04.20
TRANSFER PRICING IN MALTA
Tax Update

Tax Updates

The tax environment has experienced significant changes the past years, in view of the international consensus to combat harmful tax practices. Countries around the world are collaborating to improve the coherence of international tax rules and ensure a more fair tax environment, through the OECD recommendations.

Malta has adopted a number of such recommendations, and won the “tax compliant jurisdiction” position as announced by the OECD in 2017.

One of the most important initiatives of the OECD is the introduction of Transfer Pricing (“TP”) Guidelines, which was proposed through Action 8-10 of the BEPS project. However, Malta has not yet adopted this recommendation.

Nevertheless, the current international practice in combination with the current developments, suggest that it is only a matter of time that TP rules will be introduced in the Maltese tax laws.

THE CURRENT PRACTICE AT INTERNATIONAL LEVEL:

TP is adopted by over 60 countries (including OECD and non-OECD members) and plays a prominent role in the effort made by tax authorities across the world, in combating aggressive tax planning.

The importance of the TP rules lies on the need to counteract the tax challenges raised from globalisation, by avoiding distortion of governmental tax revenues.

In particular, TP refers to rules and methods in determining the arm’s length price of intragroup transactions, by considering the pricing, terms and conditions underpinning such transactions.

The Arm’s Length Principle (“ALP”) refers to the pricing of transactions between related enterprises that should not differ from what would have been charged by unrelated enterprises.

THE CURRENT PRACTICE AT MALTA’S LEVEL:

Even though the arm’s length principle is used in its domestic legislation, Malta does not have TP rules to provide guidance on establishing how the arm's-length price of intra group transactions should be reached.

In particular, Article 5(6) of the Income Tax Management Act provides that if  a  non-resident  person  carries  on  business  with  a resident person, and due to their special relationship, the transaction does not produce arm’s length profits for the resident person, then taxation will be imposed on the ordinary profits that would be expected to arise from the business. Also, Articles 2 and 12(1)(u)(2) of the Income Tax Act provide for arm’s length provisions in relation to the permanent establishments.

However, the above provisions of the law are rather vague and do not elaborate on an accepted methodology that can be used by all interested parties to reach to the arms’ length profits.

In recent years, Maltese law made specific reference to TP rules in its local and in particular, in its Special Tax Regime – The Patent Box.

Malta provided for the application of TP rules in its 2019 revised Patent Box Regime, following recommendations based on the BEPS initiative and the EU Rules. The revision of the regime was necessary, as the previous version was found to be harmful due to the absence of a “substantial activity” criterion. However, the revised regime not only incorporated the substantial activity criterion (by matching the allocation of income with the economic activity that generates that income), but also went a step further and provided for the determination of the income/gains from the intellectual property in accordance to the OECD TP Guidelines.

In addition, it can be argued that Malta has indirectly introduced TP rules by adhering to international conventions and relevant EU directives and in particular in the following:

1.   Associated Enterprises - Article 9 of the OECD Model Tax Convention:

Malta’s double tax treaties use the OECD Model Tax Convention. Therefore, Article 9 “Associated Enterprises” of the OECD Model Tax Convention is included in Malta’s double tax treaties. This Article provides that any transactions between associated enterprises that are not at arm’s length shall be adjusted for tax purposes in accordance to the ALP.

The Commentary of OECD refers to the application of the ALP through the OECD TP Guidelines. Further, the majority of the countries following the ALP use as means of application and interpretation of ALP, the provisions of the OECD TP Guidelines.

In the absence of legislation underpinning the application and interpretation of the ALP, in a possible situation where a cross boarder transaction is not in accordance to the ALP, the determination of the ALP will refer to various sources of international law implying the use of the TP. In such a scenario, Malta will apply TP, due to the international obligation raised from the conclusion of the relevant Article in its treaties.

2.   The EU Directive on Dispute Resolution Mechanism

Malta transposed the EU Directive on Dispute Resolution Mechanism in its domestic legislation. The Directive provides that in a case of a possible dispute, the contracting Member States concerned shall endeavour to resolve the dispute by mutual agreement, subject to conditions.

