On January 19, 2024, the Malta Tax & Customs Administration (‘MTCA’) released guidelines regarding the Transfer Pricing Rules implemented in Malta. The Guidelines,issued in terms of Article 96(2), are to be read alongside Legal Notice 284 of 2022/Subsidiary Legislation 123.207 (The Transfer Pricing Rules “TPR”).
Grandfathering Provision
In accordance with the TPR, arrangements entered into prior to 1st January 2024 and which have not been materially altered, are not expected to fall within the remit of the TPR. Having said that, the enactment of Legal Notice 9 of 2024 earlier this year has indicated that the TPRs remit will be extended to these arrangements as from 1st January 2027.
Nevertheless, the guidelines explore the intricacies of what constitutes a material alteration, indicating the need for a detailed analysis on a case-by-case basis.
Determining whether an arrangement has been materially altered or otherwise, requires extensive scrutiny, particularly on the substance of the transaction rather than the form of the arrangement. The guidelines stress the importance of evaluating changes in functions performed, assets used, and risks assumed by each party. Notably, external factors like geopolitical or economic changes, leading to alterations in conduct, are explicitly recognized as not constituting an alteration to an arrangement. The Guidelines set out examples of what may or may not qualify as a material alteration.
Ascertaining Total Income – convergence with the Notional Interest Deduction
Rule 3 of the TPR extends the scope of the arm’s length pricing considerations to transactions without any consideration. As such, an assessment must be made on any transfer pricing adjustment made vis-à-vis the Notional Interest Deduction (“NID”) in Malta. The Guidelines state that the TPR will precede the application of NID. Therefore, an entity must first determine whether the loans or other borrowings should bear interest or otherwise. This aligns with Chapter X of the OECD Transfer Pricing Guidelines (‘OECD TPG’). This Chapter initially queries the delineation of the loan’s characterization or in other words,whether it qualifies as debt or equity.
Transfer Pricing Methods
As expected, the TP Methods make direct reference to the OECD TPG particularly in relation to the application of the ‘preferred method approach’ as outlined in Chapter 2 of the OECD TPG. Furthermore, the MTCA will allow the use of ‘Other Methods’ as well as instances where more than one method is used in order to arrive at the Arm’s Length Price. Moreover,the use of the simplified approach pertaining to low value-added services as stipulated in the OECD TPG can be adopted by entities and practitioners.
Records to be Retained
The guidelines state that transfer pricing documentation should be kept by the taxpayer and shared with the MTCA only when requested, within a ‘reasonable’ timeframe as specified. It remains to be seen if further explanation will be provided by the MTCA as to what will constitute as a ‘reasonable timeframe’.,
The documentation to be prepared in line with the TPR must align with Chapter V of the OECD TPGs, specifically the Master and Local files, prepared in either English or Maltese, following the guidelines outlined in Annex I and II to Chapter V of the OECD TPGs, respectively.
De Minimis Assessment
With respect to the de minimis thresholds included within Rule 9 of the TPR, the guidelines state that dividends-in kind must be taken into consideration when aggregating items of income and expenditure.
Unilateral Transfer Pricing Rulings
Finally, the guidelines provide instances where the MTCA will consider requests for Unilateral Transfer Pricing Rulings performing a downward adjustment.
Although the guidelines have brought clarity to specific aspects of the TPR, further revision is essential due to the ambiguity present in certain definitions and approaches. Nonetheless, sufficient information is now available to determine if entities will be subject to the TPR in Malta.
Luke Aquilina
Tax & Transfer Pricing Senior Team Leader
