Transfer Pricing Guidelines and Amendments

On 19 January 2024, the Commissioner for Tax and Customs (‘CfTC’) published Guidelines in relation to the Transfer Pricing Rules (the ‘Guidelines’). The Guidelines are issued in terms of Article 96(2) of the Income Tax Act (Chapter 123 of the Laws of Malta) and are to be read in conjunction with the Transfer Pricing Rules (Subsidiary Legislation 123.207) (‘TPR’), which had been formally introduced on 18 November 2022 by means of Legal Notice 284 of 2022 and which have been amended by way of Legal Notice 9 of 2024.

Grandfathering provision

Legal Notice 9 of 2024 extends the remit of the TPR to also apply, from tax years starting on or after 1 January 2027, to arrangements entered into before 1 January 2024 and which are not materially altered on or after that date, thus limiting the temporal scope of the grandfathering provision.

The Guidelines further clarify that the determination as to what constitutes a material alteration should be conducted on a case-by-case basis. The assessment should refer to whether an existing transaction or agreement is materially altered in terms of the substance of the arrangement, on the basis of the functions performed, assets used, and risks assumed by each of the parties to the arrangement, unless such change is caused by external factors as indicated in the Guidelines.
 

Transfer Pricing methods

As anticipated, the Guidelines make direct reference to the 2022 OECD Transfer Pricing Guidelines (the ‘OECD TPGs’), particularly in relation to the application of preferred transfer pricing methods as outlined in Chapter II of the OECD TPGs, with specific reference to paragraph 2.9. While, typically, one method should be appropriate to align a transaction to the arm’s length price, the Guidelines enable a more flexible approach in complex cases.

Moreover, a taxpayer may elect to apply a simplified approach to low value-adding intra-group services in so far as said approach is aligned to the OECD TPGs and the EU Joint Transfer Pricing Forum guidelines.

Notional Interest Deduction

In terms of the Guidelines, the application of the TPRs shall precede the application of the Notional Interest Deduction Rules (S.L. 123.176). An entity within the scope of these rules shall first determine whether the loans or other debt it borrowed or any portion thereof, should bear interest or not for the purposes of the TPR before determining whether such loans or other debt constitute qualifying risk capital in terms of the Notional Interest Deduction Rules.

Records to be retained

The Guidelines confirm that transfer pricing documentation is to be retained by the taxpayer and only disclosed to the CfTC upon request within a ‘reasonable’ time as indicated in the request. The documentation should be prepared in accordance with Chapter V of the OECD TPGs, being the Master and Local files, in English or Maltese, compiled on the basis of Annex I and II to Chapter V of the OECD TPGs respectively.

The Guidelines also introduce the simplified approach in relation to record keeping for low value adding intra-group services which are to be prepared in terms of Chapter VII of the OECD TPGs.

De Minimis thresholds

In respect of the de minimis thresholds in Rule 9 of the TPR, the Guidelines clarify that in aggregating the items of income and expenditure of a revenue nature to determine the application of these rules, dividends paid to an associated enterprise should be excluded, and distributions in kind may need to be included.

Unilateral Transfer Pricing Rulings downward adjustments

The Guidelines also provide for conditions which are to be met for the CfTC to consider requests for the issuance of Unilateral Transfer Pricing Rulings performing a downward adjustment.

We remain available to support with ensuring compliance of your transfer pricing policy with the TPR and Guidelines, with preparing the required transfer pricing documentation and with understanding the risks of non-compliance.