Malta: Update on transfer pricing landscape

Transfer pricing rules in accordance with the current global standards related to the arm’s length principle

Rules in accordance with current global standards related to the arm’s length principle

Following the global project to reform the international tax system to prevent base erosion and profit shifting (BEPS), the Maltese government has committed to implementing specific transfer pricing rules in accordance with the current global standards related to the arm’s length principle.

In December 2021, the government released draft transfer pricing rules for public consultation—which concluded on 28 February 2022—that included a requirement for application of the arm’s length principle with regard to the pricing of cross-border transactions between certain associated enterprises (related parties) and with certain permanent establishments. The rules likely will exclude small and medium enterprises and include a de minimis threshold for related-party cross-border transactions. Read TaxNewsFlash

The introduction of transfer pricing rules means that in-scope entities will have to substantiate the adherence of their in-scope cross-border related-party transactions to an arm’s length principle by showing that said transactions yield profit that unrelated parties would yield in comparable circumstances. In other words, related-party transactions should fall with the range of a “market price,” since transactions below or above this range could result in tax losses for contracting-party jurisdictions and market distortions.

While it does refer to documentation requirements to be issued at a later stage, the Maltese transfer pricing consultation document is silent on whether OECD-style Master file and Local file requirements will be introduced in Malta.

In addition, recent transfer pricing cases emphasize that taxpayers must legally implement transfer pricing policies. Deficiencies in legal implementation may also lead to unnecessary fines, penalties and tax base adjustments by foreign tax jurisdictions. In order to avoid such consequences, intercompany agreements must be aligned with transfer pricing policies and documentation as regards the delineation of the transaction, the allocation of risks, the intragroup pricing as well as the ownership of intangibles.

KPMG observation

Close cooperation with finance teams likely will be particularly critical. Tax and finance teams must work together closely to satisfy these new requirements and help ensure consistency among tax and accounting data with the introduction of the transfer pricing rules.

In short, these prospective reforms are expected to have wide-ranging effects on many Maltese corporations engaged in international business, and the timeline for implementation is ambitious. Tax leaders locally may need to move quickly to assess the potential impacts, advise senior executives and other stakeholders on the coming changes, and determine what needs to be done to comply with the new rules and manage their implications.

Read a June 2022 report prepared by the KPMG member firm in Malta


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