Malta’s relationship with transfer pricing rules
“The growth of multinational enterprises (MNEs) presents increasingly complex taxation issues for both tax administrations and the MNEs themselves since separate country rules for taxation of MNEs cannot be viewed in isolation but must be addressed in a broad international context” – OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (2017).
Given Malta’s growing importance as a financial centre, the importance of the OECD’s latest updates to its transfer pricing rules cannot be underestimated, particularly in terms of any potential impact on the cross-border transactions of companies based in Malta. Although Malta does not have any specific domestic legislation regarding transfer pricing guidelines, the issue is covered to some extent in both our Income Tax Act (ITA) and Income Tax Management Act (ITMA).
Article 12 of the ITA refers to the exemption on any income or gains which are attributable to a permanent establishment situated outside Malta, while Article 5(6) of the ITMA refers to the arm’s length principle in the context of the relationship between a non-resident person and a resident person, deemed to be ‘associated’. In the recently published Patent Box Regime (Deduction) Rules, 2019, specific reference is made to the fact that the determination of income or gains shall be made on the basis of a transfer pricing method in terms of OECD’s Transfer Pricing Guidelines.
Another rule that requires Malta to apply the arm’s length principle in cross-border transfer pricing issues is the Associated Enterprises Article of the OECD Model Tax Convention, which Malta includes in its double taxation treaties. This is an extremely important article which is often overlooked. Its importance lies in that it recognises the right of a country that is party to a tax treaty to adjust the taxable profits arising from transactions between related parties and binds the other country to make corresponding adjustments to avoid double taxation. Adjustments are to be made on the basis of the arm’s length principle that has been promoted by the OECD as the international standard for determining transfer prices for tax purposes.
This principle, however, does not provide a mathematical solution and what is the correct arm’s length price in a particular transaction can be a matter of opinion and can give rise to disputes. Transfer pricing disputes can be referred to arbitration in terms of the EU Arbitration Convention, of which Malta is a party. A more effective remedy is provided by the EU Directive on Dispute Resolution Mechanism, which was adopted in 2017 and which was transposed to Maltese law in July of this year.
The question on whether Malta should introduce specific transfer pricing legislation is one which has been discussed for a number of years. To answer this question, it is essential to first understand what is happening on the international scene with regards to this topic. In 2015, the OECD released the final report of its 15-point action plan on the Base Erosion and Profit Shifting project. Action plans 8-10 focus on ‘Aligning transfer pricing outcomes with value creation’ and amended the OECD Transfer Pricing Guidelines for Multinational Enterprises for Tax Administrations. In July 2017 the OECD published the latest version of these guidelines following
a number of modifications.
Transfer pricing is also taking centre stage in discussions on taxation of the digital economy, with two separate proposals, including a Digital Permanent Establishment, recently published by the EU. The OECD on the other hand would like to achieve a consensus-based global solution for taxing the digital economy by 2020. In the interim, a number of countries, such as Italy, India and Israel, have taken unilateral measures which could create further confusion if and when the OECD reach a global consensus.
During the Global Transfer Pricing Conference held earlier this year in Vienna, ‘simplification’ was very much the order of the day on a number of panel discussions. The need for simplification of the rules, documentation and analysis was expressed clearly and strongly by several practitioners. While the introduction of transfer pricing guidelines in our domestic legislation could be an important step for Malta, we should place more emphasis on the provisions that already do exist in our legislation and which already cater for the arm’s length principle. This refers particularly to Article 9 of Malta’s Double Taxation treaties which essentially provides the basis for applying the arm’s length principle to cross-border transactions.
ARQ Group will be discussing this very timely topic, among others, during its Tax 12 conference taking place on October 17 at the Intercontinental Hotel in St Julian’s. The conference is being organised by times of Malta and ARQ Group. Conference sponsors are VAT4U and eCabs.