As the global project to modernise international tax rules nears the finish line, over 130 countries have agreed on a final set of proposals for preventing base erosion and profit shifting ('BEPS'), and tax leaders of international companies have a clearer view of the prospective future framework. Now, as the world's focus shifts to domestic implementation, tax leaders in Malta and worldwide will likely have their hands full managing the potential impacts.
Following the developments within this framework, the Maltese government is also committed to implement specific transfer pricing rules in accordance with the current global standards related to the arm's length principle.
In December 2021, the Office of the Commissioner for Revenue ('CfR') released the Transfer Pricing ('TP') rules for public consultation, which concluded on 28 February 2022. The prospective rules would apply to select cross-border arrangements between related parties in a multinational group. The scope of said rules will likely exclude SMEs, meaning that only large entities would fall within scope. Draft rules also foresee a de minimis threshold for related party cross-border transactions (financial and non-), which is yet to be determined by the CfR.
Essentially, the introduction of transfer pricings rules means that entities and transactions falling within the scope of TP rules will have to substantiate the adherence of their related party transactions to an arm's length principle by showing that said transactions yield profit that unrelated parties would yield in comparable circumstances. In other words, related party transactions should fall with the range of a 'market price', since transactions below or above this range could result in tax losses for contracting party jurisdictions and market distortions.
While it does refer to documentation requirement being issued at a later stage, the Maltese TP consultation document is silent on whether OECD TP Guidelines-style Master file and Local file requirements will be introduced in Malta. In a nutshell, a Master file is a blueprint of the international group's global operations, prescribing the transfer pricing policies within the organization, whereas the Local file is a local country TP documentation, focusing on the analysis of the local entity's intragroup transactions. The Local file typically contains a description of the functions, risks and assets undertaken by the Maltese entity (i.e., functional analysis), the delineation of the cross-border transactions entered in a given year, as well as a benchmarking analysis in order determine the appropriate remuneration for the activities undertaken.
In addition, recent transfer pricing cases emphasized that the TP policies are unlikely to be robust unless they are implemented legally. Deficiencies in the legal implementation may also lead to unnecessary fines, penalties and tax base adjustments in a double taxation scenario initiated by foreign tax jurisdictions. In order to avoid such unwanted consequences, intercompany agreements must be aligned with TP policies and documentation as regards the delineation of the transaction, the allocation of risks, the intragroup pricing as well as the ownership of intangibles.
Close cooperation with finance teams will likely be particularly critical. Tax and finance teams should work together closely to satisfy these new requirements and help ensure consistency among tax and accounting data with the introduction of the transfer pricing rules.
In short, these prospective reforms are expected to have wide-ranging effects on many Maltese corporations engaged in international business, and the timeline for implementation is ambitious. Tax leaders locally may need to move quickly to assess the potential impacts, advise senior executives and other stakeholders on the coming changes, and determine what needs to be done to comply with the new rules and manage their implications.
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