In recent years, Malta has significantly strengthened its Transfer Pricing regulatory framework. The latter, previously perceived by many operators as an implicit principle within the Maltese tax system, has become a set of formal and enforceable rules that affect companies with cross-border operations. This amendment arises from the need to align with OECD international standards, offering greater transparency in information exchange and global taxation.
Importance of the Arm’s Length Principle
The Arm’s Length Principle requires related-party transactions to be evaluated as if they were between independent parties. Objective market criteria must support prices, interest rates, royalties, and intra-group service conditions to prevent profit shifting to tax havens and ensure a fair tax base in Malta.
Formalization of the Rules in Malta
The adoption of transfer pricing rules in November 2022 marked a turning point. Effective for fiscal years beginning on or after January 1, 2024, these rules apply to cross-border related-party transactions. While the law previously recognized the Arm’s Length Principle, the key change is the requirement to use standardized methodologies, maintain supporting documentation, and comply with parameters set by the Maltese tax authority.
Small and medium-sized enterprises are excluded from strict compliance with these rules, balancing administrative burden and establishing thresholds to exempt smaller transactions.
Required Documentation and Methodologies
Companies subject to these rules must prepare two key reports: A master file detailing the group’s overall structure and Transfer Pricing policies, and a local file covering specific operations in Malta. Documentation must be in English or Maltese and comply with the OECD guidelines.
Concerning pricing, the regulations allow for the five methods recognized by the OECD:
- Comparable Uncontrolled Price (CUP) method.
- Resale Price Method (RPM).
- Cost Plus Method.
- Transactional Net Margin Method (TNMM).
- Profit Split method.
In exceptional cases, alternative approaches are permitted when none of the aforementioned are in accordance with Arm’s-length rules.
Tax Certainty: Advance Resolutions and Agreements
The regulations provide for preventive mechanisms to reduce the risk of litigation and ensure greater legal certainty to taxpayers. These include:
- Unilateral rulings: These are binding resolutions issued by the Maltese tax authority regarding the appraisal of specific transactions. They inform companies of the tax administration criteria in advance and adjust their Transfer Pricing policies accordingly.
- Advance Pricing Agreements (APAs): These are agreements between the taxpayer and the tax administration, which may be bilateral (between Malta and another jurisdiction) or multilateral (with several tax authorities). These agreements establish in advance the appraisal methodology applicable to intra-group transactions, providing stability and significantly reducing the likelihood of cross-border disputes.
Both instruments reinforce tax predictability and limit multinationals’ exposure to future litigation in an increasingly complex tax environment.
Strategic Implications for Companies
The implementation of these rules represents a challenge for multinational companies operating in Malta. Beyond a formal obligation, it requires the creation of internal control processes, the integration of comparable financial analyses, and the adoption of sound tax governance policies. Non-compliance not only leads to financial penalties but also to higher risks of tax audits and tax base adjustments.
Proactive organizations that invest in consistent documentation and adopt precise methodologies will be better positioned to mitigate risks and reap the benefits of greater transparency in their international operations.
Conclusion
The Transfer Pricing regime in Malta reflects a shift toward stricter and more transparent international standards. Companies with cross-border operations must understand that technical preparation, comparative analysis, and strategic planning are now essential elements of tax compliance. In this context, proper management of Transfer Pricing policies is not only a tax requirement but also protects against increasing international supervision.
Global Transfer Pricing Compliance
Cases such as Malta’s reflect how each jurisdiction is adopting increasingly strict regulations aligned with the OECD standards. Multinationals operating in several countries must understand these regulations and adapt their tax strategy to ensure legal certainty and minimize risks.
TPC Group assists companies in Latin America and Spain in the correct implementation of Transfer Pricing policies, compliance with local obligations, and the design of efficient and sustainable tax structures.
Source: TimesOfMalta