A common dispute between the contracting Member States concerns the ALP. The internationally accepted principle of determining the ALP is the TP rules based on the OECD TP Guideline. Therefore, this may again be considered as an indirect application of TP rules in Malta.

THE FUTURE PRACTICE OF TP IN MALTA:

Apart from Malta and Cyprus, all other European countries adopted the OECD TP Guidelines with either little or no modification.

Cyprus introduced in June 2017 the need to perform TP studies on back to back finance arrangements between relates parties, and is about to introduce full TP rules in its legislation in 2020, leaving Malta the only EU country not following the TP Guidelines.

Clearly EU policies and Directives are influenced by the OECD and its recommendations. Therefore, in our view the introduction of TP rules in the domestic legislation of Malta is not far away.

THE CURRENT PRACTICE AT INTERNATIONAL LEVEL:

TP is adopted by over 60 countries (including OECD and non-OECD members) and plays a prominent role in the effort made by tax authorities across the world, in combating aggressive tax planning.

The importance of the TP rules lies on the need to counteract the tax challenges raised from globalisation, by avoiding distortion of governmental tax revenues.

In particular, TP refers to rules and methods in determining the arm’s length price of intragroup transactions, by considering the pricing, terms and conditions underpinning such transactions.

The Arm’s Length Principle (“ALP”) refers to the pricing of transactions between related enterprises that should not differ from what would have been charged by unrelated enterprises.

THE CURRENT PRACTICE AT MALTA’S LEVEL:

Even though the arm’s length principle is used in its domestic legislation, Malta does not have TP rules to provide guidance on establishing how the arm's-length price of intra group transactions should be reached.

In particular, Article 5(6) of the Income Tax Management Act provides that if  a  non-resident  person  carries  on  business  with  a resident person, and due to their special relationship, the transaction does not produce arm’s length profits for the resident person, then taxation will be imposed on the ordinary profits that would be expected to arise from the business. Also, Articles 2 and 12(1)(u)(2) of the Income Tax Act provide for arm’s length provisions in relation to the permanent establishments.

However, the above provisions of the law are rather vague and do not elaborate on an accepted methodology that can be used by all interested parties to reach to the arms’ length profits.

In recent years, Maltese law made specific reference to TP rules in its local and in particular, in its Special Tax Regime – The Patent Box.

Malta provided for the application of TP rules in its 2019 revised Patent Box Regime, following recommendations based on the BEPS initiative and the EU Rules. The revision of the regime was necessary, as the previous version was found to be harmful due to the absence of a “substantial activity” criterion. However, the revised regime not only incorporated the substantial activity criterion (by matching the allocation of income with the economic activity that generates that income), but also went a step further and provided for the determination of the income/gains from the intellectual property in accordance to the OECD TP Guidelines.

In addition, it can be argued that Malta has indirectly introduced TP rules by adhering to international conventions and relevant EU directives and in particular in the following:

1.   Associated Enterprises - Article 9 of the OECD Model Tax Convention:

Malta’s double tax treaties use the OECD Model Tax Convention. Therefore, Article 9 “Associated Enterprises” of the OECD Model Tax Convention is included in Malta’s double tax treaties. This Article provides that any transactions between associated enterprises that are not at arm’s length shall be adjusted for tax purposes in accordance to the ALP.

The Commentary of OECD refers to the application of the ALP through the OECD TP Guidelines. Further, the majority of the countries following the ALP use as means of application and interpretation of ALP, the provisions of the OECD TP Guidelines.

In the absence of legislation underpinning the application and interpretation of the ALP, in a possible situation where a cross boarder transaction is not in accordance to the ALP, the determination of the ALP will refer to various sources of international law implying the use of the TP. In such a scenario, Malta will apply TP, due to the international obligation raised from the conclusion of the relevant Article in its treaties.

2.   The EU Directive on Dispute Resolution Mechanism

Malta transposed the EU Directive on Dispute Resolution Mechanism in its domestic legislation. The Directive provides that in a case of a possible dispute, the contracting Member States concerned shall endeavour to resolve the dispute by mutual agreement, subject to conditions.

