The Transfer Pricing (Amendment) Rules, 2024

General

The Transfer Pricing (Amendment) Rules 2024 amended Article 1(2) of the Transfer Pricing Rules, as discussed in the section dealing with Application of the Rules below.

What are the Transfer Pricing Rules?

The Minister for Finance introduced the Transfer Pricing Rules on 18^th November 2022 through Legal Notice 284 of 2022.

Application

1. General Rule on Application

Article 1(2) provides that the Transfer Pricing Rules shall apply for basis years commencing on or after 1^st January 2024, in relation to:

• any arrangement entered into on or after the 1^st of January 2024;
• any arrangements entered into before the 1^st of January 2024, but only to those arrangements that are materially altered on or after that date.

However, the new amendment under the Transfer Pricing (Amendment) Rules provides a further ground for application, being:

• any arrangement entered into before the 1^st of January 2024 and which were not materially altered after that date, but only as from 1^st of January 2027.

2. Definition of Arrangement

It defines an ‘arrangement’ as:

“(a) any transaction, agreement or dealing of any kind, where, at the relevant time, the parties to such an agreement are associated enterprises. An arrangement shall also include a series of transactions, agreements or dealings of any kind; or

 (b) any notional dealing with a body of persons and its permanent establishment.”

         3. Definition of Associated Enterprises

The Transfer Pricing Rules provides that enterprises are associated where:

• One enterprise controls another through more than 75% in voting rights or the ordinary capital of the other enterprise;
• One enterprise controls another by virtue of any powers conferred in the articles of association or any other document regulating the other enterprise;
• The same person (legal or natural) controls multiple enterprises through more than 75% in the voting rights or ordinary share capital in each enterprise.
• The same person (legal or natural) controls multiple enterprises by virtue of any powers conferred in the articles of association or any other documents regulating such enterprises.

However, in the case of enterprises qualifying as entities of a MNE Group, the aforementioned percentage interest qualification is reduced to 50%.

3(a) Definition of MNE Group

A MNE Group is defined in Annex III of the ‘Cooperation with Other Jurisdictions on Tax Matters Regulations’ (SL.123.127), as any Group that (i) includes two or more enterprises which are tax resident in different jurisdictions or (ii) includes an enterprise which is tax resident in one jurisdiction but is subject to tax in another jurisdiction with respect to business carried out through a permanent establishment. However, it also excludes Excluded MNE Groups from the definition.

It then defines an Excluded MNE Group as a Group having total consolidated group revenue of less than €750,000 during the Fiscal Year immediately preceding the Reporting Fiscal Year.

It defines a ‘Group’ as a collection of enterprises related through ownership or control such that it is either (i) required to prepare Consolidated Financial Statements for financial reporting purposes or (ii) would be so required if equity interests in any of the enterprises were traded on a public securities exchange.

              4. Cross-Border Arrangements

As will be discussed later, the provisions of the Transfer Pricing Rules apply to cross-border arrangements.

4(a) Definition of Cross-Border Arrangement

A cross-border arrangement is defined as any arrangement between associated enterprises which satisfied any of the following conditions:

• At least 1 party is a company resident in Malta and at least 1 party is not resident in Malta, and the arrangement is relevant in ascertaining the total income of that company.

• At least 1 party is a company resident in Malta and at least 1 party maintains a permanent establishment situated outside Malta to which the arrangement is effectively connected, and the arrangement is relevant in ascertaining the total income of that company.

• At least 1 party is not resident in Malta and at least 1 party, not being resident in Malta, maintains a permanent establishment situated 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.

4(b) Definition of Company

The Rules also provide that the term ‘company’ shall not include any micro, small or medium-sized enterprises.

                5. Exceptions

Article 9 provides that these rules shall not apply where:

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

• The Aggregate arm’s length value of transactions of a revenue nature do not exceed €6,000,000 and the aggregate arm’s length value of transactions a capital nature do not exceed €20,000,000.

The Arm’s Length Principle

The Transfer Pricing Rules introduces the Arm’s Length Principle into Maltese law.

What is the Arm’s Length Principle?

The Arm’s Length Principle is a fundamental rule in transfer pricing which aims to prevent the parties to a transfer colluding to minimise tax responsibilities. Thus, it requires that transfers between associated enterprises are made at a fair-market value, referred to as the “arm’s length amount”.

Article 3 – The Arm’s Length Principle in Ascertaining the Total Income

Article 3 confirms that in cross-border arrangements, the arm’s length amount automatically applies over the actual amount of the transfer for the purposes of calculating the total income of any company in terms of the Income Tax Act.

Article 3(a) provides that where any amount incurred under any cross-border arrangement differs from the arm’s length amount, it shall be deemed that the arm’s length amount was incurred instead of the actual amount incurred.

Article 3(b) provides that where any amount accrued under any cross-border arrangement differs from the arm’s length amount, it shall be deemed that the arm’s length amount was accrued instead of the actual amount accrued.

Article 4 – Definition of Arm’s Length Amount

The Arm’s Length Amount is defined at 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.

Article 5 – Calculation of Fair Market Value

The Commissioner for Revenue is under an obligation to issue guidelines designating the methodologies by which the Arm’s Length Amount shall be calculated for such transactions. The Commissioner for Revenue has since provided that the preferred methodology shall be those outlined in Chapter II of the OECD Transfer Pricing Guidelines. However, other methods may be accepted in accordance with Paragraph 2.9 of the OECD Transfer Pricing Guidelines.

Article 6 – Duty to Prepare and Keep Records

Any company under an arrangement to which these rules apply, shall prepare on a timely basis and retain records as required to determine that the total income of the company has been ascertained in accordance with the Transfer Pricing Rules.

Unilateral Transfer Pricing Rulings

General

The Transfer Pricing Rules also establish a framework for the request and issuance of unilateral transfer pricing rulings.

What is Unilateral Transfer Pricing Ruling?

It is defined as a ruling issued by the Commissioner for Revenue, which determined an appropriate set of criteria for the determination of the transfer pricing for an arrangement in advance, including the method used to arrive at the transfer pricing, comparables and appropriate adjustments thereto and critical assumptions as to future events.

Article 11(1): Power of Commissioner to Issue Rulings

The Commissioner may issue a unilateral transfer pricing ruling in order to provide certainty in relation to the application of these rules.

Article 11(2)-(7): Request for Ruling

A request for a ruling shall (a) be made by a party to the arrangement or his authorised representative, (b) be made in writing, (c) be made in relation to a specific cross-border arrangement, (d) include a reference to these rules, (d) disclose the identities of the directly interested parties, (e) include any other detailed as determined by Guidelines issued under the Income Tax Acts and (f) a non-refundable fee of €3000.

Article 11(8): Effect of Ruling

The ruling shall remain binding on the Commissioner for a period of 5 years from the date it takes effect. However, it is possible for the Commissioner to expressly provide for a shorter period when issuing the ruling.

Article 11(9)-(11): Relevant Material Changes

A ruling becomes null and void upon any material change to any arrangement. Where any party becomes aware of such change, they shall notify the Commissioner within 30 days. Such notification may also include a request for a new ruling.