Transfer Pricing

Scope of the Transfer Pricing Rules

The Transfer Pricing Rules apply to cross-border transactions, agreements and dealings entered into by associated enterprises or where the involvement of the non-associated enterprise is artificial.  An associated enterprise is defined as a body of persons with more than 75% owned or controlled by the same person or persons or else when a body of persons owns or controls another body of persons.  In the case of a Multinational Enterprise Group (MNE Group), the percentage is reduced from 75% to 50%.

Thresholds and Exclusions

Apart from the relationship between the parties which may determine whether an arrangement is within or outside the scope of the transfer pricing rules, there are also thresholds and transactions below the following amounts are excluded from the transfer pricing rules:

• Transactions of a revenue nature below €6 million in a financial period, and
• Transactions of a capital nature below €20 million in a financial period.

Dividends are not to be taken into account when determining the revenue for a particular financial period.  However, distributions in kind may need to be considered.  Also, in ascertaining the total income of a company, the arm’s length prices are to be considered.

Loans and Risk Capital

An enterprise or body of persons falling within the scope of the Transfer Pricing 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 Transfer Pricing Rules before determining whether such loans or other debt constitute qualifying risk capital for the purposes of the Notional Interest Deduction.  However, amounts brought forward such as unabsorbed losses and unabsorbed NID in respect of arrangements that were outside scope are not required to be restated in terms of the Transfer Pricing Rules.

Documentation Requirements

The documentation which must be held by taxpayers must be in line with the OECD Transfer Pricing Guidelines.  The Master file shall include the information outlined in Annex I to Chapter V of the OECD Transfer Pricing Guidelines. The Local file shall include the information outlined in Annex II to Chapter V of the OECD Transfer Pricing Guidelines.  The said files must be made available in English or Maltese and retained for a period of nine years from the end of the period to which the arrangement in question refers to or the date of that arrangement, whichever is the later.

Methods and Guidelines

The local rules rely on the OECD guidelines not only when it comes to the documentation but also with respect to transfer pricing methods including the simplified approach for low value adding intra group services.  In the case of the latter, it is also acceptable to determine the arm’s length charge in accordance with the EU Joint Transfer Pricing Forum guidelines.

Rulings and Advance Pricing Agreements

The Transfer Pricing Rules also provide for unilateral transfer pricing rulings which may be issued against a fee of €3,000 and remain valid for a period of five years. Renewals of such rulings are also possible provided the application is made six months prior to its expiry and against a fee of €1,000.  The Transfer Pricing Rules also provide for Advance Pricing Agreements (APAs) in which case the above-mentioned fees are revised to €5,000 for the initial application and €2,000 for the renewal.