A common dispute between the contracting Member States concerns the ALP. The internationally accepted principle of determining the ALP is the TP rules based on the OECD TP Guideline. Therefore, this may again be considered as an indirect application of TP rules in Malta.

THE FUTURE PRACTICE OF TP IN MALTA:

Apart from Malta and Cyprus, all other European countries adopted the OECD TP Guidelines with either little or no modification.

Cyprus introduced in June 2017 the need to perform TP studies on back to back finance arrangements between relates parties, and is about to introduce full TP rules in its legislation in 2020, leaving Malta the only EU country not following the TP Guidelines.

Clearly EU policies and Directives are influenced by the OECD and its recommendations. Therefore, in our view the introduction of TP rules in the domestic legislation of Malta is not far away.

CONCLUSION:

Safeguarding Malta’s position as financial centre is of great importance and requires compliance in all relevant aspects.

The EU support to the OECD TP Guidelines suggests that it is highly unlikely that Malta will not be able to escape implementation, so the application of the TP rules in Malta is only a matter of time.

In this respect, businesses should start evaluating the effect of possible imposition of TP rules on their intra group transactions and manage any associated risks well in advance.  

Safeguarding Malta’s position as financial centre is of great importance and requires compliance in all relevant aspects.

The EU support to the OECD TP Guidelines suggests that it is highly unlikely that Malta will not be able to escape implementation, so the application of the TP rules in Malta is only a matter of time.

In this respect, businesses should start evaluating the effect of possible imposition of TP rules on their intra group transactions and manage any associated risks well in advance. 

 

HOW KINANIS CAN ASSIST

Our firm has been involved with the preparation of a significant number of Transfer Pricing studies. The competence, skills and knowledge our firm gained in Transfer Pricing matters, enable us to provide the following services:

  • Diagnosis on Transfer Pricing risks
  • Design of group’s Transfer Pricing policies
  • Transfer Pricing documentation
  • Advance Pricing Agreements (APA’s)
  • Dispute Resolution

 

Contact Person:

 

Marios Palesis
Partner – Tax Department
Marios.Palesis@kinanis.com

 

Artemis Kyriakou
Associate – Tax Department
tax@kinanis.com

 

OUR FIRM

We are a Law Firm with offices in Cyprus and Malta and a representative office in Shanghai China comprising of more than 70 lawyers, accountants and other professionals who advise, international and local clients.

The Firm has been offering legal and consulting services since 1983 evolving from a traditional law firm to an innovative cutting-edge multidisciplinary law firm combining exceptional expertise in law, tax, vat and accounting.

From its establishment the Firm’s focus has been heavily business oriented and always abreast with the latest global developments and innovations. Drawing from our pool of experienced professionals we provide our clients’ businesses full legal and accounting support on an everyday basis as well as customized solutions in today’s global financial and legal challenges.

We consider ourselves as ‘traditional pioneers’ and our motto is to foresee and anticipate any issues that may potentially impact our clients’ business and to offer effective advice and solutions proactively.

 

Kinanis LLC

Lawyers’ Limited Company
12 Egypt Street, 1097, Nicosia
P.O. Box 22303, 1520 Nicosia, Cyprus
Tel: + 357 22 55 88 88 – Fax: + 357 22 66 25 00
E-mail: KinanisLLC@kinanis.com – Web site: www.kinanis.com

 

Kinanis

Civil Partnership, Law Firm
Kinanis Fiduciaries Limited
Suite 20, The Penthouse, 4th Floor, Ewropa Business Centre,
Dun Karm Street, Birkirkara, BKR 9034, Malta
Tel: + 356 27 54 00 24, Fax: + 356 27 54 00 25
E-mail: malta@kinanis.com  – Website: www.kinanis.com

 

Kinanis (China) Limited

China Representative Office
Unit 661, 6/F CIROS PLAZA,
388 Nanjing West Road, Huangpu District,
Shanghai City, 200003, China
Tel: + 86 18 410 072 690
E-mail: china@kinanis.com  – Website: www.kinanis.com