing the computation of branch profits in line with international best practices by adopting the OECD approach. Under the authorized OECD approach, a branch or permanent establishment is attributed the profits it would have earned if it were operating at arm’s length – i.e., as a separate entity performing the same function but unrelated to the non-resident company.

The “authorized OECD approach” for the attribution of income to a permanent establishment is included in Article 7(2) of the OECD Model Tax Convention, with additional guidance provided in the OECD’s Report on the Attribution of Profits to Permanent Establishments.

The consultation document states that the Irish legislation would likely incorporate language similar to the language in Article 7(2) of the OECD Model Tax Convention. The document includes sample proposed language for comment. It also specifically asks if all aspects of the guidance in the OECD report should be applied in the Irish legislation.

The legislation would also likely include documentation requirements. Under these requirements, documentation demonstrating compliance with the new provisions must be available for inspection. The consultation asks about whether the documentation requirements should be based on any existing guidance and what kind of issues might arise if the legislation, once enacted, imposes new specific documentation requirements effective January 1, 2022.

The legislation would also likely include documentation requirements. Under these requirements, documentation demonstrating compliance with the new provisions must be available for inspection.

The consultation also seeks input on the application of the OECD standard on attributing profits to branches, such as whether it should apply to companies of a certain size. It further seeks input on what industry-specific guidance might be necessary noting, in particular, the potential need for such guidance for the finance and insurance industries.

Ireland’s adoption of the OECD approach to taxing branches builds upon the updating of Ireland’s transfer pricing rules that began with Finance Act 2019, which included updates to transfer pricing rules to comply with the OECD approach.