Malta: The Commissioner For Tax And Customs Releases Guidelines In Relation To The Transfer Pricing Rules

Grandfathering Provision

Rule 1(2) of the Rules provides for a time limited grandfathering clause for arrangements entered into before 1 January 2024 and which were not materially altered on or after 1 January 2024 to apply on or after 1 January 2027.

It is being clarified that in relation to whether an alteration to an existing transaction or agreement between parties materially alters the arrangement a case-by-case analysis is required based on the functions performed, assets used, and risks assumed by each of the parties to the arrangement unless such change is caused by geopolitical or economic factors. The term 'arrangement' as defined in the Rules extends to dealings between parties which may necessitate a repricing of the arrangement resulting in a material change.

Examples of what would be regarded as material alterations include:

• A change in consideration for the performance of the arrangement;
• A change in the rights and/or obligations undertaken by the parties to the arrangement;
• A change in the duration of the agreement.

The guidelines provide that transactions, agreements and dealings with a party which is not an associated enterprise fall outside the scope of the definition of a series of transactions, agreements and dealings in Rule 2 except where such involvement is artificial.

In ascertaining the total income, the arm's length amount referred to in Rule 3 should include transactions that do not contemplate the payment of any consideration.

The Rules shall precede the application of the Notional Interest Deduction Rules S.L. 123.176 (NID). In scope entities of the NID rules shall first determine whether loans or other debt borrowed or any portion thereof, should bear interest or not for the purposes of the Transfer Pricing Rules before determining whether such loans or other debt constitute qualifying risk capital in terms of the NID Rules.

The application of size thresholds, thresholds of associated enterprises or de-minimis thresholds as provided for in the Rules may lead to an in-scope company entering into an arrangement not remaining within these thresholds in future or intervening periods. The guidelines clarify that the 'arm's length amount', so determined under the Rules, would continue to be applied to such periods.

Transfer Pricing Methods

The OECD Transfer Pricing Guidelines are to be applied for the purposes of these Rules. Other methods may be accepted in terms of Paragraph 2.9 of the same Guidelines allowing a more flexible approach in more complex cases to give the best approximation of the arm's length price.

With respect to low value adding intra-group services a taxpayer may opt to adopt the simplified approach based on the OECD Transfer Pricing Guidelines and the EU Joint Transfer Pricing Forum Guidelines.

Records

The Transfer Pricing documentation which is required to be kept in terms of these rules is in line with Chapter V of the OECD Transfer Pricing Guidelines. A master file and a local file as outlined in Annex I and II respectively to Chapter V is to be kept and required to be disclosed within a reasonable timeframe to CfTC upon request. With respect to low value adding intra-group services the information to be prepared is in terms of Chapter VII of the said guidelines. This documentation is part of the record keeping obligations in terms of Article 19(1) of the Income Tax Management Act. The time limit referred to in Article 19(5) of the Income Tax Management Act for the retention of such records shall start to run from the later of the date from the end of the period to which the arrangement in question refers to or the date of that arrangement.

Exceptions

With respect to the de-minimis threshold in Rule 9 the guidelines clarify that in aggregating transactions of a revenue nature to determine the application of these rules dividends paid to an associated company should not be included but distributions in kind may need to be considered.

Unilateral Transfer Pricing Rulings

The guidelines provide that the arm's length principle is met for the CfTC to consider requests for the issuance of a Unilateral Transfer Pricing Ruling performing a downward adjustment.

Such a ruling is spontaneously exchanged with the tax administration of the relevant jurisdiction.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.