Malta issues formal transfer pricing requirements

On 18 November 2022 the Minister for Finance and Employment issued Legal Notice 284 of 2022 (‘LN 284/22’), which provides for the formal introduction of specific transfer pricing rules in Malta.

By means of LN 284/22, the Government of Malta has followed up on its commitment to implement specific transfer pricing rules as part of Malta’s Recovery and Resilience Plan agreed with the EU Commission and approved by ECOFIN in 2021. LN 284/22 was issued in terms of article 51A of the Income Tax Act, Cap. 123 of the Laws of Malta (‘Malta ITA’), to the effect that officially the rules will be titled as Transfer Pricing Rules, (S.L. 123.207) (‘TP Rules’).

The TP Rules will apply as from any financial year commencing on or after 1 January 2024 and vis-à-vis any arrangement entered into on or after the said date and any other arrangement which, albeit was entered into before the said date, is materially altered on or after that date.

The TP Rules can be split into three parts. The core transfer pricing rules are provided for in the first part, whereas in the second and third parts the TP Rules provide for the introduction of mechanisms related to formal unilateral transfer pricing rulings and advance pricing agreements respectively.

A. Core transfer pricing provisions

The core transfer pricing provisions revolve around rule 3 of the TP Rules, which will basically ensure that in ascertaining the total income of any company in accordance with the Malta ITA, any amount arising from a cross-border arrangement (‘CBA’) entered into with an associated enterprise is at arm’s length. As hinted from the above, the TP Rules will not apply across the board, but, rather, will only apply vis-à-vis certain transactions entered into by certain taxpayers.

First and foremost, the core transfer pricing provisions only apply to companies which are subject to income tax in Malta and that are not a micro, small or medium-sized enterprise as defined in Annex I of Commission Regulation (EU) No 651/2014. As noted above, the provisions of rule 3 provide that such companies would be required to ensure that any CBA entered with an associated enterprise is at arm’s length, provided that the amount receivable or payable under the said CBA is relevant in ascertaining its total income.

However, notwithstanding the above, a company should not be required to abide to the provisions of rule 3 if either:

• the arrangement comprises a securitisation transaction in terms of the Securitisation Transaction (Deductions) Rules, (SL 123.128); or
• unless the taxpayer opts otherwise, the de-minimis threshold applies on the basis that the aggregate arm’s length value of those items of income and expenditure stemming from a CBA in the relevant financial year does not exceed the amounts below:

If rule 3 applies and hence the taxpayer is required to determine the arm’s length, the arm’s length must be determined in line with methodologies which will be designated by the Commissioner for Revenue in guidelines to be issued at a later stage. It is worth noting that when the Commissioner had launched the Public Consultation vis-à-vis the introduction of the TP Rules, in the public consultation document it has been indicated that the OECD Transfer Pricing Guidelines will constitute an important source of reference in the application of the TP Rules. Furthermore, such a taxpayer would also be required to prepare on a timely basis and retain transfer pricing documentation.

The same provisions also extend the requirements above vis-à-vis notional arrangements entered into between a company tax resident in Malta and a permanent establishment located outside of Malta or vice versa. In the latter case, however, the core transfer pricing provisions will apply to all body of persons operating a permanent established located in Malta and not just companies. Moreover, in applying the TP Rules in the context of such notional arrangements, the TP Rules also require reference to the 2010 Report on the Attribution of Profits to Permanent Establishments approved on 22 June 2010 by the Committee on Fiscal Affairs and by the OECD Council on 22 July 2010.

B. Transfer pricing rulings

The TP Rules also put in place two programmes dedicated to transfer pricing agreements. One concerns unilateral transfer pricing rulings (‘Unilateral TPRs’) that may be requested from the Commissioner for Revenue, whereas the other empowers the Malta Competent Authority (‘CA’) to enter into bilateral or multilateral advance pricing agreements (‘APAs’) with competent authorities of other states.

The provisions underpinning the two programmes are broadly similar but do diverge in certain aspects. They are both binding for a maximum period of 5 years, provided that there weren’t any material changes. Both contemplate a roll-back period and are subject to the payment of a varying non-refundable fee. An application for a Unilateral TPR is subject to a non-refundable fee of €3,000 whereas an application for an APA is subject to a non-refundable fee of €5,000. A Unilateral TPR and an APA can also be renewed, subject to the payment of a non-refundable fee of €1,000 and €2,000 respectively.

Whether an APA is issued or not is conditional on the Maltese CA coming into agreement with the other competent authority/ies, whereas the issuance of a Unilateral TPR is chiefly at the discretion of the Commissioner. Indeed, the Commissioner is empowered to refuse the issuance of a Unilateral TPR if either the applicant is not up-to-date with its tax filings or, in his view, the Malta Income Tax Acts clearly provide sufficient certainty with regard to the tax treatment of the CBA.

Where Unilateral TPRs are concerned, the TP Rules also lay down a procedure allowing any directly interested party who has submitted an application for Unilateral TPR to refer any matter relating thereto, including the Commissioner’s refusal to issue a Unilateral TPR, to the Administrative Review Tribunal.

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