As part of Malta’s Recovery and Resilience Plan[i], the Government of Malta has committed to reform the governance of the judiciary, anti-corruption, anti-money laundering and the fight against aggressive tax planning. In this respect, the plan includes crucial reforms to strengthen the judiciary’s independence, to address some features of the tax system that facilitate aggressive tax planning and to strengthen the institutional framework in order to fight against corruption and money laundering. Consequently, the introduction of Specific Transfer Pricing Legislation and procedures to prevent loss of public revenues through international tax arbitrage was overdue.

What is Transfer Pricing?

Transfer pricing refers to the setting of the correct transfer price between associated enterprises forming part of a multinational enterprise (hereinafter referred to as MNE) group.

Transfer pricing by itself does not necessarily involve tax avoidance. It is where the transfer pricing does not accord with applicable international norms that mispricing or incorrect pricing occurs, and where issues of tax avoidance and fraud may arise. In order to ensure the determination of the correct transfer pricing between associated enterprises, Organisation for Economic Co-operation and Development (OECD) Member States have chosen to treat each entity in the MNE as a separate entity. The OECD has also published and subsequently revised by the finalisation of the BEPS project, the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2017.

This separate entity approach is the most reasonable means for achieving equitable results and minimizing the risk of unrelieved double taxation. In order to apply the separate entity approach to intra-group transactions, individual group members must be taxed on the basis that they act at arm’s length in their transactions with each other. However, the relationship amongst the members of the MNEs may permit that they establish special conditions between themselves, which do not reflect and/or differ from normal market conditions between independent enterprises.

To ensure the correct application of the separate entity approach, OECD member countries adopted the Arm’s Length Principle (ALP), under which the effect of special conditions on the levels of profits should be eliminated.

The Arm’s Length Principle

The general rule is that, profits derived by an enterprise of a contracting State are taxable only by the contracting State in which the enterprise has its residence.14 Article 9(1) in the OECD Model Convention, allows the State to depart from these general rules by adjusting profits accruing to a domestic enterprise, which is associated with a foreign enterprise, to the extent that the business profits concerned were affected by terms and conditions differing from normal market conditions between independent enterprises. The ALP provides that, the conditions made or imposed between associated enterprises must be compared with those which would be agreed between independent enterprises, thus a comparability analysis taking into account functions performed, assets used and risks assumed, must be performed. There is above all a concrete possibility to make a comparison whenever a market price exists and can be ascertained, at a certain point in time and in a specific market for the, inter alia, goods and services received.

If there is no such possibility to make a comparison, an attempt must be made to estimate by other means what would have been agreed between third parties that are independent of each other in the absence of any influence under company law. This comparison is necessarily a hypothetical one.

What must be taken in consideration is that the price is founded on certain market situations independent of the association of the two enterprises. Another point to be observed in the comparability analysis is the function, which the dependent enterprise has within the group as a whole.

For providing concrete basis for comparisons, certain standard methods have been developed for establishing the Arm’s Length price which are laid down in the above-mentioned OECD Transfer Pricing Guidelines.

Malta’s Public Consultation

On the 22nd of December 2021, the Commissioner for Revenue issued the draft Transfer Pricing Rules for public consultation. The Commissioner for Revenue, through this document, is seeking feedback in relation to a set of transfer pricing rules drafted with a view to implement legislation prescribing the requirement for the application of the arm’s length principle for the pricing of transactions between associated enterprises falling within the scope of the rules. The consultation period will end on 28 February 2022. Any submissions received after this date may not be considered. It is envisaged that the proposed transfer pricing rules (the rules) shall come into force with effect for financial years commencing on or after 1 January 2024.

Speaker

Dr Franklin Cachia is currently the Head of Tax and Regulated Industries at CSB Group.  He attended the University of Malta, and successfully completed a Bachelor of Laws degree, followed by a Doctor of Laws degree in 2012. In fulfilment of his LL.D., Franklin submitted and defended his thesis entitled: “The Custody Business in the Financial Sector”.

Following his graduation from the University of Malta, for the last 6 years, Franklin was employed with a local firm specialised on international tax planning, financial services, investment funds, corporate law, commercial law, and financial-legal matters. Franklin obtained his Advanced Diploma in International Taxation (ADIT) which helped him solidify his foundations in domestic and international taxation.

In 2015, Franklin furthered his studies at the University of Leiden in the Netherlands, where he read an Advanced LL.M. in International Tax Law. He successfully submitted and defended his thesis entitled, ‘Analysing the European Commission’s Final Decisions on Apple, Starbucks, Amazon and Fiat Finance & Trade’.

Franklin also lectured the Advanced Taxation Module for the Association of Chartered Certified Accountants (ACCA P6) course provided through Aim Professional Academy and the EU Direct Taxation module for the ADIT. Franklin is also a member of the Board of Examiners of the Faculty of Law at the University of Malta. Franklin also delivered employment law, company and business law training to public and private bodies as well as in-house training. He also published other articles on the international tax journal EC Tax Review published by Kluwer Law International with his very latest article entitled: ‘Tax Transparency for Intermediaries: The Mandatory Disclosure Rules and Its EU Impact‘ (2018) 27 EC Tax Review, Issue 4.

Moreover, Franklin pursued the course organised by the Institute of Financial Services Practitioners entitled ‘Introduction to the Virtual Financial Assets Act’ and successfully passed the exam prescribed by the Malta Financial Services Authority. In view of his experience, Franklin’s main practice areas include local and international and Maltese tax law, corporate and trusts law, financial services, digital economy and virtual currency, blockchain, intellectual property and employment law.

Events Resources

Events resources will be sent by email after the delivery of the event.

Event Details

Date: 24/05/2022

Start time: 09:30 CEST

End time: 12:45 CEST

Venue: Online Live Session

Phone: +356 27555560 / +356 77555560

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