Malta enacts transfer pricing rules

Following the addition of article 51A in the Income Tax Act, Chapter 123 of the Laws of Malta (the ‘ITA’) in 2021, authorising the Minister of Finance to make rules in connection with transfer pricing in general and, in particular, to provide for, inter alia, the determination of arm's length pricing of a transaction or series of transactions, Malta introduced formal transfer pricing regulations on 18 November 2022 by means of Legal Notice 284 of 2022 (the ‘Transfer Pricing Rules’).

General overview

The enactment of specific transfer pricing legislation and procedures to prevent loss of public revenues through international tax arbitrage formed part of a series of commitments made by Malta in its Recovery and Resilience Plan approved by the EU Commission in 2021. This was followed by a public consultation on the draft Transfer Pricing Rules published by the Commissioner for Revenue (the ‘CfR’) in December 2021.

The Transfer Pricing Rules shall apply for basis years commencing on or after 1 January 2024 in relation to any arrangement entered into on or after that date, and for those arrangements entered into before that date, the Transfer Pricing Rules shall apply to those arrangements that are materially altered on or after that date.

Scope

The Transfer Pricing Rules shall not apply to micro, small or medium-sized enterprises fulfilling the criteria laid down in Annex I of the EU Regulation (EU) No. 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Article 107 and 108 of the Treaty, as in force at the relevant time (the ‘GBER’). In terms of Annex I of the GBER, the category of micro, small or medium-sized enterprises is made up of 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.

An additional exception applies where:

a) the arrangement comprises a securitisation transaction in terms of the Securitisation Transactions (Deductions) Rules; or

b) Where, in relation to a company within the scope of the Transfer Pricing Rules:

i. 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

ii. 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.

Arm’s length amount

For the purposes of ascertaining the total income of any company within the purview of the Transfer Pricing Rules:

a) where any amount incurred or due in the year preceding the year of assessment under any cross-border arrangement to which these rules apply differs from the 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;

b) where any amount accrued or derived in the year preceding the year of assessment under any cross-border arrangement to which these 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.

In addition, it is expected that the CfR shall be publishing guidelines in terms of article 96(2) of the ITA to prescribe methodologies for the purposes of determining the arm’s length amount.

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 the rules.

Additional considerations

The Transfer Pricing Rules also regulate the ascertainment of the total income of a permanent establishment, unilateral transfer pricing rulings and advanced pricing agreements.

How can we help?

Deloitte Malta is able to assist in answering your queries, so please do not hesitate to reach out to us for any further guidance you may require.

In addition, Deloitte Malta is able to assist companies within the scope of the Transfer Pricing Rules to carry out an impact assessment and prepare an effective strategy to comply with the new requirements as from 1 January 2024.