Through the publication of Legal Notice 284 of 2022, Transfer Pricing Rules have been introduced in the Income Tax Act.  The introduction of transfer pricing Rules are aimed at preventing international tax arbitrage.   

Scope

The Rules are effective for basis years commencing on or after 1 January 2024 for arrangements entered into on or after such date.  The Rules are also applicable for arrangements entered into before this date, whereby such arrangements are materially altered on or after 1 January 2024.

The transfer pricing Rules shall not apply to ‘micro, medium-sized enterprises’. In terms of Annex I of the GBER, the category of micro, small or medium-sized enterprises covers enterprises which employ fewer than 250 persons and which have an annual turnover of not more than €50 million, and/or an annual balance sheet total not exceeding €43 million.

Furthermore, the Transfer Pricing Rules shall not apply to the following:

(1)    Arrangement relating to a securitisation transaction in terms of the Securitisation Transactions (Deduction) Rules; or

(2)    Where the aggregate arm’s length value of all items of income and expenditure of a revenue nature forming part of cross-border arrangements in the year preceding the year of assessment, does not exceed € 6,000,000; and

(3)    The aggregate arm’s length value of all items of income and expenditure of a capital nature forming part of cross-border arrangements in the year preceding the year of assessment, does not exceed € 20,000,000.

 

Main Definitions

 

Advanced Pricing Arrangement – an agreement entered into between the competent authority and a relevant foreign authority under the provision of the mutual agreement procedure.  Such agreement determines in advance cross-border arrangements between associated enterprises, an appropriate set of criteria for the determination for the determination of the transfer pricing for those transactions or determines the attribution of profits to a permanent establishment (PE) in line with the arm’s length standard.

Arm’s length amount in relation to an arrangement is the amount that independent parties would have agreed to in relation to the arrangement had those independent parties entered into that arrangement in comparable circumstances.

 The term ‘Arrangement’ encompasses the following:

(a)    Any transaction, agreement or dealing where the parties to such arrangement are associated enterprises at that point in time. Such arrangement should also include a series of transactions, agreements and dealings of any kind; or

(b)    Any notional dealing between a body of persons and its PE.

Associated enterprises means bodies of persons where:

(a)    One of the bodies of persons controls the other body of persons as a result of the fact that it holds directly or indirectly a participation of more than 75% in the voting rights, or the ordinary capital, of the other body of persons or by virtue of any powers conferred by the articles of association or other document regulating the other body of persons; or

(b)    The same person or persons controls 2 or more bodies of persons where as a result of the fact that it holds, directly or indirectly, a participation of more than 75% in the voting rights, or the ordinary capital, of the 2 or more bodies of persons or by virtue of any powers conferred by the Articles of Association or other document regulation the tow or more bodies of persons.

Provided that for the purpose of this definition, where such bodies of persons are constituent entities of an MNE Group, the percentage interest in the voting rights or the ordinary capital shall be 50%.  

Cross Border Arrangements means an arrangement between associated enterprises whereby any one of the following conditions are satisfied:

(1)    At least one party to the arrangement is not resident in Malta and at least one party to the arrangement is a company resident in Malta and the arrangement is relevant in ascertaining the total income of that company;

(2)    At least one party to the arrangement maintains a PE situated outside of Malta to which the arrangement is effectively connected and at least one party to the arrangement is a company resident in Malta and the arrangement is relevant in ascertaining the total income of that company;

(3)    At least one party to the arrangement is not resident in Malta and at least one other party, not being resident in Malta, is a company which maintains a PE in Malta, to which the arrangement is effectively connected, or otherwise derives income or gains arising in Malta, and the arrangement is relevant in ascertaining the total income of that company.

Micro, small or medium-sized enterprise means undertakings  fulfilling  the  criteria  laid  down  in  Annex  I  of Commission  Regulation  (EU)  No  651/2014  of  17  June  2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty, as in force at the relevant time. In terms of Annex I of the GBER, the category of micro, small or medium-sized enterprises relate to enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding €50 million, and/or an annual balance sheet total not exceeding €43 million.

Unilateral transfer pricing ruling means a ruling issued by the Commissioner that determines, in advance of an arrangement, an appropriate set of criteria for the determination of transfer pricing for that arrangement. The said criteria include the method used to arrive at the transfer pricing, comparable and appropriate adjustments thereto and critical assumptions as to future events.

 

Ascertaining total income

In ascertaining the total income of any company where any amount incurred or due in that basis year under any cross-border arrangement to which the rules apply differs from arm’s length amount, it shall be deemed that the arm’s length amount was incurred or due instead of the actual amount incurred or due.  Where any amount accrued or derived in the basis year under any cross border arrangement to which the rules apply differs from the arm’s length amount, it shall be deemed that the arm’s length amount was accrued or derived instead of the actual amount accrued or derived.

 

Any adjustments made shall apply exclusively for the purpose of ascertaining of the total income of one or more parties to the cross border arrangement as the case may be and shall not affect any other person.

 

Furthermore, Rule 6 of the Transfer Pricing Rules obliges companies in relation to an arrangement to which the rules apply, to prepare on a timely basis and retain such records as may reasonably be required for the purposes of determining whether, in relation to the arrangement, the total income of the company has been ascertained in accordance with these Rules.

 

Provided that  where  the  parties  to  cross-border arrangements make a request in writing  to  the  Commissioner  for  the  issuance  of  a  determination stipulating  that  the  provisions of  these  rules  shall  apply  and the Commissioner issues such a determination, the provisions of these rules shall apply as may be determined.

 

Unilateral Transfer Pricing

The Commissioner may issue a unilateral transfer pricing ruling in order to provide certainty. A request for unilateral transfer pricing ruling shall be made by a party to the arrangement in writing and should make reference to the requirements of the Rules.

The  Commissioner  shall  not  unreasonably  withhold  the issuing of a unilateral transfer pricing ruling. The Commissioner may, however, decline to issue a unilateral transfer pricing ruling where the Income Tax Acts, and any rules, regulations and guidelines made or issued thereunder, clearly provide sufficient certainty with regard to the tax treatment of the relevant arrangement.