The Accountant – Issue 3 of 2021 (MIA Publication)

Transfer pricing refers to pricing arrangements between related parties, often involving transfers of tangible and intangible property.

This is an important tax and management issue for enterprises operating in a cross-border environment. Transfer pricing rules play a central role when multinationals apply their intra-group pricing arrangements on a cross-border basis. Increasingly extensive documentation requirements, additional transparency and stricter penalties demand regular review of the transfer pricing policies of multinational enterprises.

A group of companies with cross-border activities must have an individually tailored transfer pricing strategy and implement it successfully, if for example:

• it intends to change its business model;
• it envisages expanding into new markets;
• the OECD or legislators adopt new guidance or regulations for instance in respect of certain classes of transactions or assets.

In many cases, related parties forming part of a multinational group are affected by special circumstances on transfers to and from other group entities and related parties. This arises from the intra-group relationship that would not be present in transactions between unrelated parties or between independent entities transacting in an open market.

Some form of transfer pricing rules are currently in force in most countries across the globe. To date, Malta does not have sophisticated transfer pricing legislation or rules, although it does have some general anti-avoidance provisions that may be invoked in a transfer pricing context. Transfer pricing rules in various jurisdictions refer to the arm’s length principle (ALP) and this concept is not alien to our legislation.

What is the Arm’s Length Principle?

In terms of the OECD guidelines, the ALP should be applied in instances where transactions take place between related enterprises. In this regard, transactions should be valued as if they are to be carried out between unrelated parties, each acting in their own best interest.

Article 5(6) of the Income Tax Management Act refers to a similar concept in the context of a non-resident person carrying on business with a resident person over which it has substantial control. The law would, in this case, bring to charge the non-resident person in the name of the resident person when the course of such business is so arranged that it produces for the resident person either no profits or less than the ordinary profits which might be expected to be made from such business.

Transfer pricing in Malta

Maltese tax law does refer to the arm’s length principle but does not define the term. Such references are found in Articles 2(1) and 12(1)(u)(2) of the Income Tax Act, in the context of determining profits attributable to a permanent establishment situated outside Malta. References to the arm’s length principle are also found in the Patent Box Regime (Deduction) Rules, 2019 and the recently introduced European Union Anti-Tax Avoidance Directives Implementation Regulations.

Article 51 of the Income Tax Act includes a general anti-avoidance provision that empowers the Commissioner to disregard any scheme which “reduces the amount of tax payable by any person” and where such scheme is “artificial or fictitious or is in fact not given effect to”.

The article further empowers the Commissioner to determine the tax liability of any person who as a direct or indirect result of any scheme of which the sole or main purpose was that of obtaining any advantage which has the effect of avoiding, reducing or postponing liability to tax, has obtained or is in a position to obtain such an advantage.

Recently an enabling provision was introduced (in terms of Article 19 of Act XVIII of 2021) in the Income Tax Act empowering the Finance Minister to enact rules in relation to transfer pricing:

“51A. The Minister responsible for finance may make rules in relation to transfer pricing generally and may, in particular by such rules, provide for the determination of the arm’s length pricing of a transaction or a series of transactions, any adjustments in relation thereto and advance pricing agreements.”

In the light of the recent international developments and the recently introduced Article 51A in the Income Tax Act the expectation is that specific transfer pricing rules would be introduced in Malta in the near future. This will introduce a significant change to Maltese tax legislation and Maltese enterprises will need to be adequately prepared.

Concluding comments

Transfer pricing is a complex area for any business. The pace of change is fast and regulations are constantly evolving around the world.

Even though practitioners in Malta and the Maltese tax authority are already dealing with transfer pricing matters due to regulations in other jurisdictions and actions taken by foreign tax authorities, activity in this area will surely increase further. Practitioners in Malta and the tax authorities will need to invest further in upskilling to grapple with the increased complexities presented by the transfer pricing phenomenon.

Mirko Rapa joined PwC Malta in 2002 and is a Tax Partner. He has worked for some time in the international tax department at PwC Berlin and currently provides tax advice to a varied portfolio of clients.

Audrey Azzopardi joined PwC in 2009 and over the past years, she has assisted in providing advice to a wide portfolio of local and international clients across a wide variety of industries. She has been involved in various tax compliance and tax advisory work for large international clients.

Neville Gatt is an advocate specialising in tax and corporate legislation. Over the last 26 years, Neville has advised extensively on local, European and international tax issues to clients across a variety of industries, but with special focus on the financial services industry.