Global transfer pricing update – even so-called tax havens get the TP blues

More and more countries are moving toward introducing specific Transfer Pricing (“TP”) rules, even the low tax jurisdictions which we thought never would. The spate of new rules is largely aligned with the Organisation for Economic Co-operation Development (“OECD”) Guidelines for Multinational Enterprises (“OECD Guidelines”).

Remember a while back your TP advisors said you don’t need to worry about the other side of your transactions with related parties because there were no TP rules in Malta, UAE, Cyprus, or Ireland to mention a few? Well, those days are long gone as TP has essentially become a global phenomenon.

Today we share a round-up of some recent developments in this space.

Malta

Malta recently issued draft TP rules. It is envisaged that the draft TP rules will form part of the legislation and will largely follow the OECD Guidelines. The Maltese government plans to implement these rules to align with global standards and best practices. The Maltese Income Tax Act defines what constitutes an associated entity, and transactions between entities and their permanent establishments will not be spared. The good news is that the small and medium entities and cross-border transactions below a yet-to-be-determined threshold will be excluded from the TP scope.

Although the rules are anticipated to only come into effect from 1 January 2024, it is important for multinationals with operations in Malta to start getting their ducks in a row by developing appropriate TP policies and frameworks.

Interestingly, the Maltese rules also provide a framework for the application of Unilateral TP Rulings and Advanced Pricing Agreements, which even jurisdictions that have long-standing TP rules are only considering now (not looking at anyone South Africa).

Cyprus

In Cyprus, the TP rules are expected to be enacted sometime in 2022. The proposed rules, which have been under debate for a while now, will comply with the OECD Guidelines. These rules will require multinationals with domestic and cross-border intercompany transactions to comply with the arm’s length principle and prepare TP documentation.

The TP rules will apply to multinationals in Cyprus and foreign entities operating through a PE in Cyprus, subject to certain exemptions as detailed in the ITA.

Entities meeting the threshold will need to submit the Local File and Master File to the Cyprus revenue authority within 12 months from the fiscal year-end.

Ireland

From 1 January 2022, Ireland enacted updated TP rules into law which are in line with OECD Guidelines. The TP rules detail specific legislative provisions that inter-company arrangements be priced based on the substance of the commercial or financial relations, where the form of the arrangement is inconsistent with the substance. The rules explicitly provide the Irish Revenue with the power to disregard the contractual form of an arrangement and replace it with an alternative arrangement that achieves a commercially rational result.

The rules require that taxpayers prepare three-tiered documentation namely the Local File, Master File, and Country by Country Reporting. The new scope has been expanded to also include capital transactions exceeding EUR 25 million.

The UAE

On 31 January 2022, the Ministry of Finance made an announcement that a new federal corporate income tax system will be incorporated in the UAE effective from 1 June 2023. The new rules will see corporations being liable for a 9% corporate tax rate. With all these new developments, where does this put TP compliance? Well, with the introduction of the corporate income tax, come TP rules aligned to OECD Guidelines, which UAE companies will need to comply with. Generally, we would expect that the cross-border intercompany transactions would need to be undertaken at arm’s length which should be supported through the preparation of relevant documentation. Whilst we await further clarification on the specific documentation details, the time is right to start building a robust TP framework.

Brazil

Finally, Brazil has come to the Carnival and is ready to follow the global standard practice by aligning its TP rules with the OECD Guidelines.

In the past few years, Brazil has been in close communication with the OECD committee to help them integrate the OECD Guidelines into its TP rules. Amongst other things which will be included in the new Brazilian TP rules are the requirement to have three-tiered documentation in place. Discussions around the consequences of non-compliance with these rules are still ongoing, but penalties and increased monitoring by tax authorities are expected.

Next steps?

If you have operations in any country where new TP rules are being brought in, it’s time to get ready. Unfortunately, the TP compliance burden remains one of the meatiest from a tax perspective, so early planning to ensure compliance and manage risk is key. Please contact us if you require further insight.