The guidelines, published as Legal Notice 9 of 2024, expands the scope of the Transfer Pricing Rules such that, with regards to fiscal years starting on or after 1 January 2027, arrangements initiated before January 1, 2024 which are not materially altered on or after that date will also be included within the scope of the rules, hence imposing a time limit on the grandfathering provision.
The Guidelines clarify that determining whether an arrangement has been materially altered requires a case-by-case analysis which must consider whether an alteration to an existing transaction or agreement between parties to an arrangement materially alters the substance of the arrangement by reference to the functions performed, assets used, and risks assumed by each of the parties to the arrangement. Specifically, the guidelines provide that changes to the consideration, the rights and/or obligations of the parties, and the agreement duration are deemed to be material changes to the agreement.
Notional interest deduction
The guidelines outline that the Transfer Pricing Rules take precedence over the Notional Interest Deduction Rules [Subsidiary Legislation 123.176 of the Laws of Malta]. Entities falling under these regulations must initially assess whether loans or other debts borrowed or any portion thereof, should carry interest for Transfer Pricing Rules, before evaluating if such loans or debts qualify as risk capital under the Notional Interest Deduction Rules.
Transfer pricing methods
The guidelines clarify that the preferred methodology to be applied for the purposes of these rules shall be those outlined in Chapter II of the OECD Transfer Pricing Guidelines. Other methods may be accepted in accordance with Paragraph 2.9 of the OECD Transfer Pricing Guidelines. Whilst the guidelines do not require the use of more than one transfer pricing method, the use of multiple methods where warranted is not prohibited.
Record keeping
In terms of the guidelines, the taxpayer is expected to maintain transfer pricing records and would be required to disclose such to the Malta Tax and Customs Administration only upon a specific request. The documentation which is required to be held by taxpayers shall be in line with Chapter V of the OECD Transfer Pricing Guidelines, being the Master file and the Local file, which are required to be made available in either Maltese or English. The guidelines delineate that a taxpayer which opts to adopt the simplified approach in terms of low value adding intra-group services shall prepare the information in terms of Chapter VII of the OECD Transfer Pricing Guidelines.
Exceptions
In relation to the deminimis thresholds included in rule 9 of the Transfer Pricing Rules, the rules outline that in aggregating the items of income and expenditure of a revenue nature to determine the application of the rules, one should not include any dividends paid to an associated enterprise. On the other hand, distribution/s in kind may need to be considered for the purpose of the rules.
Unilateral Transfer Pricing Rulings
The guidelines also introduce certain conditions that must be satsified in order for the Commissioner to consider requests for the issuance of Unilateral Transfer Pricing Rulings performing a downward adjustment.Are Transfer Pricing rules applicable to your company?
The below Transfer Pricing flowchart establishes a decision process to assist companies in determining whether a particular transaction falls within the remit of the rules, in particular taking into account the potential exclusions for SMEs and for transactions, the value of which, in aggregate, is below prescribed deminimis threshold.
Transfer Pricing Flowchart
The flowchart may be used as guidance in assessing whether the Rules are triggered and includes simplifications and assumptions meant to enable an easy flow through the flowchart. Any conclusion as to whether a particular transaction falls within scope or otherwise should be based on a detailed case-by-case analysis and not on the preliminary indication that may be obtained from the flowchart.
For a proper assessment of the potential applicability of the Transfer Pricing Rules, get in touch with our Tax Team at taxadvisory@bdo.com.mt.