Issue link: https://maltatoday.uberflip.com/i/1246698
14.05.2020 8 OPINION S o far in Maltese law, there is no legislation on transfer pricing rules pertaining to OECD guide- lines. Yet, why is transfer pricing so im- portant for cross border taxation? The answer is international pressure to deal with perceived tax avoidance by multinational groups, a desire for increased access to information that enables the audit of the full value chain and the pressure to increase tax revenues by often exploiting in- tra-group transactions' audits. One needs to assess whether prices are genuine having regard to all rele- vant facts and circumstances. During the Covid-19 lockdown, it is obvious that state coffers are not exactly brimming with revenue so at- tempts by tax authorities to tighten the TM rules on cross border transac- tions become popular. In Malta, which relies heavily on international trade, we are not com- pletely shielded from this rule be- cause in accordance with Article 5 (6) of the ITMA this gives the discretion to the Commissioner to determine the transfer price following the OECD guidelines. In this regard, the Regulations pro- vide that for the purposes of calculat- ing the tax liability of a taxpayer, an ar- rangement or a series of arrangements can be ignored where it has been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the applicable tax law and are not genuine having regard to all relevant facts and circumstances. One may also find reference to trans- fer pricing in the recently published Patent Box Regime (Deduction) Rules, 2019. Here, there is a specific refer- ence made to the fact that the deter- mination of income or gains shall be made on the basis of a transfer pricing method in terms of OECD's Transfer Pricing Guidelines. Taxpayers have so far been spared the rigours of transfer pricing exercis- es even though there are embedded in the law. The arsenal includes: general an- ti-avoidance provisions and brief references to transactions at arm's length. There is an unwritten rule that regulates transactions between resi- dents and non-residents which must adhere to the arm's length principle. This means that prices quoted be- tween parties ought to reflect the commercial rates usually charged by non-related parties. Having said that, so far there are no fixed rules to establish how such pric- es can be determined. Furthermore, the new anti-tax avoidance (ATAD) provisions recently introduced in Maltese tax law re-emphasise the gen- eral anti-abuse rule already existent in Maltese tax legislation. In this regard, the law provides that for the purposes of calculating the tax liability of a taxpayer, an arrange- ment or a series of arrangements can be ignored where it has been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the applicable tax law. The spirit of the law that regulates transfer pricing under OECD rules is therefore somewhat mimicked in our legislation. Effectively, it argues that any arrangement can be regarded as non-genuine to the extent that it is not put into place for valid commer- cial reasons that reflect economic re- ality. At this stage, let us give some back- ground on the journey that took us to adopt ATAD. It was on 12 July 2016, that the Coun- cil of the EU unanimously adopted the Council Directive. Later, ATAD 2 was introduced which builds on the provi- sions of ATAD 1. Another important rule requires Malta to apply the arm's length princi- ple in cross-border transfer pricing is- sues. This can be found in the Associ- ated Enterprises Article of the OECD Model Tax Convention, which Malta accepted in its double taxation trea- ties. One may venture to comment, how indirectly transfer pricing rules do creep in our legislation. A typical case is the right of a coun- try that is party to a tax treaty to ad- just the taxable profits arising from transactions between related parties and binds the other country to make corresponding adjustments to avoid double taxation. Here comes the rub. Such adjust- ments must be made on the basis of the arm's length principle that again refers us back to the OECD standard. The latter regulates how transfer pric- es for tax purposes can be computed. As can be imagined, in similar cir- cumstances there may arise disputes in the interpretation of how such pric- es are determined. In such instances, OECD rules allow for disputes to be referred to arbitration. This follows in terms of the EU Arbitration Conven- tion, of which Malta is a party. Another remedy is provided by the Directive on Dispute Resolution Mechanism - this was transposed to Maltese law this year. As can be ex- pected, Malta has so far not been sub- jected to such dispute resolution since transfer pricing rules are not applica- ble. For most member states, such dis- putes can be common and arise when exercises are carried by respective countries to ascertain the arms-length - ie the true commercial price. In practice, this means that to pre- vent double taxation, a primary (up- ward) adjustment by one tax admin- istration should be followed by a corresponding (downward) adjust- ment by the other. Needless to say, no administration takes lightly to a reduction of its tax base. That said, it is clear that in the field of transfer pricing, a sincere form of collaboration is paramount. There- fore, it would be expedient to recog- nise that it is in everyone's interest to avoid double taxation and double non-taxation hence the reason to in- voke the arm's length principle. To assist in reaching consensus, OECD highly recommends for parties to agree to a joint audit. The findings of such an audit should be incorpo- rated in a concluding report. To the extent possible, tax administrations should endeavour to arrive at a com- mon interpretation of how the arm's length principle applies to the find- ings of a specific audit based on a scientific analysis of all the facts and circumstances. Such an agreed outcome would give an undertaking that the audit does not result in double taxation. Only thus, can tax authorities reach a common understanding of how a true and fair arm's length exercise works. Once agreement is reached then the necessary adjustment is passed in the countries respective domestic tax as- sessments. In the situation, where no agreement is reached then it is advised that a final report should still include all relevant facts and circumstances with a clear reference to the points on which the tax administrations man- aged to agree. One observes that a final report on a coordinated transfer pricing control does not have a legal value per-se, un- less it is specifically empowered via national legislation. It may also transpire that the facts subject to the audit result in an assess- ment under the arm's length principle which does not alter the position dur- ing the tax periods before or after the respective audit period. In conclusion, one cannot relax that the full burden of transfer pricing rules is not yet activated in Malta. How such rules will affect Malta and its financial sector in the future is too early to assess. What is important is that practitioners avoid taking an os- trich head-in-sand attitude. Will transfer market rules make it to Malta? George Mangion George Mangion is a senior partner of an audit and consultancy firm, and has over 25 years experience in accounting, taxation, financial and consultancy services. His efforts have seen PKF being instrumental in establishing many companies in Malta and ensured PKF become one of the foremost professional financial service providers on the Island