For countless times, many have incorrectly contended that Malta did not follow transfer pricing (TP) principles.
In reality, however, the concept on an arm’s length value to a transaction has been enshrined in the Income Tax Act since inception, and a more correct statement of TP would have been that Malta still had not adopted a formal and refined system in TP. This has now been formalised with the enactment in our laws of 2022. The questions thus arises automatically − what is TP and why does it matter?
TP is a concept that affects nearly every multinational group. It refers to the pricing of transactions between related companies within the same corporate group − whether involving the transfer of goods or services, the use of intellectual property, intragroup financing or sharing resources.
Why transfer pricing matters?
The price charged between related entities determines where profits are reported and, ultimately, where tax is paid. Because of this, tax authorities around the world scrutinise intra-group cross-border transactions and the price at which they are charged.
At the heart of TP regulations is the Arm’s Length Principle (ALP). This principle requires that transactions between related companies be priced as if they were conducted between independent parties in the open market. The aim is to prevent profits from being artificially shifted to low-tax jurisdictions, ensuring fair tax revenue allocation across countries.
Transfer pricing in the Maltese context
Focusing on the local context, with Malta having successfully attracted a number of multinational companies and with the 2022 enactment of TP legislation and the subsequent publication of TP guidelines by the Maltese Tax and Customs Authority (MTCA), transfer pricing and its consequences have become a matter of debate within boardrooms and between directors and their tax consultants.
Although multinationals are typically already familiar with the rigorous benchmarking process required to ensure compliance with international standards, local considerations are also necessary and need to be contemplated.
Benchmarking is the process which involves comparing the pricing of intercompany transactions with those that would be agreed upon by independent parties under similar conditions.
As a result, many multinational groups have long adopted ALP when setting prices between related entities, in line with the transfer pricing regulations applicable across the jurisdictions in which they operate.
Documentation requirements: master file and local file
Multinational groups are generally expected to maintain comprehensive documentation outlining their TP policies. This includes detailed records of the group’s approach to pricing intercompany transactions, as well as the comparability and benchmarking analyses conducted to support those prices. These documents are commonly referred to as the “master file” and the “local file,” and they serve as key components in demonstrating compliance with international TP standards.
Having a clear and well-documented TP policy is not just a compliance exercise ‒ it is a strategic necessity
In Malta, directors and key officials of Maltese companies operating within such multinational groups are expected to familiarise themselves with the TP rules introduced in Maltese legislation towards the end of 2022 and the supplementary guidelines issued by the Maltese Tax and Customs Authority (MTCA) to make sure that the group policies and documentation are in line with Maltese legislation and that the necessary documentation are retained within the Malta offices of the group.
These guidelines issued by the MTCA state that taxpayers operating in multinational groups are expected to disclose their TP documentation upon request.
Legal framework and compliance
As noted previously, although Malta formally introduced TP rules through Legal Notice 284 of 2022, ALP has long been embedded in Maltese tax law. It is reflected in Malta’s double tax treaties and in provisions of the Income Tax Management Act, which empower the commissioner for tax and customs to adjust taxable income where transactions with related non-resident entities deviate from ALP conditions.
Malta’s TP rules, effective from January 1, 2024, align with the OECD Transfer Pricing Guidelines, setting a global standard for compliance. Companies falling within scope must now maintain proper documentation − typically a master file and a local file − to demonstrate that intra-group transactions meet the ALP. Non-compliance may result in tax adjustments, penalties, interest charges and reassessments of prior years.
What should businesses in Malta do?
To ensure compliance and mitigate risk, in-scope companies in Malta should:
• Review existing transfer pricing policies;
• Ensure documentation is in place and up to date;
• Support the choice of method used to price transactions;
• Keep policies under review as business and regulatory environments evolve;
• Companies should also not rely on their international master files. It is critical that local files are prepared and incorporate the real value of a transaction which is related to the Malta operations.
In today’s regulatory climate, having a clear and well-documented TP policy is not just a compliance exercise ‒ it is a strategic necessity for managing tax risk, avoiding tax fines and costly time-consuming disputes.
To explore these considerations further, we invite you to join our TP event on September 24, where our specialists will provide detailed insights and practical guidance for navigating this evolving landscape.
The event will feature a panel including Andre Gialanze, chief tax officer from the Commissioner for Tax and Customs, and Nico Sciberras, director from Indirect Taxation from the Malta Tax and Customs Administration, who will share their expertise on TP and practical implementation considerations. For more information, visit www.forvismazars.com/mt/en.
Paul Giglio is a partner and Ruth Farrugia is tax director, both at Forvis Mazars.