Introduction of Transfer Pricing in Malta

  • By:Melissa Speigner

The Budget Measures Implementation Act, 2021, published on the 16 of April, includes a new enabling provision (article 51A) that empowers the Minister for Finance to introduce detailed transfer pricing rules. As a result of this provision, the introduction of such rules in Malta appears imminent. This comes as no surprise and follows on the chain of recent legislative developments upgrading the Maltese tax system in line with EU, OECD and international best practices.

One of the most important initiatives ever proposed by the OECD in combating the artificial shift of profits offshore was the introduction of the Transfer Pricing (“TP”) Guidelines way back in 1995 and subsequently amended. The importance of the TP rules is based on the need to circumvent and thus counteract the base erosion and the profit shifting of tax revenues offshore, thus resulting in a depletion of income for States.

It is worth noting that the Income Tax Act and related subsidiary legislation had already indirectly introduced TP, in the sense that now, more of often than not, it made very clear references to the Arm’s Length Principle. Hence, the formal introduction of TP rules should not come as a surprise.

The new contemplated Article 51A (hereinafter the “Enabling Provision”), once formally introduced into the Maltese Income Tax Act will, in general, provide for the determination of the arm’s length price of intragroup transactions by considering the pricing, terms and conditions underlying such transactions.

While details will be revealed once the rules are published, the Enabling Provision of the Act clearly states that the rules will provide for the determination of the arm’s length pricing of a transaction or a series of transactions, any adjustments in relation thereto and for advance pricing agreements, also commonly known as APAs.

In this respect, enterprises should start considering the effect of TP rules on their intra group and related party transactions by following Authorized OECD Approach by carrying out a functional analysis, risks assumed and assets used by related and associated enterprises in a transaction.

Posted in: International Taxation